6.1 Definition and Characteristics of NFTs

학습 목표: Clearly differentiate between fungible tokens (FT) and non-fungible tokens (NFT), and deeply understand the core characteristics of NFTs, such as uniqueness, indivisibility, and verifiable ownership, along with their foundational implementation (e.g., ERC-721 token standard).

Core Differences Between Fungible (FT) and Non-Fungible (NFT)

Understanding NFTs begins with grasping the meaning of “non-fungible,” which requires a comparison to “fungible”:

• Fungible Tokens (FT): Each unit of the token has the same value, properties, and functionality, allowing them to be interchangeable. For example, a 1-dollar coin in your pocket holds the same purchasing power as a 1-dollar coin in someone else’s pocket. In the crypto world, Bitcoin (BTC), Ethereum (ETH), and most cryptocurrencies and stablecoins (like USDT) fall under fungible tokens. If you lend a friend 1 BTC, they can return any 1 BTC without needing to return the original.
• Non-Fungible Tokens (NFT): In contrast, NFTs are unique, irreplaceable, and typically indivisible (though there are technical means to implement fractional ownership). Each NFT possesses its unique identity (Token ID) and metadata, which describes the specific asset or rights it represents, distinguishing it from all other NFTs (even those within the same series). For instance, a specific concert ticket, a unique digital artwork, or a rare in-game item are all non-fungible. You cannot use a Jay Chou concert ticket to attend a Taylor Swift concert, even if their face values are the same.

Unique Identifiers, Metadata, and Verifiable Ownership of NFTs

• Unique Identifier: Each NFT has a unique Token ID and the address of its associated smart contract on the blockchain. This combination constitutes the NFT’s unique identity globally.
• Metadata: The metadata of an NFT is a dataset describing the details of the asset it represents. For a digital art NFT, the metadata may include the artwork’s title, creator information, creation date, description, links to image/video files (often stored on decentralized storage systems like IPFS or centralized servers), and other custom attributes (like rarity traits). The method of storing metadata and its mutability significantly impact the NFT’s value and longevity.
• Verifiable Ownership: NFTs provide a transparent, public, and immutable digital ownership record through blockchain technology. The wallet address (public key) recorded on the blockchain as the current holder of an NFT is recognized as its owner. Ownership transfers are also publicly recorded via blockchain transactions. This verifiability is one of the core values of NFTs.

NFT Implementation Standards on the Blockchain (e.g., ERC-721, ERC-1155)

To ensure compatibility and interoperability of NFTs across different wallets, markets, and applications, their creation and trading typically adhere to specific blockchain token standards. The most well-known standards primarily come from Ethereum:

• ERC-721: This is the earliest and most widely applied standard specifically for non-fungible tokens on Ethereum. It defines a minimal interface (including ownership queries, secure transfers, etc.) to ensure each ERC-721 token is entirely unique. Notable early examples include CryptoPunks (which inspired ERC-721) and CryptoKitties.
• ERC-1155: Proposed by the Enjin team, this is a more flexible and efficient multi-token standard. It allows the simultaneous creation and management of multiple token types within the same smart contract, which can include non-fungible (e.g., a unique game item) and fungible tokens (e.g., game coins available in multiple identical copies). This significantly reduces Gas fees and complexity for deploying multiple tokens, particularly suitable for gaming and metaverse scenarios requiring various asset types.

In addition to Ethereum, other major public chains (such as Solana, BNB Chain, Polygon, Flow, Tezos, etc.) have their own NFT standards and active NFT ecosystems.

6.2 NFT Minting Process and Lifecycle

학습 목표: Understand the complete process of an NFT from conception to market circulation, including key minting steps.

The lifecycle of an NFT involves multiple stages, from the birth of an idea to becoming a verifiable unique asset on the blockchain, to market circulation and application. The core aspect is “minting.”

NFT Minting and Lifecycle Infographic

Minting of NFTs: Minting is the process of converting digital files (like images, videos, audio, 3D models, etc.) or descriptions of real-world assets into NFTs on the blockchain. The main steps include:

1. Preparing Digital Content and Metadata: Creators first prepare the digital content they wish to tokenize. They also need to prepare the metadata describing this content, such as name, description, attributes (features, rarity, etc.), and links to the content itself.
2. Choosing Blockchain and NFT Market/Platform: Creators decide which blockchain (e.g., Ethereum, Solana, Polygon) to issue the NFT on and typically select an NFT minting platform or market (e.g., OpenSea, Rarible, Magic Eden, or a custom smart contract).
3. Connecting Wallet and Paying Gas Fees: Creators must use a compatible cryptocurrency wallet (like MetaMask) to connect to the minting platform and ensure they have enough native tokens (like ETH) to cover the minting transaction fees (Gas fees).
4. Uploading Content and Filling in Information: The digital content is uploaded on the platform (or a storage link is provided, such as IPFS CID), and metadata information is filled in.
5. Executing Minting Transaction: The platform guides the creator to initiate a special blockchain transaction that calls the minting function of the NFT smart contract. Once the transaction is confirmed by the blockchain network, a new NFT with a unique Token ID is created and recorded under the creator’s wallet address. This NFT now officially exists on the blockchain.

NFT Lifecycle:

• Creation/Minting: As described above, this is the starting point of an NFT’s life.
• Primary Sale/Distribution: After minting, the creator can sell the NFT directly to collectors or users or distribute it through auctions or blind boxes.
• Secondary Market Trading: NFT holders can list their NFTs for sale on various NFT markets. Smart contracts often allow creators to automatically earn a percentage of royalties from each secondary market sale.
• Holding & Display: Collectors can keep NFTs in their wallets and display them in digital galleries, metaverse spaces, or as social media avatars.
• Utility & Application: Beyond collectible value, NFTs can have practical utility, such as serving as game assets, membership credentials, event tickets, voting rights, or certificates for redeeming physical goods.
• Burning: In some cases, NFTs can be permanently destroyed by their owners (i.e., sent to an inaccessible address), for example, to reduce supply or as part of a game mechanism.

The NFT lifecycle is dynamic, and its value and significance may evolve with time, market trends, and community interactions.

6.3 Current Status and Analysis of the NFT Market

학습 목표: Review the NFT market’s explosive growth followed by a significant decline, understand changing market size trends, and analyze the main factors contributing to recent fluctuations.

Rise and Bull Market Peak of the NFT Market (Approx. 2021 to Early 2022):

Though the concept of NFTs emerged as early as 2014 and gained initial attention in 2017 with projects like CryptoKitties, the market truly experienced phenomenal explosive growth in 2021, peaking in trading volume and attention in early 2022.

Market Characteristics During This Period:

• High-Value Digital Art Auctions: Artist Beeple’s work “Everydays: The First 5000 Days” sold for $69.3 million at Christie’s, marking a landmark event in the NFT market that garnered widespread media and public attention.
• Popularity of Profile Picture (PFP) Projects: Projects like CryptoPunks and Bored Ape Yacht Club (BAYC) rapidly emerged not only as high-value collectibles but also evolved into symbols of digital identity and high-end community membership, attracting participation from numerous celebrities and brands.
• Rise of GameFi: Games like Axie Infinity, representing the “Play-to-Earn” model, utilized NFTs as core game assets, drawing a large user base, especially in Southeast Asia.
• Celebrity Influence and Brand Entry: Many entertainers, sports stars, and well-known brands (like Nike, Adidas, Gucci) launched their NFTs or collaborated with NFT projects, further boosting market enthusiasm.

During this period, market sentiment was extremely optimistic, with speculative behavior prevalent. A significant influx of capital (including venture capital and individual investors) flowed into the NFT space, leading to record-high trading volumes and NFT prices.

Significant Market Decline and “Zero Value” Phenomenon Analysis:

Starting in the second half of 2022, with tightening global macroeconomic conditions (such as interest rate hikes and inflation), the overall cryptocurrency market entered a bear market (e.g., the LUNA/UST collapse, FTX bankruptcy, and other black swan events), and the early market bubble gradually burst, leading to a notable cooling and adjustment in the NFT market.

Many NFTs that had been hyped during the bull market experienced dramatic price declines, with trading volumes shrinking significantly and liquidity drying up. According to some market analysis reports (e.g., dappGambl’s report in September 2023), among thousands of surveyed NFT collectibles, up to 95% of projects had their market value reduced to zero or nearly zero, indicating almost no trading activity or market demand.

Changes in Trading Volume and Market Size Data:

NFT’s weekly trading volume plummeted from its peak (e.g., nearly $2.8 billion in January 2022) to the tens of millions of dollars level in early 2023 and 2024 (e.g., around $80 million in a week in September 2023).

Despite experiencing dramatic adjustments, not all NFTs lost value. Some leading projects with strong brands, community bases, and practical utility (like certain series of CryptoPunks and BAYC, along with works from notable artists) still maintain market value and trading activity, albeit lower than peak levels.

For the long-term scale of the NFT market, some market research institutions remain cautiously optimistic. For instance, projections suggest that the global NFT platform market size was about $4.9 billion in 2023, potentially reaching around $40.5 billion by 2032, indicating a certain expected compound annual growth rate (approximately 30.23% CAGR). This suggests that the market anticipates NFT technology will find sustainable growth points in more mature application scenarios after undergoing reshuffling.

The dramatic fluctuations in the NFT market reflect the transition from early irrational enthusiasm and speculative phases to a more rational return that focuses on fundamentals, intrinsic value, and sustainable development models. The bursting of the bubble has eliminated numerous inferior projects but has also created space for genuinely valuable innovative applications to thrive.

6.4 Reasons for NFT Value Declines or Significant Drops

학습 목표: Analyze the multifaceted root causes leading to the sharp decline or zero value of many NFT projects during market adjustments, including supply-demand imbalances, excessive speculation, and lack of long-term value support.

After the frenzy of 2021-2022, the NFT market has experienced massive value declines, with many projects trending toward “zero.” This outcome is the result of multiple factors working in concert:

Severe Supply-Demand Imbalance and Extremely Low Production Threshold:

• Massive Supply: During the NFT boom, the relatively low technical barrier for creating and issuing NFTs allowed anyone to easily mint digital images, videos, or even simple texts into NFTs. The emergence of numerous NFT markets and minting platforms further reduced issuance costs.
• Impact of AI-Generated Content: The proliferation of AI-generated art (AIGC) tools (e.g., Midjourney, DALL-E) enabled the rapid, low-cost mass production of visually appealing digital content, leading to an explosive increase in NFT supply.
• Dilution of Scarcity: When the market is flooded with millions or even tens of millions of NFT projects, the vast majority struggle to maintain the claimed “scarcity” and uniqueness, causing severe supply-demand imbalances.

Excessive Market Speculation, Hype, and Irrational Bubble Bursting:

• FOMO-Driven Sentiment: At the peak of the bull market, many investors purchased NFTs not based on an understanding of their artistic value, technological innovation, or long-term utility, but rather out of a fear of missing out on wealth opportunities (FOMO), blindly chasing trends and driving up NFT prices, creating a massive market bubble.
• Prevalence of Hype Culture: Celebrity influence, viral social media promotion, and excessive marketing from some projects fueled the irrational prosperity of the NFT market. Many NFT prices became detached from their intrinsic value.
• Liquidity-Driven Ponzi Characteristics: Some NFT projects relied on ongoing new buyers to take over at higher prices. Once market sentiment cooled and new capital inflow slowed, liquidity dried up, making it difficult to sustain this “passing the parcel” game, leading to price collapses.
• Bubble Burst: When macroeconomic conditions reversed, the overall cryptocurrency market declined, or speculators began to realize the risks were too high and started to take profits, the NFT market bubble burst rapidly.

Lack of Genuine Utility and Long-Term Value Support:

• Value Dilemma of “Images”: The vast majority of NFTs merely serve as certificates linking to digital images, lacking any practical functionality or utility beyond visual appreciation or display. Once market enthusiasm wanes, the value of these “little images” becomes difficult to maintain.
• Lack of Sustained Ecosystem Development: Many NFT projects lack a clear long-term development roadmap, ongoing community building, empowering plans, or integration with other applications after issuance, failing to provide ongoing value returns or unique experiences for holders, resulting in user disinterest and sell-offs.

Low Holding Rates and Concentrated Ownership:

Research indicates that during market adjustments, many NFT collectibles have a very low actual independent ownership ratio (e.g., certain reports indicated that at one point, about 79% of NFT series had a high proportion of unsold NFTs relative to total supply, meaning a significant number of NFTs were held by a few “whales” or project teams, or simply not fully absorbed by the market). This high concentration of ownership led to poor market liquidity; once large holders sold off, prices plummeted.

Issues with Project Teams and Fraudulent Activities:

• Rug Pulls: Some malicious project teams may have initially aimed to defraud by attracting investors to purchase NFTs through false advertising, quickly transferring the raised funds, and abandoning the project, resulting in instant zero value for NFTs.
• Poor Management or Abandonment: Even without malicious intent, project teams may fail to sustain operations and develop projects due to inexperience, insufficient funding, or changes in market conditions, ultimately leading to impaired NFT values.

Macroeconomic Factors and Overall Market Environment:

Tightening monetary policies, such as interest rate hikes to combat inflation in major global economies, have led to reduced market liquidity, diminishing investors’ appetite for high-risk assets. The overall cryptocurrency market entering a bear phase has also negatively impacted the NFT market.

Technical and Infrastructure Issues:

Some NFTs have metadata stored on centralized servers. If these servers shut down or project teams cease maintenance, NFTs may become “dead links,” losing their visual representation and some value. While decentralized storage solutions like IPFS help mitigate this issue, not all projects adopt them, and files on IPFS need nodes to continuously pin them to ensure permanent availability.

In summary, the adjustment of the NFT market is the result of multiple overlapping factors, revealing the immaturity and vulnerability of the early market. It also provides profound lessons for the future healthy development of the industry: the long-term value of NFTs must be built on genuine artistic merit, innovation, community consensus, practical utility, or tight integration with the physical economy, rather than short-term speculation and hype.

6.5 Major Applications and Scenarios of NFTs

학습 목표: Broadly explore practical applications and potential value of NFT technology across various fields, including digital art, gaming, collectibles, brand marketing, virtual worlds, and identity verification.

Despite market fluctuations, NFTs, as a unique representation of digital assets and ownership verification technology, still possess vast application potential and have demonstrated value across multiple domains:

Digital Art & Collectibles:

• Most Mature Application: This is the most recognized and currently primary application domain of NFTs. Artists can mint their digital images, videos, audio, 3D models, and other works as NFTs, establishing their authenticity, uniqueness, and ownership on the blockchain, and sell them through NFT markets.
• Empowering Artists: NFTs provide digital artists with new channels for monetizing their work and more direct interaction with collectors. Smart contracts can also be set to ensure artists automatically receive a percentage of royalties from each secondary market resale of their works.

Profile Picture (PFP) NFTs:

• Projects like CryptoPunks, Bored Ape Yacht Club (BAYC), and Azuki have evolved not only as digital collectibles but also as unique community identity markers, cultural symbols, and membership credentials for exclusive clubs, granting holders specific rights and a sense of community belonging.
• Integration of Traditional Art with NFTs: Some traditional artists and galleries are starting to experiment with integrating physical artworks with NFTs or issuing NFT versions based on their works.

In-Game Assets (GameFi – Play-to-Earn/Own):

• True Asset Ownership: NFTs can represent various virtual assets in games, such as characters, items, skins, weapons, land, and pets. Unlike traditional games where players only have usage rights, NFT-based game assets are genuinely owned by players and recorded on the blockchain, allowing them to trade, transfer, or use them across compatible games/platforms freely.
• Play-to-Earn (P2E) Model: Players can earn NFT assets or game tokens through participation, completing tasks, or winning competitions. Axie Infinity is a representative of the early P2E model. Although the sustainability of the P2E model is under challenge, the concept of “owning assets while playing” is still developing.

Brand Interaction, Marketing, and Membership Systems:

• Brand Collaborations and Digital Collectibles: Numerous well-known brands (like luxury brands Louis Vuitton, Prada, Tiffany; sports brands Nike, Adidas; automotive brands Porsche; food brands Starbucks) have utilized NFTs for brand marketing, issuing limited edition digital collectibles to establish new interactions with consumers.
• Membership and Exclusive Experiences: NFTs can serve as membership cards, VIP passes, or loyalty program certificates, allowing holders to enjoy exclusive discounts, priority purchasing rights, participation in offline events (e.g., fashion show tickets, backstage passes), and access to special content.

Integration of Physical Products with NFTs (Phygital):

• Purchasing physical products may include corresponding NFTs as proof of authenticity, ownership certificates, or to unlock additional digital experiences.

Assets in the Virtual World (Metaverse):

• In decentralized metaverse platforms (e.g., Decentraland, The Sandbox, Otherside), NFTs are widely used to represent ownership of virtual land (LANDs), buildings, avatar clothing and accessories, and other virtual items. Users can buy, sell, or lease these NFT assets and engage in construction and interaction within the virtual world

NFT financialization (NFTFi):

• Financial services around NFT, such as NFT lending, installment payments, index funds, derivatives, etc.

Industry standardization and standardization:

• As the market matures, the industry may strengthen the standardization and standardization of NFT issuance, trading, copyright, etc. to improve market transparency and protect user rights.

Ecological diversification:

• The application of NFT will go beyond current collections and games and expand to more practical scenarios, such as educational certificates, professional certifications, loyalty programs, voting rights, etc.

6.6 Risks of Investing in and Using NFTs

학습 목표: Identify potential investment and security risks when participating in the NFT market.

Authenticity and Copyright Issues:

• The market may contain fraudulent NFTs minted from unauthorized copies of others’ works, or creators may exaggerate the originality of their works. Purchasing an NFT does not necessarily mean acquiring the copyright to the work.
• It is essential to carefully verify the identity of the creator and the provenance of the work.

Market Liquidity Risks:

• Many NFT projects, particularly niche or emerging ones, may face liquidity issues, making it difficult to find buyers when needed or forcing sales at prices significantly lower than expected.

Platform Security and Technical Risks:

• NFT trading platforms may become targets for hacking attacks, leading to the theft of user funds or NFTs and exposure of user data.
• Vulnerabilities in smart contracts may result in stolen NFTs or functional anomalies.
• NFTs that rely on centralized servers for metadata storage may lose their visual representation if the servers are shut down (the “image turns into a dead link” problem). Decentralized storage solutions like IPFS can help mitigate this issue.

Market Volatility and Speculative Risks:

• The NFT market experiences extreme price fluctuations influenced by market sentiment, celebrity effects, macroeconomic factors, and other unpredictable elements, exhibiting high speculative characteristics.
• Investors may face risks of significant price drops within short time frames, potentially leading to values approaching zero.

Compliance and Regulatory Risks:

• Global regulations regarding NFTs remain unclear and are continually evolving. Certain NFTs may be classified as securities and subject to corresponding regulations.
• Tax treatment may also be complex.

Fraud and Rug Pull Risks:

• Some unscrupulous project teams may attract investors to purchase NFTs through false advertising and then execute a rug pull, disappearing with the funds and leaving investors with worthless NFTs.

Understanding Risks:

Many investors may lack sufficient understanding of the underlying technology, value basis, and potential risks of NFTs, leading to blind investments based solely on market hype.