February 2023

2023 CMC Crypto Playbook: NFT Market — 2022 Recap and Outlook for 2023 by Sfermion In this section of the 2023 CMC Crypto Playbook, CMC spoke with leading metaverse-focused investment firm Sfermion on their outlook for NFTs as we head into 2023. Table of Contents CMC spoke with Mo Patel, investor from Sfermion to provide a detailed overview of the NFT market’s performance and growth during a challenging 2022, as well as what Sfermion considers the market’s prospects for 2023. Subscribe Join us in showcasing the cryptocurrency revolution, one newsletter at a time. Subscribe now to get daily news and market updates right to your inbox, along with our millions of other subscribers (that’s right, millions love us!) — what are you waiting for? Q1: How to measure the success of the NFT market in 2022? The NFT market in 2022 has faced such a decrease in volume due to the bear market and overall downturn that there was widespread concern that NFTs are dead. However, if you exclude bull market-driven 2021 as an anomaly in terms of volume and traction, the NFT market in 2022 is in fact thriving in many areas. The drop-off in NFT trading volume as compared to the smaller drop-off in NFT transactions shows that people are still using NFTs and that the downturn is just a broader market trend. For example, the rapid adoption of layer-2 solutions like Arbitrum and Optimism meant growth in unique addresses holding NFTs, which showcases the amount of building activities supporting the L2 space. Meanwhile, Polygon is also active in NFT business development and continues to draw stellar Web2 talent and clients to blockchain. Music NFTs are also seeing success on various platforms, with high sales volumes and increased minting. Web3 social platforms using NFTs in various ways are also gaining traction, such as Aave’s Lens Protocol that already boasts nearly 100,000 users since its May 2022 launch. In addition to a plethora of quantitative data to consider, there’s also ample qualitative data available that indicates that the recent NFT craze has led to an influx of strong Web2 builders entering the Web3 space to build with NFTs. This underscores the success of the NFT market and the global attention it has garnered in a very short time. These new entrants include leading Web2 founders and gaming studios who have built established and enduring products in the Web2 space and are now using Web3 and NFTs to supercharge new applications, such as NetEase, Pixel Gaming, Wildlife, Square Enix, Ubisoft and Zynga. Top-tier brands such as Gucci, Nike, Adidas and Prada are all onboarding NFTs in their marketing to connect better with their customers. Instagram, with its over half a billion daily active users (DAU), is now effectively an NFT marketplace. Reddit has come out of nowhere this year with its sudden implementation of NFTs (although they refuse to use the term) as a core technology in its digital collectible avatar program, bringing in a vast number of new users and wallet owners in the process. Web2 giants are also using the world’s biggest sporting and entertainment events, such as the World Cup and Super Bowl, to enhance In-Real-Life (IRL) experiences by leveraging NFT drops, as we saw with Coca Cola’s NFT drop at this year’s World Cup. Limit Break is planning a Super Bowl freemint for next year where you can scan a QR code and get a free NFT mint during the US’ flagship annual sports event. The above applications of NFTs allow for the seamless transaction of digital property rights and interoperable assets. Despite current market fluctuations, the continued involvement and innovation of top builders and brands in the NFT space are laying the foundation for strong growth in the future, as these projects come alive and, ideally, coincide with a market uptick. While there’s currently not much joy to be found in the crypto space in general, there’s cause to be bullish on NFT adoption and many web consumer applications. Whether it’s a bear market or bull market, the truth is that gamers are going to game and consumers are going to consume. If NFTs keep unlocking these digital property rights to allow owners to transact within these games with interoperable assets, it’s just a matter of time for quantitative data to pick back up. Viewed with this lens, 2022 can therefore be seen as quite successful for NFTs. Q2: Which NFT verticals and use cases have been a key focus in 2022? The main focus for 2022 has remained on Web3 gaming and related consumer services, such as loyalty and ticketing, while metaverse experiences and Web3 social applications have also garnered attention. NFT data analysis to track assets on-chain has also been a continuous trend which is somewhat well built out. We also saw a drop-off in the DAO and Guild tooling narrative, as play-to-earn (P2E) models crashed in 2022 due to the bear market, poor tokenomics and a general failure to deliver a compelling gaming experience to retain gamers. It’s clear that the industry is beginning to understand that Web3 gaming and metaverses will take time to go mainstream; therefore, the focus is shifting to building the right experiences and infrastructure around that. This change in focus will boost the following sectors: gaming infrastructure aimed at building better gaming applications, infrastructure on wallets and marketplaces, and NFT creations that can service more complex incoming metaverses as well as Web3 social applications and products that will help unlock Web3 intellectual property (IP). In 2021, the incredible popularity of PFP NFTs led to the creation of a significant amount of new IP, mainly consisting of pictures and images to interact with. The goal for 2023 will be to create more advanced gaming products and applications that can help unlock and enhance this IP through the potential application of AI-based utility or in-game utility. Q3: Why did NFT theses like NFTFi and SocialFi fall short of expectations in 2022? A few 2022 NFT theses failed to deliver on the massive