Episode 10: An introduction to NFTs | The State of Digital Assets

Host and National Lead, Digital Services Adam Rodricks is joined by Kareem Sadek, Partner, Technology Risk Consulting; Kenneth Viegas, Senior Consultant, Technology Risk Consulting; and Kaan Farahani, Intern, Technology Risk Consulting as they dive into all things NFTs, including different projects and their uses cases as well as corporate adoption in various industries throughout 2021.

Episode Transcript

(00:00):
Hello everyone and welcome back to KPMG in Canada’s state of cryptoassets podcast series. We are back with a very special episode focused on NFTs, a recent trend taking the crypto community by storm.

(00:16):
For today's episode, I am very excited to welcome back Kareem Sadek, Kunal Bhasin, Ken Viegas as well as introduce long time listener and first time caller Kaan Farahani. So first and foremost - welcome, gents. It is a pleasure to be back in the studio with you today all of you. Now, further to the announcement of the World of Women NFT acquisition, which is aligned with KPMG’s values of supporting international women's day and women working in crypto, this episode is near and dear to all of our hearts. So let's just jump right in to it? Kareem, as our resident podcast veteran, I'm gonna come to you to kick off as we usually do. NFTs seem to be positively everywhere these days - can you talk a little bit about what a non fungible token is and why you chose to buy the World of Women NFT.

(01:04):
Absolutely, and I am so glad to be back with you again on this podcast. So maybe I'll do the flip side - I'll start off with why the World of Women NFT. I think you touched on it a little bit Adam and your intro just in terms of the World of Women NFT itself. I think it's continuing from what KPMG in Canada, what we're doing, supporting the ecosystem and the cryptoassets ecosystem. It's also aligning with something that that we hold very close to ourhearts in terms of women in crypto [and] woman in tech, I think more broadly. I think when we looked at the World of Women and our values as KPMG in Canada, it's just aligned very well.

(01:45):
We look at the community of World of Women and what they stand by and what they in terms of diversity, equality for women across the board and I think that aligns really, really well with what we're doing. Quite frankly, I think just from an NFT standpoint, this is just one part of a lot of the areas that we're thinking of, in terms of continuing to support the ecosystem, but also it's being innovative in the way that we interact with the system as our cryptoassets team here in Canada. So that's really why the World of Women.

(02:14):
In terms of non-fungible token - so non-fungible is just essentially something unique, but non-fungible token, let me take a crack at it. So, it's a unique digital certificate that is assigned to any option. Think of it, whether it be real world or digital, and it's really that a non-fungible token is recorded on the blockchain ledger and it keeps track of data in real time, essentially providing the buyer with that proof of ownership.

(02:41):
And that's sort of a big key in the NFT space. Maybe I'll look at it from the opposite side; I'm gonna try to give an example and see if that makes it a little bit easier. So, what's fungible referring to? When we say fungible, that really refers to how interchangable an object is. So, for example, I'll give a simple example, think of a one dollar bill or cash. It’s highly fungible cause it really doesn't matter which one I use or to buy something, they really just carry the same value in general. But think of this for a second, however - I come across a particular one dollar bill with sort of a, a unique trait. I don't know. Maybe an interesting serial number or something else. Someone else might be willing to pay a lot of money for that one dollar bill. Because of that unique feature, hence it's there for becoming less fungible because of that work.

(03:36):
So, that that's essentially the non-fungible token is and the comparison to fungible. To be honest with you, what really excites me in the NFT space - we hear a lot of the variation of it and how it continues to evolve. So we hear, of course, about the arts and collectibles, what it's being used in the sort of media realm, music and all of that, but I sincerely think that the whole thing about this podcast is how we're going to look at the application of it - even today, but also in the near future, so I'm very keen. Maybe Ken and Kaan - you can just tell us a little bit more and delve a little bit deeper in terms of some of those applications and the types of NFTs that we see today.

(04:17):
Yeah, I can kick things off. There's been a lot going on in the NFT space and in 2021, it was a huge year for NFTs. This was led by, I think, profile picture or PFP collections that became extremely popular alongside generative art and various forms of collectibles. At the core of a successful end of the NFT project is the community; I have to commend the NFT community for their passion and dedication to some of these projects. The initial wave of NFTs is exciting, but I believe the underlying technology has many other general applications that will lead to greater adoption. As you mentioned, NFTs can be used as a means of proving ownership over physical or digital goods. In traditional organizations, NFTs can be used to complement existing recognition and awards programs, or as a way to issue and authenticate credentials, such as the CPA or a university degree. Kaan, what have you been seeing?

(05:11):
So, let's talk about some of the types of NFTs that we see the market today. Currently, we see two major categories - the first being art and collectibles and the second being gaming. So, let's take a look at the art space first.
In terms of volume, pre-collectives dominate the market that being Bored Ape Yacht Club, CryptoPunks and Art Blocks. The first two are limited edition profile picture collectives each consisting of 10,000 unique NFTs. They have unique features as well. So, for example, if you own a Bored Ape, the token itself doubles as a membership for access to an exclusive social club. Interestingly, Crypto Punks could initially be claimed for free by anyone with an Ethereum wallets, but all 10,000 were quite quickly claimed so now they have to be purchased from secondary markets. On the other hand, Art Blocks is a programmable art platform. It uses an algorithm to randomly generates digital content, the output of which could be a static image, a 3D model or an interactive experience.

(06:14):
Now, when it comes to collectibles, sports fans have really pushed two platforms into the spotlight. The first is one that tokenizes basketball milestones and viral highlights into officially licensed NFTs. These NFTs are categorized by scarcity, starting from very common ones where you can have over 50,000 to quite rare ones and very exclusive ones with fewer than 99. They also have thematic collections, which might be a tribute to for example, dunks or showcasing upcoming rookies. The second is a global fantasy soccer game that sees players collect cards of athletes as NFTs and create virtual teams to compete or trades. They can build a team of 5 cards to participate in what are known as weekly tournaments in which scores are obtained, according to the actual real life performance of athletes and those who pick the best line ups earn rewards by way of a built-in dynamic reward system and once again, these NFTs are categorized by scarcity.

(07:12):
For example, every season there is a maximum number of cards minted for each player and they're distributed as rare, super rare and unique cards.We also see that other gaming NFTs have been capturing market share recently. Axie Infinity is a popular example. Players of this blockchain game collect creatures called Axies as pets, which are represented by NFTs. The universe has a virtual economy where players own and trade Axies alongside other resources they earn, which could be earned through gameplay or contributions to the ecosystem. Overall, we observe that gaming NFTs tend to show a very high number of secondary transactions relative to art and collectibles, and the main reason is because they carry in-game utility and are much more actively used.

(07:59):
Yeah, thanks guys. Honestly just great insights, but, as I said such great use cases. I always say, the potential in this space is incredible. I'm even looking at things - like once we start seeing more use cases of NFTs and the metaverse so that you create that more of an ecosystem or a social ecosystem within the metaverse with the adoption with NFTs. So it's great to see that. So, maybe I'll shift gears a little bit. Based on what we've all seen throughout 2021, the explosion of all of these NFTs and everything else, What do you think guys? What does the overview of the market really look like?

(08:42):
Believe me now that 2021 was an explosive year for NFTs. There were many events that took place throughout the year to secure the technology spot in the crypto ecosystem. Some of the more notable highlights can include Beeple's NFT selling for nearly 69 million dollars US to celebrities and influencers showing off their Bored Apes or corporate companies acquiring Crypto Punks. As both Adam and yourself mentioned earlier, KPMG was able to acquire a rare piece from the World of Women collection, which I was personally super excited to be a part of. If we look at the data around NFTs though, the numbers are really impressive.

(09:20):
Total NFT trading volume in 2021 was nearly 13 billion US with OpenSea, being the world's largest end of team marketplace, standing out and facilitating most of these trades taking the majority of the market share over other marketplaces like Magic Eden or LooksRare and Nifty Gateway. Now, the average daily spend across all the marketplaces in 2021 has grown to nearly 40 million US dollars in comparison to 180,000 US. in 2020. That's a massive 200x growth. The number of active wallets has also increased t remendously and the unique number of wallets that have ever owned an NFT, is currently around 4,000,000. Board Ape and CryptoPunks have some of the strongest communities and they currently demand our price of around 75 ETH which is roughly 187,000 US or 237,000 Canadian. So, it really shows that these communities, these groups that are actually collecting these NFTs are really strong to stand by each other and they're in very high demand.

(10:22):
By the way Ken, I quickly wanted to mention - some of the examples that you gave demonstrates the power of auction-based gaming and a new found business model known as pay to earn. The play to earn model is a win win. It empowers both users and game developers by allowing for ownership and interoperability of assets and the ability to earn game rewards. So, in essence play to earn revolutionizes the relationship between game and player because it enables them to earn real value in exchange for their time whereas, on the other hand, what once used to be opaque and gray market activity from a developer's perspective is now replaced by transparent trade of in-game assets, which enhances their ability to oversee and monetize.

(11:09):
Truly a win win. Thank you for that, Kaan. You know, I think our listeners would probably agree that it's safe to say that they there have been measurable increases as well in institutional adoption. Kunal, I want to come to you. Can you tell us a little bit more about that?
Yeah, absolutely and, you know, just building off of everything that the team has been saying so far - we first, saw corporate brands actually start to pay attention to NFTs towards I would say the second quarter of 2021 when one of the fast food chain restaurants in in the U. S.; they were the 1st company to launch their own art collection as NFT which was around. 25 animated GIFs. They were not selling for that much, but the initiative really quickly spread and prompted a whole range of other companies to think about how they should be leveraging this technology to get that sort of marketing and what strategy they should be using to engage with their customers, Overall, I think, starting in Q2 of 2021, by the end of 2021, we had around 15 to 16 corporate NFT collection releases and these were ranging from food and beverage, sporting goods, fashion, consumer & retail, social media. We had automobile companies as well that were, that were launching their own collections.

(12:40):
Out of all of these industries, I think the most dominant participant was the food and beverage industry, where they were covering towards half of all of the corporate NFTs launches throughout 2021. A close tie was between the fashion and the sporting goods industry for the second place. You know, these 3 industries were taking advantage of some of the opportunities that were available to them and executed on some of those strategies really quickly. We did see among some of the successful NFT launches in the F&B industry - a beverage manufacturer [created] a collection of just four individual NFTs, um, and those are actually the option of almost 228, I think it was around 217 ETH or something. We also had another global brewer that actually collaborated with a blockchain game to release a collection of 50 gaming NFTs where each 1 was auctioned, you know, between 2 to 24 ETH. I’m not going to go into what the actual US dollar value of it was because really, it depended on the value at the time.

(14:02):
We did also see a lot of high-end fashion brands experimenting by really merging the physical fashion and the digital fashion word. Some partnered with a blockchain game, some partnered with projects by releasing NFTs in combination with the respective, handmade goods as well. But I think all of the activity that we saw in 2021 - it's just a start of of a new trend, right? The digital economy is real, and it's coming sooner than many companies anticipate. I think all of the actions corporates have been taking so far is towards the right direction and understanding what the value of an NFT could be and what are the value propositions that it could mean for them and them engaging with their customers. As an analogy, some of the successful brands in the dot com era - they didn't call it a day after buying just a domain name and posting, like a static website. They started asking – “So now we have this. What's next? How do we engage our customers more leveraging this technology out there?”

(15:22):
In terms of the marketplaces, these are becoming huge businesses, right? We saw OpenSea and Rarible – these are the two most recognizable marketplaces for NFTs. It really started with Rarible with its exclusive launch during March 2021 but we soon saw that OpenSea take a major market share from them. I think it's the whole trend of purchasing NFTs corporates launching their own collections – its a trend that's pointing to a driving motivation behind corporate involvement. I think participants are kind of tinkering with the NFT market and trying to see how they fit in, how do they engage with the customers?

(16:18):
They're coming with more and more creative ideas every now and then. I think just looking at all of the corporations that are looking to engage with the NFT space, looking to see how they can interact with Web 3.0 and you know, I think it's, it's very, very cool for us to be working in a space like that and working with some of the clients that we have that are thinking about new and innovative ways to engage with their customers because they want to have a presence where their customers are going to be.

(16:52):
If the customers are gonna be in the metaverse and want to buy clothes and shoes for their metaverse avatars, that's where our clients want to be as well. So, it's a very interesting time to see how institutions continue to evolve their education on everything - not only on NFT, blockchain and metaverse matters, but just the crypto behind it and the technology behind it. It’s gonna be a much, much more than profile pics - we're talking about meta economies, digital economies, so very cool to be in the space and you know, there's never a dull day, I would say.

(17:30):
Kunal, you so eloquently and perhaps somewhat rhetorically pose this question, but it's the perfect question to end on for the NFT space, which is ‘What's next, really?’ I mean, so so cool. Kareem, Kunal, Ken and Kaan, in addition to being highly alliterative, this has been a truly impressive experience for me to just listen to and just understand some of the biggest stories from the world of crypto in 2021 on a deeper basis. Unfortunately, though, that does bring us to a close for today but before we go, I wanted to extend my most sincere thank you to each and every one of you for joining us today. I know our listeners are going to love this episode. And to our awesome subscribers as well as our listeners, thank you so much for tuning in. Be sure to join us next time on KPMG in Canada’s series on the state of cryptoassets. Bye for now.