A lot of financial commentators call the NFT market nothing more than a massive bubble. Most people inside the crypto community think there is much more to the market, but it’s hard not to recognize that NFT values are somewhat inflated right now. Some aspects look a little too much like a Ponzi scheme to ignore.
Play-to-earn (P2E) games are likely the best example of “ponzinomics” in the market. P2E NFTs usually earn tokens, which are then used to mint more NFTs, increasing the supply exponentially. Profits are high in the early stages as new investors buy up newly minted NFTs to get in.
Most of the time, the influx of buyers can’t keep up with the rapidly increasing supply, and then prices crash.
As the value of the NFTs drops, so does the token used to create them, causing a deadly cycle of negative price action. A few intelligently built P2Es have been able to avoid this problem but will have difficulty staying alive for years to come.
It all comes down to the simple economic principle of supply and demand.
Supply and Demand Affects NFTs
P2E isn’t the only type of NFT that has to worry about inflation. Some of the most popular collections might face a similar predicament looming on the horizon.
It’s a major problem for P2E projects, but it’s a bit harder to see how NFTs may suffer from a slightly different kind of supply dilution.
The NFT market is all about profit. Many teams claim they are all about the community or art, but that isn’t what the majority of investors care about. Founders want to show the community that their project will give holders greater value than other projects.
Sometimes that value comes from access to events, a game, or exclusive merchandise, but most of the time it’s purely financial. By far, airdrops have quickly become the most popular way to deliver value.
The trend was inspired by Yuga Labs, the creators of the Bored Ape Yacht Club collection. It airdropped a new token, ApeCoin, and their next 2 generations of NFTs to Ape holders.
The combined floor value of these airdrops for one ape, if the holder kept it through all of them, is worth about 76 ETH (~$255,000). Yuga Labs will probably give holders a free piece of NFT land for their upcoming metaverse platform too.
The airdrops likely proved quite beneficial to the BAYC collection as a whole, because they showed that the founders could bring holders a ton of value. But this does have some downsides in the long-term. The token and airdropped NFTs diluted the supply of BAYC assets significantly, and this doesn’t seem like it’s stopping anytime soon.
However, each iteration provided cheaper entry points for the most popular brand in NFTs, and the community took advantage of all of them. This model has proven itself for the top 0.01% of NFTs, but can it work for other collections?
The short answer to that–for now–is yes, as long as they are big enough.
The next most successful project following the airdrop model is CloneX, the flagship collection of the popular digital collectibles startup RTFKT. It became popular even before it minted, because it was created in collaboration with world-famous digital artist Takashi Murakami.
Soon after the release, it launched into the stratosphere when RTFKT was acquired by Nike.
A couple of months later, RTFKT airdropped 3 different NFTs to every CloneX holder if they’d held long enough. The first was a “pod” that functions as a customizable personal metaverse NFT gallery, made in collaboration with Oncyber.
They are selling for about 1.7 ETH, and pod holders were later airdropped another metaverse pod that trades for 0.7 ETH.
The second, MNLTH (pronounced Monolith), was Nike’s first NFT, and it’s just as mysterious now as it was when it was created in February. It’s a metallic black box with the Nike Swoosh and RTFKT’s logo.
It also has a unique ethereal animation of it breaking apart to reveal a bright blue light. We have almost no other information about what it is, what it will do, or how it will fit into the RTFKT and Nike digital collectible universe, and it’s trading for 7 ETH as of this writing.
Adding it all up, if you held a CloneX for 3 months, you would have been given about 9.4 ETH (~$30k) worth of NFTs.
If a project has a price floor of say 0.1 ETH, no one will care that they airdropped an NFT to holders. It just won’t be worth much of anything. But if RTFKT, now owned by one of the largest apparel brands in the world, does it, it can sell for 7 ETH. The art doesn’t matter, and neither does the utility. It’s all in the brand, connections, and collaborations.
Even Cool Pets, the NFT collection airdropped to holders of the blue chip NFT collection Cool Cats, is performing well despite multiple failures during its launch. The team promised to release a fully working play-to-earn game along with the Cool Pets mint months ago and we still don’t have a release date. (You can read more about how this project turned into a fiasco in a matter of a few weeks in NFTimes 12.)
BAYC, CloneX, Cool Cats, and more have proven that large enough collections can make an airdrop model work incredibly well in the short term. The biggest unanswered question is how this can be sustained.
Yuga Labs can’t airdrop a new collection every few months to bring holders value. Every airdrop dilutes the supply of the Bored Ape ecosystem. If they continue this way, it will be nearly impossible to maintain value in the medium- to long-term.
Is There a Better Solution?
Right now, there’s enough demand to keep each BAYC airdrop profitable, but even the largest NFT project has its limits. The market must find a different solution to bringing holders value before that limit is reached.
Another blue chip collection, Doodles, thinks they have a solution. Their team dropped another collection of NFTs, but they strayed from the usual airdrop model. The new collection is tied into the original collection so it won’t dilute the Doodles supply.
Holders can stake their Doodle to turn it into a Space Doodle, and they’ll show up on OpenSea as two different collections. However, if you sell your Space Doodle, the new owner will be able to unstake your Doodle and keep it as well. Holders got a cool new NFT that increased the value of their original one without increasing the supply at all.
Though this great idea circumvents many of the issues that come with the airdrop model, it’s not perfect. It increased the value of Doodles but nowhere near as much as BAYC or CloneX holders earned from their airdrops.
It may not be the magic bullet for NFT sustainability, but at least it’s moving in the right direction.
Do you want to learn more about NFTs and keep up with the rapidly evolving market? Check out some of our favorite editions of The NFTimes:
Read how Yuga Labs, the creators of Bored Ape Yacht Club, are shaking up the NFT market in NFTimes 11 – $400 Million From One NFT Mint?
Learn how the Cool Cats team screwed up the Cool Pets P2E game launch in NFTimes 12 – A Tale of Two P2Es
Find out what NFT utility really is and which projects do it the best in NFTimes – 9 Now THAT is Utility
Want to keep up with Henry and NFTs 24/7? Join him in AlphaMint’s dedicated NFT Discord server.