Chapter 13: Unraveling Web3, Metaverse and NFT’s

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In essence, Web3 aims to return ownership of data to users. Currently, our data is stored by big tech, which isn’t ideal from a privacy standpoint. Decentralization is crucial in Web3, a facet prominently featured in blockchain networks. These networks could authenticate ownership of specific data or virtual objects.

Crafting items in a virtual game today doesn’t grant ownership of these objects. They remain the property of the game’s publisher. When you stop playing or deactivate your account, you forfeit all your efforts. This changes with an NFT. It should enable you to transport these items to another universe.

Moreover, these entire worlds could potentially be community-governed. Rather than being controlled by big tech, where power is concentrated among a few, governance could be distributed among users. This can be facilitated through DAOs, or Decentralized Autonomous Organizations. Token holders could participate in decisions regarding the project’s further development.

Delving into NFTs

An NFT, or non-fungible token, is a unique token of which only one instance exists, making it non-replaceable. The Ethereum blockchain witnesses the launch of numerous such tokens. Interestingly, the ETH coin itself is fungible or replaceable. If you buy 1 ether on Saturday and another on Sunday, then wish to sell 1 ether next week, it doesn’t matter which one you sell. Both cryptocurrency coins are replaceable and not uniquely identifiable. However, a non-fungible token is.

An NFT allows you to acquire a piece of land, for instance, within a virtual game. In this case, the NFT references a specific parcel of land. The holder of the token becomes the owner. Subsequently, this token or land piece can be sold to someone else. As these transactions are recorded on the blockchain, you can always trace the previous owners of this token.

In virtual realms like The Sandbox, plots of land are being sold for millions of euros. The buyer genuinely becomes the owner of this virtual portion of the world and can customize it as desired. The substantial effort invested in constructing a virtual house can be monetized by selling the NFT.

Who Purchases Virtual Items?

Presently, children prefer virtual currency to spend in their favorite games like Roblox. It enables them to buy items or clothing to personalize their avatars. It’s akin to children in the past boasting expensive branded clothing at school, except now, they do so in a virtual world. For this generation, investing money to shape their identity in the metaverse will be the norm. As adults, they might hang expensive art they’ve bought as NFTs in their virtual homes.

For many, grasping why one would pay for something virtual is challenging. However, in the future, this will become commonplace.

Exploring the World of NFTs

NFTs gained prominence primarily through digital images that exchanged hands for substantial sums. An NFT renders a digital file, like an illustration, unique. Copies may circulate, but only one file is the original and can be identified as such. Consequently, there’s only one true rightful owner.

In 2021, million-dollar transactions unfolded through NFTs. A digital house was sold for 288 Ether, amounting to over half a million euros. Ultimately, it’s merely a file allowing one to walk through a house in 3D, yet collectors are willing to shell out significant amounts. An NFT digital artwork by Beeple fetched nearly $70 million. Even Jack Dorsey’s (Twitter’s founder) first tweet was sold as an NFT for nearly $3 million.

In April 2021, the Bored Ape Yacht Club launched, featuring a collection of 10,000 images depicting bored-looking apes. Initially sold at a price of 0.08 Ether, less than 200 euros each, these apes started gaining popularity. Celebrities flaunted their acquired Bored Ape on social media platforms like Twitter. In November, Jimmy Fallon from The Tonight Show bought one for about $145,000, introducing many of his fans to the phenomenon, further fueling the hype.

NFTs can be highly profitable for digital artists. They receive an initial amount upon selling their work and can set it up to receive a percentage with every subsequent sale. Unlike physical art, where artists don’t benefit when their old artwork is resold at a higher price.

Surge in Trading Volumes

The soaring prices of NFTs have led to a tremendous surge in trading volumes. In December 2021 alone, the trading volume for Bored Ape images amounted to a staggering $111 million. OpenSea, according to data from The Block, emerged as the market leader among NFT platforms, accounting for the majority of volumes traded.

The monthly volumes on OpenSea notably skyrocketed, especially from August 2021 onwards. The total sales of NFTs in 2021 reached around $13 billion. In contrast, in 2020, this figure was a mere $33 million.

However, due to the crypto crash in 2022, NFT trading volumes tumbled. For instance, the trading volume of Bored Apes dropped to about $15 million in August 2022, marking more than an 80% decline from peak months.

Useful Applications of NFTs

Beyond extravagant indulgence in quirky images, NFTs hold practicality for the masses. People have an innate penchant for collecting, and this inclination continues in a digital world. Consider NFTs that can be employed in video games to prove ownership of specific items, creating a burgeoning marketplace for these items to be traded among gamers.

In Web3 projects, owning items acquired or crafted in a game will be feasible through one’s personal wallet. Traditional games might allow you to collect weapons, but once you stop playing or deactivate your account, these valuable possessions are lost. In a Web3 world, these items can be stored as NFTs in your personal wallet. Moreover, if there’s interoperability across different games, these items can be transported to other worlds or offered for sale on specialized NFT markets.

The Web3 revolution essentially revolves around restoring data ownership to consumers, leveraging blockchain technology. This restrains the dominance of big tech; data won’t be stored centrally on a tech player’s server but will be decentralized in the user’s wallet.

Other exciting aspects include AR (augmented reality) graphics, where, for instance, you can purchase a virtual dinosaur that only appears in your backyard thanks to the NFT. While the masses encountered AR through games like Pokémon Go, this technology will have much broader applications in the future.

In sports or music, numerous NFTs are launched, enabling fans to purchase digital objects associated with their favorite sports clubs or artists. Even access tickets for events can be blockchain-secured. When reselling your ticket at a higher price, a percentage of the transaction could automatically return to the concert organizer.

Moreover, NFTs can tokenize documents or objects from the ‘real world.’ For instance, a document proving ownership of a building. When selling the building, a transaction signed can transfer this NFT to another person’s wallet. This method could potentially render notary visits obsolete, as often, visits are merely to place a signature. Another advantage is the digital trace in the blockchain, establishing ownership history for various items, from real estate to cars and pianos, and beyond.

Challenges with NFTs

NFTs currently serve as ‘bragging items’ with little genuine value behind them, typical of markets in an exaggerated phase.

Further, various fraudulent practices abound. For instance, manipulating the market by purchasing an NFT at one address for 1 ETH and selling it to another address, repeatedly raising the price before selling it back to oneself for a higher amount. This manipulates the NFT’s price, potentially luring buyers willing to pay inflated prices, leading to substantial profits for the manipulator.

Another form of deception involves deliberately creating a loss to minimize tax obligations. By purchasing an NFT for 2 ETH with an anonymous wallet and selling it to oneself for 4 ETH but this time to an address linked to one’s identity, recording a loss when sold for 3 ETH to an anonymous address. In certain jurisdictions, these losses can offset crypto gains, reducing tax liabilities.