NFT triggered a global boom in 2021. Digital art and characters were traded at high prices and quickly became the focus of attention. In the same year, ‘NFT’ was nominated for the ‘You-Can New Words and Trendy Words Award’, which attracted the interest of not only individuals but also many companies and others in Japan.
NFTs are also known as ‘non-substitutable tokens’, and as the name suggests, they are tokens that cannot be substituted for other things.
Legal tender and cryptographic assets such as Bitcoin are not of this kind, as they can replace anything in circulation, regardless of when they were issued. However, NFTs are referred to as non-replaceable tokens because they do not have a single unique identity and each one of them cannot be replaced.
Some of the works that created a boom in NFTs include CryptoPunks, with its distinctive dots, and the Bored Ape Yacht Club (BAYC), with its unique fashion, etc., and a monkey with a somewhat languid expression, both of which are now worth several hundred million yen. Some of these works are now worth hundreds of millions of dollars.
But it is the work of digital artist Beeple that has had the biggest impact on people.
At an art auction held at Christie's, the world-renowned auction house, his work ‘Everydays: the First 5000 Days’ sold for approximately 7.5 billion yen (at that time). The shock was felt not only in the Web 3.0 domain, but also in many other fields. To this day, no successful bids have exceeded this price and no transactions have been confirmed on the secondary distribution market.
In line with the boom in NFTs, NFT-specific trading markets also grew significantly. One representative example is OpenSea, which many may think appeared in conjunction with the NFT boom, but has actually been in service since 2017. As a result of steady preparations, it emerged as NFTs gained more attention.
Initially, many trades were in the so-called ‘art’ category, such as the NFTs mentioned above, but as time went on, the categories that users paid attention to also changed.
One is the existence of GameFi. Some blockchain games have been played before the NFT boom, as blockchain-based blockchain games allow players to earn NFTs or in-game tokens through the game, which can then be traded for actual compensation.
After the NFT boom, Axie Infinity was particularly popular, as it established a ‘scholarship system’ whereby users could earn in-game tokens by lending NFTs they needed to play the game to other users as owners. This system was well received and many users played the game, especially in South-East Asia.
In mid-2022, ‘STEPN’, which allows users to earn compensation for walking, became popular worldwide. The simplicity and uncomplicated nature of the ‘walking’ gameplay has significantly lowered the barriers to entry into GameFi.
Despite the attention given to the NFT in terms of art and games, there was a period in 2022 when the momentum was slowing down. This is due to inflationary trends in the global economy and the crypto asset market, which has cooled down due to all kinds of incidents. Especially around the time of the collapse of the crypto asset exchange FTX, the volume of NFTs traded also stagnated.
There has also been a change in the category of NFTs traded. Previously, the focus had been on artistic or expensive NFTs, but gradually the focus has shifted to utility - ‘What can I do with that NFT?’ has gradually come to focus on the utility of the NFT.
Each NFT project has added value to NFTs by devising ways in which owning a particular NFT allows you to participate in special events or to receive regular benefits. Among these, the importance of community building is a unique feature of Web 3.0 and, by extension, the NFT domain.
Nowadays, the existence of communities cannot be ignored when operating NFT projects. The camaraderie and sense of common unity that comes from having the same NFT can be a great source of energy for a community. Therefore, by increasing the value of the community, the added value of the NFT can easily be synergistically increased.
To take it a step further, the heat of the community is directly linked to the value of NFTs.
Recently, ‘Bitcoin NFTs’, commonly known as ‘Bitcoin NFTs’, issued on the Bitcoin blockchain, have attracted a lot of attention. In a project called ‘Ordinals’, bitcoins are issued by assigning a unique number to each bitcoin issued so far and linking images and other data on the blockchain.
Issuing NFTs in a method known as full-on chain, where all image data and other data is stored on the blockchain, would cost several hundred thousand yen for Ethereum, whereas it costs only a few thousand yen for Bitcoin. If stored in full-on chain, the data can be referenced at any time as long as the blockchain is operational.
In addition to this, the cost advantage and the buzz of issuing NFTs on bitcoin, which until now has been regarded as nonsense, means that bitcoin NFTs are attracting a lot of attention.
Furthermore, the market environment is also changing.
Since the NFT boom, ‘Blur’ has emerged as a competitor to OpenSea, which has shown strength amongst the various NFT marketplaces that have emerged. It has temporarily surpassed OpenSea's trading volume and is attempting to change the market environment in which OpenSea was the dominant player.
The number of users has increased rapidly as Blur has no fees except for gas paid by users and has an aggregator function that allows users to trade NFTs from various exchanges together.
It has recently announced an NFT indefinite lending service and also offers unique services such as the ability to borrow crypto assets by pledging specific NFTs as collateral.
OpenSea has also already released an advanced service to compete with Blur. For users, the increase in competition can be seen as a positive, as the liquidity and convenience of NFTs is likely to increase as various marketplaces become more active.
On the other hand, looking at Japan, it cannot be denied that the country is a little behind the curve. Various factors can be considered, but the most significant reason is the impact of regulations. It goes without saying that, while regulations can strengthen the protection of users, they also effectively limit their behaviour.
Nevertheless, Japan's advantage is growing through the collapse of the FTX and the various incidents that occurred in 2022. Japan's Web 3.0 industry is experiencing a tailwind, partly due to the fact that it was ahead of the rest of the world in terms of regulation, and partly due to accelerated discussions towards deregulation in terms of taxation. Naturally, this includes NFTs, and indeed a number of major companies have entered the industry.
Games are an important category. For Japan, a content powerhouse with many globally popular games and IP, games are a major weapon in leading Web 3.0 in the world.
Various domestic blockchain games have been available since early 2023, and Square Enix and GREE have already announced their participation. More game content is scheduled to be released from this summer, and it is expected that a blockbuster blockchain game will emerge from among these.
However, there are challenges to the penetration of blockchain games in Japan. In particular, a barrier to entry is the existence of wallets.
There are various types of wallets. There are ‘hot wallets’, which are wallets connected to the internet, and their opposite, ‘cold wallets’, which are not permanently connected to the internet.
Representative examples of wallets include MetaMask and Ledger, DOSI Wallet developed by a subsidiary of LINE, which is well-known in Japan, and SBI Web3 Wallet by SBI VC Trade, a crypto asset exchange under SBI.
While domestically produced wallets have also appeared, the penetration rate of MetaMask, one of the most popular wallets, is said to be particularly low in Japan among the G20 countries. Factors contributing to this include ‘high bank account penetration’, ‘low incentives’ and ‘connection to unregulated contracts such as DeFi’.
Japan's bank account ownership rate is said to be around 97%, which is very high compared to the World Bank's global account ownership rate of 76%. In other words, due to Japan's advanced efforts towards financial inclusion, there are few cases of reliance on crypto assets in real life. Furthermore, the current crypto asset taxation system for individuals is not user-friendly, and the uniquely Japanese negative image of crypto assets may also hinder their widespread use.
This leads to the second reason. If there is no need to be proactive about crypto assets and they have a negative image, they will be slow to take off unless there is some kind of incentive to do so. There are very few cases where downloading a wallet comes with significant benefits, and for some people, even setting up the wallet will feel complicated and tedious.
The same can be said for DeFi and other services where the word ‘self-responsibility’ is strongly attached. In Japan, it is recommended in principle to use a service licensed by the FSA as a crypto asset exchanger, and the hurdles are much higher when using a foreign service with a language barrier.
In addition, if the reasons for owning crypto assets are low, people are unlikely to actively seek knowledge about them unless they have a special opportunity to do so.
Against this background, relevant domestic operators state that in addition to onboarding, including setting up wallets, UI/UX needs to be improved. In addition, it is usually necessary to prepare crypto assets such as Ethereum when trading NFTs, but this requires obtaining crypto assets from exchanges in advance, which is also a bottleneck in terms of man-hours required.
In this respect, services that allow users to purchase NFTs in Japanese yen have been increasing in Japan, mainly from major players, and SBIWeb3 Wallet automatically converts crypto assets to yen, eliminating the need for crypto asset transactions and transfers to a wallet. It is designed to be friendly to beginners, who may be trading only in Japanese yen.
NFTs are increasingly heard of in everyday life, and it is important to learn and interact with them in accordance with your objectives, while keeping a close eye on their history and current state.
▶︎ To popularise wallets, it is essential to improve the UI/UX and onboarding. The shortcut to popularisation is to make the service easy to use even for beginners and to familiarise people with it through familiar experiences.
◉Virtual NISHI
SBI VC Trade (Crypto Analyst / New Business Strategy) / Deputy General Manager, Digital Space Office, SBI Holdings
He analyses crypto asset markets, including on-chain data, using his experience as a dealer, and provides commentary on crypto asset markets in newspapers and magazines, in addition to disseminating information via Twitter.
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