Nonfungible tokens (NFTs) have remained an essential component of the Web3 ecosystem throughout 2023, as community members continue to explore new opportunities and tackle the challenges within the space.
Despite critics predicting the demise of NFTs, the trading activity surrounding this asset class proves otherwise. In the past 30 days alone, the top 10 blockchains used for NFT transactions have recorded a combined sales volume of over $1.5 billion, indicating a continued demand for NFTs.
Among the many developments in the NFT space this year, several stood out significantly. These include significant milestones such as the creation of Bitcoin Ordinals, the first-ever Securities and Exchange Commission (SEC) case against NFTs in the United States, and the ongoing debate surrounding creator royalties.
Bitcoin Ordinals emerged as a notable innovation in 2023, introduced by software engineer Casey Rodarmor. Following a blog post on January 21, Rodarmor deployed the program on the Bitcoin mainnet, effectively creating Bitcoin’s version of NFTs known as “digital artifacts.”
Unlike traditional NFTs that often rely on metadata pointing to off-chain storage, Bitcoin Ordinals store the assets’ contents directly on the blockchain. This approach safeguards Bitcoin NFTs from issues such as blank images or inappropriate content. However, it does not prevent individuals from minting unsavory images on the Bitcoin network.
While there have been concerns about Ordinals potentially congesting the Bitcoin block space, the protocol’s decentralized nature allowed a bad actor to upload an explicit image shortly after its launch. Although the image was swiftly removed, the inscription will forever remain on the Bitcoin blockchain.
Despite these challenges, many believe that the emergence of Bitcoin Ordinals represents a positive development for the network. Throughout the year, Bitcoin enthusiasts engaged in discussions about whether Ordinals have a place within the ecosystem. Nevertheless, the protocol’s adoption has already gained significant traction.
In May, the Bitcoin network surpassed Solana in monthly sales volume due to increased Ordinals transactions. By December, the network claimed the top spot for the most sales in 30 days, generating over $744 million, while Ethereum garnered $391 million.
Regulatory issues have also surfaced in the NFT space in 2023. The SEC made its first claim against unregistered securities sales involving NFTs. On August 28, the SEC charged Impact Theory, a Los Angeles-based entertainment company, for allegedly selling unregistered securities through its NFT collection called Founder’s Keys.
According to the SEC, Impact Theory encouraged investors to view the NFTs as an investment in the company, making them investment contracts and, therefore, securities. As a result, the SEC accused the company of violating the law by selling unregistered NFTs. Subsequently, the SEC issued a cease-and-desist order, which Impact Theory agreed to comply with.
Following the charges against Impact Theory, the SEC filed a lawsuit against another company for selling NFTs. On September 13, the SEC charged Stoner Cats 2 (SC2), the creators of the Stoner Cats animated series, with conducting an unregistered offering of crypto asset securities. Similar to the previous case, the SEC issued a cease-and-desist order, and SC2 complied.
The Stoner Cats project, spearheaded by Hollywood actress Mila Kunis, involved collaborations with NFT creators and featured notable personalities such as Ashton Kutcher, Chris Rock, Gary Vaynerchuk, and Ethereum co-founder Vitalik Buterin.
The SEC claimed that the company marketed the NFTs as having the potential for secondary sales and implied that the involvement of prominent individuals would increase their value. However, many disagreed with the SEC’s crackdown on NFTs. SEC Commissioners Hester Peirce and Mark Uyeda published a dissenting statement, arguing against the SEC’s interpretation of investment contracts.
The lack of clear regulations surrounding NFTs has raised concerns among industry experts. Oscar Franklin Tan, chief legal officer of NFT platform Enjin, expressed the view that the absence of definitive rules could discourage creators from exploring Web3 models and hinder the realization of NFTs’ full potential.
Furthermore, NFT creators have faced challenges regarding royalties. Earning royalties from NFT sales has been a significant advantage for artists and creators. However, the introduction of optional royalties by NFT marketplaces in 2022 has impacted creators’ earnings. Under this model, buyers can choose whether to contribute royalties to the NFT project, potentially resulting in creators not receiving royalties when their NFTs are resold.
In 2023, the negative effects of the optional royalty trend became apparent. Research data published on March 29 revealed that Web3 creators had already suffered losses of around $20 million in just two leading collections by NFT company Yuga Labs, namely the Bored Ape Yacht Club (BAYC) and Mutant Ape Yacht Club (MAYC) NFTs.
In response to this trend, some NFT marketplaces have prioritized supporting creators and ensuring they receive royalties. Rarible, for instance, launched an Ethereum Virtual Machine testnet that embeds royalties into its code, reaffirming its commitment to creator support. Similarly, Enjin launched a mainnet with integrated NFT transfers and royalty enforcement.
Looking ahead to 2024, the NFT space is poised for further growth and innovation as marketplaces compete for market share. With new advancements like Bitcoin Ordinals and the SEC’s ongoing regulatory actions, the NFT industry will undoubtedly experience another eventful year. While there may be fluctuations, as long as NFT users continue to “hodl,” the industry will persist.