How Ethereum fuelled the NFT boom

For three months toward the end of 2017, Dieter Shirley and his team sat in a little room in the corner of a startup foundry in Vancouver and developed ERC-721, an Ethereum token standard that made digital art “verifiably scarce.” That project, called CryptoKitties, went so viral that it almost crashed Ethereum shortly after its launch. And its success sparked the creation of a digital art industry that’s projected to reach $315 million this year. 

The great innovation was to introduce scarcity to cryptocurrency; while each individual Bitcoin is indistinguishable from the last, each of Shirley’s ERC-721 tokens is unique. Shirley and his team used the technology to create a new kind of art.

They had embedded into each CryptoKitty—ERC-721s representing cartoon “derpy” cats—what amounted to genetic code. Each CryptoKitty has unique “cattributes”, mothers and fathers, personalities. 

“They breathed life into something that was boring—what is essentially just an economic token. They put eyeballs on it and they gave it traits. It became relatable and cute—people have passion for their CryptoKitties,” said Franky Aguilar, an artist from Los Angeles who later worked with Dapper Labs, the company behind CryptoKitties. 

And owners can breed their cats to create new ones. Rare CryptoKitties can be worth thousands; one cat, “Dragon,” sold for $170,000 in 2018. 

A NFT idea

The craze took off, with others quickly minting their own ERC-721 tokens, also known as NFTs, or non-fungible tokens. Marketplaces opened, game developers integrated NFT-based digital objects and digital artists started to play around with them. Now, several years later, French gaming giant Ubisoft has built an entire game around NFTs, the NBA has stamped online trading cards with ERC-721s and fine artists use them to sell their oeuvres for thousands. Even Doctor Who has got in on the action, in the BBC’s first venture into blockchain.

Looking at the world he’s helped create, Shirley said: “I'm just so proud that we took the effort to make something that other people could build on top of, because what they've built shows creativity beyond the bounds of what any single team could hope to achieve,” he said. “It gives me so much joy.”

But times have changed: some say that the NFT market has grown too large for Ethereum, with its high gas fees and sluggish performance. People are starting to look elsewhere. Shirley’s team, which grew into Dapper Labs, has spent the past two years building Flow, a blockchain that’s purpose-built for NFTs. Dapper Labs is bringing its reputation with it; the company recently inked a deal to create NFTs based on Dr. Seuss characters on the Flow blockchain. 

If Ethereum can’t solve its own problems, the NFT industry may abandon it. 

Market makers

Devin Finzer is co-founder and CEO of New York-based OpenSea, one of the largest marketplaces for NFTs. He started his company with co-founder and CTO Alex Atallah around the time CryptoKitties went viral. The pair launched the marketplace in early 2018. 

“It was really just another way to trade your CryptoKitties,” he told Decrypt. It wasn’t particularly useful at first, he added, since CryptoKitties had its own marketplace. But then other NFT games launched without bespoke marketplaces. “That was where OpenSea was useful: people who owned these items could connect their MetaMask and immediately start trading them without the game having its own marketplace.”

Finzer said that dozens of poor quality projects mimicked CryptoKitties in the months to come, trying to “ride the tailwinds of CryptoKitties” and profit from its “speculative craze.” But it didn’t take long for NFT projects to mature, he said. By February 2018, the market had already attracted legitimate projects—higher quality ones with “a lot more development.” He now counts between 600 and 700 legitimate projects on OpenSea. 

Connie Digital, a digital artist from New Jersey, was there at the start. He’d followed Bitcoin since 2013 but dove into Ethereum following the launch of CryptoKitties: “I was breeding cats. I was buying cats, I sold a couple of cats,” he told Decrypt. Then he learned he could create these NFTs himself. “That’s when things really started to change for me.” Now, he’s hosting virtual reality gallery showings and selling his art in exchange for $HUE, his own token. “It's exciting because a lot of this is uncharted territory,” he said.

Finzer’s company now has around 20,000 traders who trade about $1 million per month. He estimates the entire monthly market volume at $4-5 million. “We’re still at the very beginning, even today. The number of people who are using NFTs today is totally small.” 

The art of the matter

NFTs are already attracting serious artists. Photographer Lyle Oweko, doodler Jon Burgerman and 3D digital art producer Perry Cooper are among a dozen or so artists who’ve found a home on Nifty Gateway, a NFT marketplace that launched a few months ago with backing from Cameron and Tyler Winklevoss, the founders of crypto exchange Gemini.

Pieces can go for thousands of dollars. “I think the most exciting part for me continues to be the fact that all these digital artists who have large followings on Instagram and that have never had a way to sell their work before or for the first time they can serious money selling their artwork,” said Duncan Cock Foster, who co-founded Nifty Gateway along with his brother, Griffin. 

Nifty Gateway features new artists every Thursday and many sales sell out within hours. Jon Noorlander, a digital artist who has eked a career out of sharing his art with his 400,000 TikTok followers, has sold his digital art on Nifty Gateway. “He’s making real money off of it for the first time. It’s just pretty awesome to witness,” said Cock Foster. Cock Foster did not disclose the cut he takes from these sales.

Ethereum’s growing pains

Ethereum was a “no brainer” for Cock Foster: It has “the most collectors, the most tools, most of the infrastructure. Finzer didn’t dither either, even though NFTs are available on other blockchain networks. “Ethereum has been the main chain for crypto collectible applications over the last couple of years,” he said.

The infrastructure built for Ethereum sustains its NFT community. For instance, connect your MetaMask to crypto collectibles game Decentraland and you can transfer tokens to OpenSea or use them in another game, like Cryptovoxels—a virtual world, kind of Second Life meets Minecraft. You can’t do that on other blockchains.

But the blockchain has “substantial limitations,” Finzer said. High gas prices, prompted recently by the rise of DeFi, or decentralized finance, make things impossible for games that rely on microtransactions for crypto collectibles. 

“Right now, to buy something on OpenSea, you pretty much always have to pay about a dollar in gas to just make a purchase,” he said. “That's a pretty bad user experience if you're trying to buy game items that are maybe only 50 cents each, and you have to pay an extra dollar tax.” 

That’s why Shirley has spent the past few years at Dapper Labs building a blockchain purpose-built for NFTs. The blockchain, called Flow, is still under construction. Shirley wants to move CryptoKitties to the new chain once it’s finished. It promises to support the entire NFT industry and get rid of high transaction fees. 

But it’s unlikely it’ll support Ethereum, at least at launch—meaning that Ethereum-based NFTs, and the games and marketplaces that support them, would be out of reach. “Interoperating between decentralized systems is incredibly challenging,” said Shirley. “It's a problem that I don't think anyone has really solved yet.”

So, will the Ethereum community jump ship? Cock Foster doesn’t see any reason to move Nifty Gateway to another blockchain, since Ethereum’s transaction fees, while high, won’t put off those ready to drop $10,000 on a JPEG. Connie Digital, whose own token, $HUE, relies on microtransactions, doesn’t think that people are desperate to leave either. “People are tied to Ethereum. But with any other business, if you provide a service that's faster, cheaper, people will tend to gravitate towards that,” he said.

And those who’ve invested in crypto collectibles aren’t likely to abandon the platform, said Shirley. “A hundred years from now, someone, somewhere is going to be running an Ethereum node—even if it's just in the Smithsonian Institute.” 

“So long as Etherum is alive and well, NFTs on Ethereum will be alive and well,” said Shirley. But would superior blockchain allow for a much bigger ecosystem than is possible on Ethereum today? “Yeah, absolutely.”