That’s the world of crypto, full of surprises! One of the more interesting questions to come out of this is whether or not NFTs could end up outperforming Ethereum itself. Sokha Chan is an astute observer of the NFT space. He examines historical trends, current market dynamics, and what it would mean for the overall crypto ecosystem.

Indeed, the NFT boom of the first half of 2021 helped trigger Ethereum’s price explosion. By November 2021, the price of this cryptocurrency had surged to an all-time high of just under $4,800. The NFT market’s peak activity aligned with Ethereum’s peak price, showcasing the clarity of the connection between the two sectors. Prior to the 2021 explosion, CryptoKitties was the talk of the town. Released in 2017, this Ethereum-based game managed to take about 25% of the whole network’s traffic just days after it launched. This notable but early example of this process highlights the fact that NFT activity can dramatically affect the Ethereum blockchain.

The NFT market's activity had a positive impact on Ethereum's ecosystem, with many NFT projects being built on the Ethereum blockchain. All of this increased projects and users added to the growth and vibrant ecosystem that were making the Ethereum network seem so alive. Could NFTs eventually eclipse Ethereum's performance? Here are the reasons this should be the case.

Factors Favoring NFTs

If NFTs continue to outperform Ethereum as a whole, it will drastically impact the decentralized finance (DeFi) industry. The broader crypto ecosystem could be affected too.

Cultural Relevance and Recognition

  • Increasing recognition of NFTs as a unique digital asset: The Collins Dictionary Word of the Year 2021 was NFT, indicating a growing awareness and recognition of NFTs as a distinct concept. This mainstream recognition signals a shift in perception and acceptance.
  • Growing interest in digital art and collectibles: The sale of Beeple's NFT "The First 5000 Days" for $69 million at Christie's auction house in 2021 sparked a surge in interest in NFTs as a new form of digital art and collectibles. This high-profile sale demonstrated the potential value and desirability of NFTs.
  • Museums and cultural institutions exploring NFTs: Museums and cultural institutions are starting to explore the use of NFTs to represent and manage digital cultural heritage, which could increase their relevance and adoption. This move towards institutional adoption could bring NFTs into the mainstream cultural landscape.
  • Potential for NFTs to democratize art and cultural ownership: NFTs could provide a new way for artists and creators to monetize their digital work, making it more accessible to a wider audience and potentially democratizing art and cultural ownership. This democratization could lead to broader adoption and increased value.
  • The metaverse and online cultural experiences: As the concept of the metaverse gains traction, NFTs could play a key role in representing and trading digital cultural assets, making them more relevant to online cultural experiences. The integration of NFTs into the metaverse could drive significant demand and value.

Institutional Adoption

NFTs deliver strong diversification benefits in times of market turbulence. We saw this play out during the COVID-19 crisis, especially at the time of the historic market drop in March 2020. This resilience in all economic conditions may help them become an appealing countercyclical option during times of economic downturn.

  • Increased demand: Institutional adoption of NFTs can lead to increased demand, driving up their market value.
  • Legitimization: Institutional involvement can legitimize NFTs, attracting more investors and increasing their market value.
  • Improved liquidity: Institutional adoption can improve liquidity in the NFT market, making it easier to buy and sell NFTs, which can contribute to their increased market value.
  • Diversification: Institutional investors may diversify their portfolios by investing in NFTs, which can increase demand and drive up their market value.
  • Comparison to Ethereum: The value of NFTs may be compared to Ethereum, with increased adoption and use cases potentially leading to a higher market value for NFTs relative to Ethereum.

Potential Consequences for DeFi and the Crypto Landscape

Whether or not NFTs will prove to be the killer app that “steals Ethereum’s thunder” is yet to be seen. The opportunity to have more cultural relevance and institutional embrace is immense. Diversification benefits of NFTs are driving them to become a leading crypto force. Being aware and flexible will be the best strategy for thriving in this rapidly changing world.

  • Shift in Capital Flows: If NFTs start to outperform Ethereum, capital flows may shift toward NFTs, potentially reducing liquidity and investment in DeFi protocols, which are primarily built on Ethereum.
  • Impact on Ethereum's Dominance in DeFi: Ethereum's foundational role in DeFi might be challenged if NFTs outperform Ethereum, potentially altering the dynamics of the DeFi ecosystem and Ethereum's dominance within it.
  • Changes in Investor Priorities: A shift toward NFTs could indicate a change in investor priorities, with a greater emphasis on digital ownership and cultural relevance over traditional financial metrics, potentially affecting the types of projects and assets that receive investment in DeFi.
  • Diversification of DeFi Assets: If NFTs outperform Ethereum, DeFi protocols might begin to incorporate more NFT-based assets, leading to a diversification of DeFi assets and potentially new opportunities for investors.
  • Potential Decrease in Ethereum's Price: If NFTs outperform Ethereum, it could lead to a decrease in Ethereum's price, potentially affecting the collateralization of DeFi loans and the overall stability of the DeFi ecosystem.

It's also worth noting that NFTs may offer diversification benefits during turbulent times, as seen during the COVID-19 crisis, and especially around the great March 2020 market plunge. This resilience could make them an attractive alternative during periods of economic uncertainty.

Whether NFTs will ultimately "steal Ethereum's thunder" remains to be seen. However, the potential for increased cultural relevance, institutional adoption, and diversification benefits suggests that NFTs could indeed become a dominant force in the crypto world. As always, staying informed and adaptable is key to navigating the ever-evolving landscape of Web3.