Analyzing the three root causes of the big rout in the NFT market

In the previous article "Data reveals that the growth of the NFT market in 2023 is due to the entry of new funds or the involution of old funds", we mentioned that thanks to Blur's successful airdrop incentives, the NFT market will usher in the beginning of 2023. There was a short-term prosperity, especially between February and May, the funds invested in the NFT market rose by 60% month-on-month. However, the latest data shows that after the peak of NFT trading volume in February and March 2023, it began to show a downward trend-NFT entered a bear market again.

Some have pointed out that the growth of the NFT market usually lags the growth of cryptocurrencies by a quarter or two, so with the recent growth of cryptocurrencies, NFT may soon be booming again. However, we believe that in addition to the factors of cyclical industry downturns in the recent bear market, more importantly, it stems from some fundamental problems, which directly led to the sluggishness of the NFT market.

**In this article, we will first present the specific performance of the recent bear market state of the NFT market with data, and then analyze the main reasons hindering the growth of the NFT market. **

Data from all dimensions reveal that the NFT market is shrinking

1. The transaction volume (Volume), the number of transactions (Sales) and the number of active wallets (Wallets) all show a downward trend

It is worth emphasizing that, except that the weekly transaction volume is basically the same as that of the bear market in 2022, the number of transactions and the number of active wallets are significantly lower than those in 2022, **that is to say, the transaction activity of the NFT market and The number of participants is at the lowest level in the past year. **

NFT trading volume

Number of NFT transactions and number of active addresses

2. The value of blue-chip NFT series continues to plummet

The Blue-Chip-10 and NFT-500 indices provided by Nansen measure the total market capitalization of blue-chip/top NFT series, thus reflecting the general performance of the entire NFT market. Both indexes have continued to decline significantly since April this year, and the comprehensive market value of **blue chips/top NFT has directly evaporated by 70-80% compared to the peak in February. **

Blue-Chip-10 Index

NFT-500 Index

3. The investment in the NFT market decreases by 20%-40% month by month

Based on the method of calculating the investment funds in the NFT market in the previous article, we calculated the monthly investment funds in the NFT market from February to June 2023. The data shows that the investment funds in the NFT market have decreased significantly every month (except for a small increase from May to June). Funding levels in June were only 40% of February levels.

monthly investment

The above indicators reflect that the **NFT market is experiencing a decrease in traders, a decrease in trading activity, a shrinking investment, and a decline in prices. All dimensions jointly explain: the NFT market is facing stagnation or even shrinking. **

Three main reasons for the malaise in the NFT market

1. Using the "Bid for Airdrop" mechanism to stimulate liquidity on the demand side is inherently flawed

Blur will launch an airdrop (Airdrop) incentive mechanism at the end of 2022, mainly rewarding loyal users who list (pending sell orders) and bid (pending buy orders) on Blur. At the beginning of the mechanism launch, many senior NFT players believed that this would be a strategy that could effectively drive NFT liquidity, and the market also confirmed this view in the early stage —— During the beginning of Blur Season 1 to Season 2, the liquidity of the market And the transaction volume has been significantly improved.

However, shortly after the start of Airdrop Season 2, the situation began to turn sharply-after the transaction volume of the entire NFT market peaked in February 2023, it showed a continuous downward trend.

In addition, the prices of several blue-chip NFTs also plummeted in the following months — BAYC lost 60% of its market value, Doodles dropped 70%, and Moonbirds even dropped 80%! Many participants in airdrop activities lost a huge amount of money due to the decline in the value of NFT (“buy high and sell low”), and the points rewards obtained in the airdrop obviously cannot make up for the shortfall of this part of the funds, so although the short activities are still going on, many The player has opted out.

In a liquid market, the market price will usually be more stable, that is, it will not fluctuate violently due to transactions. Blur's original intention was to increase the liquidity of the NFT market by encouraging Bidding (pending buy orders). This starting point is good, but the prices of most series have not only not stabilized, but even spiraled down as mentioned above. .

Due to Blur’s airdrop activity, bidders can get potential Blur token airdrop rewards, so most bidders don’t really want to buy NFT, but just want to get airdrop rewards. When they "unfortunately" take over NFT, most people will ship it as soon as possible, and most of the time they will sell it at a lower price than when they bought it; this makes the floor price of NFT drop, and the price level of Bid drops accordingly , so that bidders will sell NFT at a lower price-this vicious circle has caused the price of many NFT series to spiral down, which completely deviates from the "high liquidity and stable price".

The fundamental reason for this phenomenon is that Bid on Blur is not a real market demand, which to a certain extent shows that the participants in the airdrop activity are not optimistic about most NFTs, but the main reason is that most NFTs lack long-term Intrinsic Value.

Although Blur's incentive mechanism does not create real liquidity, it has important guiding significance for the follow-up "how to realize the real liquidity of NFT". Blur’s Airdrop Season 2 is still going on, but the NFT market has fallen into fatigue. This is because many players have suffered serious losses in the early stages of Airdrop Season 2, so they choose to withdraw from the event, or they have learned the lessons of their predecessors, and later players are more cautious in participating . Regardless of the reason, it shows that the airdrop incentive mechanism cannot provide continuous and healthy liquidity for the NFT market.

The total market value of NFT has dropped sharply with the progress of Blur season 2

2. Most project parties lack experience in market value management

Blur's incentive mechanism not only attracts people who want to earn Blur tokens, but also attracts a lot of malicious arbitrage funds.

A typical example of "malicious arbitrage" in the Blur airdrop: an arbitrageur will first buy a large number of tokens in an NFT series at a lower floor price, and then list these tokens at a higher price, thereby raising the floor price . At the same time, they will place "false" buy orders close to their list price on Blur, while other players (aka miners) who want to earn points will place orders in the second and third gears to reduce the probability of "unfortunate" taking over NFT. Because these miners) do not know that the top bidders are actually the ones who place the sell orders, and those who place the sell orders (list) can choose to take over the bidders in their own hands, so when the bid pools of the second and third gears are deep enough, the arbitrageurs will The NFT in hand will be sold to these miners in large quantities.

These malicious arbitrageurs usually repeat the same operation for several rounds of a series, but the height of each increase will be lower than the previous one. This is to prevent the tokens sold in the previous round from being dumped back into their hands at a high price. In this way, these arbitrageurs realize "buy low and sell high", thereby making a profit.

Arbitrageurs generally hold a certain amount of funds (tens to hundreds of ETH), so they can profit in this "game", but many NFT series (especially those issued before Blur launched the reward mechanism) The project party did not expect this kind of malicious arbitrage phenomenon to occur, so in most cases, they did not reserve enough NFT and funds to deal with the huge amount of funds of the opponent, and ultimately were unable to control the market to save the market value of the project.

3. Many NFT projects lack long-term intrinsic value, so prices are extremely vulnerable under market panic

This may be the most fundamental reason why the NFT market is in a growth dilemma.

When NFT first experienced a lot of hype in 2020 and 2021, the project party had an ambitious roadmap that promised to bring value to the holders of its NFT series.

However, two years have passed, and the roadmaps of many NFT projects have become empty checks. Their promises have not been fulfilled, and they have not brought real value to holders. Although some project parties are doing things, when making T-shirts, dolls and other peripherals, and holding some IRL meetups, the value brought to holders does not match the high price of NFT series, and it also lacks innovation.

These reasons make most NFT projects lack real intrinsic value, which leads to fewer and fewer users investing in NFT and holding it for a long time, and finally making the NFT market more and more a "market for speculators".

How to revive the NFT market

On the basis of in-depth exploration of the reasons for the shrinkage of the NFT market, we put forward some views on the revival of the NFT market.

First of all, we should be committed to creating an NFT ecosystem with real value. This means that NFT project parties should continue to bring real value to holders, so as to realize the sustainable development of NFT. At the same time, the sharp drop in the prices of a large number of NFT series in this bear market is not necessarily a bad thing, because "big waves washing the sand" can clean up low-quality and inactive projects, and at the same time encourage other project parties to do practical things and improve innovation; The series that really work hard and continue to create value for NFT holders and the entire NFT ecosystem, although the price may be temporarily affected by Blur's mining mechanism, we believe they can still persist. For example, even though Moonbirds has been hit hard by malicious short selling, I personally still have a lot of hope for the PROOF team because they have been creating value through high-quality content.

Secondly, the project party should be aware of the importance of market value management. After the events related to the Blur airdrop event, the market value management of NFT project parties has become more important. In order to avoid repeating the same mistakes, the project party should prepare enough tokens in advance, and master the funds and relevant knowledge, so that when the NFT price is maliciously manipulated again, it can take action in time to control the market value of the project.

Finally, there is the issue of liquidity. First of all, we currently have no shortage of products that improve liquidity: Blur’s pro-trader trading platform, other liquidity-improving products such as NFT fragmentation protocols, NFT lending protocols, etc. are all very good products. However, the basic reason for the current poor liquidity is that most projects have no real value, resulting in sluggish market demand. Therefore, we believe that the key to creating real liquidity is that project parties no longer focus on short-term interests and ignore long-term value, but focus on real value creation, thereby stimulating real market demand and attracting value investment.

While the recent stagnation of the NFT market has been disappointing, once the underlying issues are identified, we can work on ideas to fix them. We still have a long way to go to fully realize the true value and possibility of NFT.