Web3 Defi already has opportunities for dynamic staking, cryptocurrency-collateralized loans, Decentralized Autonomous Organizations (DAO), and countless other offerings that are simply too complicated or possibly uninteresting to the average internet user.
So, what does the crypto industry have to offer that has the ability to bring in new users? Two of the most successful Decentralized Finance projects in existence are Ethereum (ETH) and Solana (SOL), both of which have greatly benefited from their respective NFT markets over the past year.
Non-Fungible Tokens (NFT) get mixed reviews with some people comparing them to other crazes like the sports memorabilia or watch collectors markets, while others look to NFTs as viable investment vehicles for capturing profit. No matter how you feel about NFTs, they exist, and we must acknowledge their impacts on the Layer 1 blockchains that host them.
April saw over $7 billion worth of global NFT volume, with a large majority of the volume (over 90%) coming exclusively from Ethereum NFT collectors and about 5% from Solana.
NFTs incentivize the adoption of blockchain technology in several ways, but primarily by providing an asset outside of just cryptocurrencies themselves in which people can buy, sell, and trade. There are relatively few barriers to entry, as all you need to start trading NFTs is a cryptocurrency wallet, crypto funds, and a chosen marketplace (OpenSea, LooksRare, MagicEden, Solanart, etc.). If you thought that cryptocurrencies were a gamified version of stocks, then NFTs are an even more gamified version of that!
The gamification of the cryptocurrency market ensures that there will be a relatively constant supply of retail market participants, trading volume, and new user adoption/cash inflows. On the surface, NFTs seem to only add value to Layer 1 blockchains, however, this past weekend proved that things can also go very wrong.
Bots are Dangerous to more platforms than just Twitter
One of the key priorities for Elon Musk in his acquisition of Twitter is to eliminate fake users and scam accounts, often referred to as ‘bots’.
Bots have existed since the early internet, and are simply software programs that are automated in order to perform a pre-defined or repetitive task. Bots are used in countless digital contexts, but typically have a very specific task when deployed in the context of NFTs.
The inherent nature of most NFT projects means that the size of a given collection will typically be limited to a finite supply in order to create demand-driven value for their holders. It is extremely common for popular NFT collections to sell out instantly upon their initial public sale. It is also common for NFTs to sell out during their initial sale and then trade for a 2x-10x premium on secondary markets within minutes of the primary sale being completed. If you are able to purchase a rare or popular NFT before it completely sells out then you may be looking at instant profits were you to re-sell on the open market.
This is where bots come in.
Solana NFTs have two advantages when compared to Ethereum NFTs: Solana has cheaper transaction fees than Ethereum and also claims to have significantly faster transaction speeds. Thanks to how cheap and fast Solana’s blockchain claims to be, savvy traders are often able to deploy a bot in order to buy NFTs that are in high demand.
Unfortunately, bots can be difficult to discern from real human traders, and this means that a bot transaction is just as likely (if not more likely) to be processed and approved as a real human transaction would be.
Bots have been exploited by NFT traders since day 1 in order to increase the likelihood of successfully purchasing/acquiring an NFT from a hyped-up but limited-supply collection. Simply, you are far more likely to be able to successfully purchase a limited NFT by using a bot that is able to make thousands of transactions simultaneously instead of attempting to manually execute a single transaction.
This past Saturday, the combined activity of all bots being deployed to Solana’s NFT smart contract was enough to crash the entire Solana network… for 7 hours thanks to an estimated 4 million bot transactions per second. That means that nobody was able to access or transact on the Solana network for most of the day Saturday, although the SOL coin was still tradable on exchanges. The complete crash of services operating on the Solana blockchain was more than enough to spook the market, as we saw SOL selloff hard after this event.
Although cryptocurrency prices already got beat up a little bit over the past week, Solana’s network going down was enough to instantly crash the price of SOL by another -10%.
It has become extremely apparent that bots have the ability to effectively shut down different blockchains through oversaturation of network activity, so the Solana team will have to address options for how to prevent this from happening again.
At the end of the day, the Solana network will be fine and this crash helps the founders of the project to recognize potential weaknesses that can be reworked and emboldened moving forward. However, the NFT marketplace is still young and has the ability to impact larger blockchain networks in both positive and negative ways depending on the news.
Fortunately, this event wasn’t enough to crash the price of SOL through key support around $79, and may have even provided a buying opportunity for the hungry traders out there.
Both price and momentum according to the short-term 10/50 Real Motion indicator got sufficiently oversold on Saturday to signal the potential for mean reversion back to the upside. If you were to attempt to bottom pick here, you’ll look for the 50-day moving average as your next price target, and probably not want to hold this position if it were to sufficiently break down under that $79 range low.
Online Gas Prices Soar Squeezing Out
NFT Traders’ Guaranteed Profits?
Although Solana may have faster and cheaper transactions, Ethereum NFTs still retain the lion's share of interest from the broader NFT market. The biggest lifestyle brands are all building NFT projects on Ethereum including the likes of Nike, Adidas, Taco Bell, and even Campbells Soup.
The Ethereum NFT market has the benefit of the first-mover effect, as Ethereum was the first blockchain to create functionality for NFTs to exist! However, while the ETH blockchain has gained tons of new users and new cash flow as a result of supporting NFTs, the broader network has also been rather negatively affected when it comes to oversaturation.
Simply put, Ethereum does not have the ability to securely validate thousands of NFT transactions at once, so the network charges a ‘gas fee’ that is essentially the payment received by the network/person/node that validates a given transaction. A standard gas fee for buying or selling an NFT is typically anywhere from $10-30, but that price can go way up when there is major network oversaturation.
The problem with Ethereum’s gas fees becomes all too apparent during the launches of hotly anticipated NFT projects, because when there are only a couple thousand NFTs up for grabs and not everyone will be able to successfully buy one, there effectively becomes a gas price triage.
You have the option to pay a gas price that is above the current market rate in order to jump up in line so that your transaction gets validated before others do. Logically, validators will make more money when they confirm transactions that come with a higher gas fee before processing transactions with a lower gas fee.
This is where the gas wars begin.
This past weekend saw Yuga Labs, the company behind the world’s most popular NFT project known as Bored Ape Yacht Club (BAYC) launch a virtual land sale in which you could purchase an NFT that represents ownership of a plot of land in the BAYC metaverse (say that 5x fast).
Currently, an NFT from the main BAYC collection will run you about 150 ETH or close to $400,000 on the secondary market, so it is no surprise that NFT collectors worldwide flocked to the BAYC land sale this past weekend that had a price tag of only 305 APE or $5,800 per plot of land at the time of launch. Even better, the new collection which is called Otherside would sell 55,000 NFTs compared to only 10,000 from the original BAYC collection, allowing the opportunity for far more people to become proud owners of the project.
The sale netted about $317 million for the founders, but even more crazy was the cumulative $180 million that was spent on gas fees. Individuals online were reporting having spent between 1 and 5 ETH on gas simply to get their transaction validated before the 55,000 piece collection sold out. Insane.
This must have been a major bummer for those that had saved up just enough to pay for the NFT and got priced out at the finish line because the gas fees ended up costing as much if not more than the NFT itself!
Is this a testament that Ethereum simply can’t sustain the volume of NFT activity that it is currently facing? Or, does this event reflect the desperation of frenzyish crypto traders that will pay an arm and a leg for a piece of digital art?
The ETH 2.0 update is scheduled to be completed by the end of 2022 and hopes to improve the speed and scalability of the Ethereum network, so hopefully, that will be able to prevent such insane gas wars from occurring in the future.
Regardless of the insanity of the current NFT markets, both the Solana network crash and Ethereum gas wars represent both flaws and opportunities that exist in NFTs. Even if you think NFTs are dumb and you have no interest in them, it is necessary to recognize their importance in the broader cryptocurrency world.
The same way that you wouldn’t just blindly buy a stock without first understanding what the company behind it does, you should always understand what the cryptocurrencies that you’re investing in are doing too.
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