Market Report

NFT Infrastructure
The Institutional Case for NFTs

June 2022
© 2022 web3 Studios Extrusion by Pak &
All rights reserved. Trevor Jones (2020)
Foreword
The term ‘NFT’ has shaped the last 12 months like no other – its connotation quickly spiked
from a technical revolution to the most-hyped buzzword people stopped paying attention to.
After the drastic rise of attention has created an almost infinite amount of market entrants
and a lot of retail users have been paying the price to more sophisticated, institutional
players, the term ‘NFT’ has lost a lot of its early-days glamor and has moved from the
world’s spotlight back to a more isolated, quiet corner with native users.

In this report, we want to demystify the NFT space, elaborate on why we have been heavily
investing time as well as capital in the NFT sector, and why we think there is a strong
institutional case to be made far away from the hype and craze that has stigmatized the first
phase of adoption.

In early 2021 we began writing about the NFT sector for some of the world’s largest
alternative asset managers and service providers aiming to dissect the market, carve out
specific use cases and explain the long-term potential of the ‘newly’ formed token standards
that allowed to proof ownership of non-fungible, i.e. unique, items on the blockchain.
Our message was simple: we view NFTs as a new concept of ownership, which we believe is
a significant improvement for specific use cases in many parts of the economy, and human
interaction more broadly.

Therefore, to grasp the opportunity it is important to look beyond the first application areas
(e.g. art, collectibles) that this concept of ownership is currently being used for and think
about the use cases yet to come for which the foundation is equally being built out as we
speak.

Yet, the universal media attention to pixel images selling for millions had seemingly made a
constructive dialogue impossible. Maybe now with a reset in valuations and less
surveillance, it is a good time to roll up this conversation again.
Content
Executive Summary 1

I. Marketplaces 4

II. Storage 10

III. Data and Analytics 13

IV. NFTs as Financial Assets 20

Metaverse Infrastructure 24

Concluding thoughts & Why now 28

web3 Studios Outlook 30

Contributors 31
web3 Studios | Research Report: NFT Infrastructure

Executive Summary
The key takeaway for us is that while the market is still nascent certain projects represent
opportunities that are of truly institutional grade quality. We are observing parallels to the
early days of the internet where strong network effects accrue to ‘established’ players,
especially as more and more utility is being added.

Furthermore, the market structure as we see it shaping out is similar to traditional markets,
eventually addressing end-users basic needs:
“Where can I trade my NFTs?” - Marketplaces
“Where is the data stored?” - Storage
“Where can I track/analyze NFT activity?” - Data and Analytics
“How can I make use of my NFTs?” - NFTs as Financial Assets

1
 web3 Studios | Research Report: NFT Infrastructure

Executive Summary
The overall NFT market is growing at a significant pace resulting in
large overall transaction volumes and an ever-increasing number of
individual NFT buyers, while still relatively small. Another characteristic
is its truly global set-up with a dispersion of activity around the globe.

Within these segments, we see varying degrees of maturity.

Marketplaces typically develop early maturity as they
are solving core customer needs and their growth is
fueled by strong network effects (like in web2). In
web3 these dynamics have led them to be one of the
most advanced verticals to date.

Similarly, with more and more data being produced,

storage has been one of the major topics for Big Tech
over the last decades so people have started to focus
on solutions rather early. In the specific case of NFTs,
storage of NFT metadata has not yet reached the appropriate level of
importance in the space with many philosophical questions about
where data should be stored remaining to be discussed.

When it comes to NFT data and analytics, there is a

mix of established crypto data analytics providers and
more specialized NFT players in the market - while
more and more data points and tools become
available, we have not met a single person active in
the space who feels satisfied with the tool kit currently
available.

Image credit: @bady_qb

2
 web3 Studios | Research Report: NFT Infrastructure

Executive Summary
Another nascent sub-vertical is the use of
NFTs as financial assets, as utility beyond
collecting and displaying is still limited. We
have started to see a lot of engagement
around the implementation of basic
financial services (e.g. lending, fractionalization) in the NFT
context and expect a lot more activity at the intersection of
Decentralised Finance (‘DeFi’) and NFTs going forward.

Not so prevalent yet, but moving closer to an extended reality

we believe people are also going to ask “What role do NFTs
play in the metaverse?” and it will be important to have a
sophisticated view of how ‘the metaverse’ will evolve. While it
is hard to foresee exactly what form it will take, we strongly
believe NFTs will play an integral role in that transition and
there are a couple of infrastructure pillars we think are
universally applicable.

"Innovation at the infrastructure level of emerging technologies has

created the biggest opportunities in the past, and we believe we are in
the early innings of a new innovation cycle.
While challenges in the space are more apparent than ever today, we expect
use cases leveraging NFTs to continue evolving that greatly facilitate
interactions between creators and consumers - and adoption will scale in
lockstep with the maturity level of the underlying technological
infrastructure, the user experience layer as well as the regulatory
framework."

Xiao-Xiao J. Zhu
Blockchain Lead KKR

Image credit: @bady_qb

3
web3 Studios | Research Report: NFT Infrastructure

I. Marketplaces
Marketplaces are the backbone of large parts of the NFT ecosystem, where trading of digital
assets is needed, allowing users to trade NFTs directly at a fixed price or through auctions.
Similar to more traditional industries, business-to-consumer (B2C) marketplaces can become
a central infrastructure layer and attractive business model as a market matures and reaches
critical levels of supply and demand volumes.

In addition to that, consumer-to-consumer (C2C) trading activity for digital goods has the
potential to significantly outgrow that for physical ones, given that the transparency and
verifiability of digital goods solve many of the roadblocks that limit its growth in the
physical domain. We distinguish between four major categories of NFT marketplaces along
two dimensions: Verticalization and Decentralization.

Institutional maturity level of vertical

4
web3 Studios | Research Report: NFT Infrastructure

1. General Marketplaces
General marketplaces take a holistic approach, offering NFTs from a broad range of projects
and with various functionalities, often unfiltered and uncurated. These platforms inherently
manage to address a large user base and therefore capture significant market share. Notable
examples include OpenSea, LooksRare, and Magic Eden*.

OpenSea is arguably one of the most prominent ‘institutional cases’ in the NFT space. The
platform has been dominating the industry ever since the introduction of NFTs, accounting
for c. 59% of total NFT trading volumes across all blockchains in 2021 according to
Dappradar*. OpenSea was founded in 2017 and has been valued at $13.3bn in the latest
$300m funding round led by Paradigm and Coatue in January 2022*.

However, other generalized marketplaces both within and outside the Ethereum ecosystem
have recently gained significant market share. In January 2022, LooksRare launched a
“vampire attack” to lure OpenSea users to switch to the new platform by incentivizing users
with trading rewards. The platform managed to achieve c. 4x OpenSea’s sales volumes
during this time and peaked at 80% market share in January 2022, but has since then
continuously lost market share to OpenSea*.

Source: The Block*. As of June 19, 2022

*Sources
1 https://www.fool.com/the-ascent/research/nft-market/
2 https://techcrunch.com/2022/01/04/nft-kingpin-opensea-lands-13-3b-valuation-in-300m-raise-from-paradigm-and-coatue/
3 https://www.theblock.co/data/nft-non-fungible-tokens/marketplaces

5
web3 Studios | Research Report: NFT Infrastructure

Total volumes remain the most important figure for NFT marketplaces from an economic
perspective with OpenSea and LooksRare charging 2.5% and 2.0% fees for every transaction,
respectively. Although LooksRare managed to capture a significant volume share, OpenSea’s
continuous dominance in terms of transaction count (c. 97% of Ethereum NFT transactions)
suggests that its average dollar value per transaction is significantly lower. By contrast,
LooksRare’s transaction count market share has never exceeded 3%*.

But what do these numbers actually mean in terms of revenues? LooksRare generated
$307m in protocol revenue in the first 30 days*. Clearly, this number is highly inflated due
to the strong incentives given to users, which caused a lot of wash trading activity post-
launch. However, OpenSea has demonstrated how profitable NFT marketplaces can
eventually be: the platform reported a total volume of more than $14bn in 2021 which
resulted in over $350m trading revenue based on OpenSea’s 2.5% transaction fee*.

While OpenSea and LooksRare remain the two dominant NFT marketplaces on the Ethereum
blockchain with a 94% combined market share at the time of writing, NFT volumes on the
Solana blockchain have significantly risen in early 2022*. Magic Eden, the leading NFT
marketplace on Solana, only launched in late 2021 and has generated a $1.45bn trading
volume to date according to DappRadar*. The platform has an impressive 97% volume share
(as of June 2022) despite OpenSea’s recent Solana integration*. With the continued adoption
of other smart contract platforms (e.g. Avalanche, Algorand, Near), we will most likely see
more generalized NFT marketplaces capturing a share of the total NFT market.

"The leading marketplaces in every ecosystem have been successful

when the foundations have been centered around enhancing the
user experience. This is one of our core principles and will always be
the heart of what we do. That's how you create great network effects
to build an engaged and active audience."

Jack Lu
Co-Founder of Magic Eden

*Sources
1 https://dune.com/hildobby/NFTs
2 https://thedefiant.io/looksrare-opensea-protocol-revenue/
3 https://cryptobriefing.com/opensea-saw-a-646x-increase-in-trading-volume-in-2021/
4 https://dappradar.com/solana/marketplaces/magic-eden
6
web3 Studios | Research Report: NFT Infrastructure

2. CEX Marketplaces
Centralized Exchanges (“CEX”) have emerged as the users’ gateway to the world of
cryptocurrencies and are now also trying to participate in NFT trading as they expand their
product offering. Unlike decentralized projects, a CEX is run by one typically regulated
entity, monitoring and facilitating transactions and securing assets. It provides the necessary
infrastructure for market participants to conduct transactions which are generally settled
off-chain on a centralized server. Needless to say, leading players such as Binance or
Coinbase are well-positioned to attract critical mass for an NFT marketplace given the large
number of active users. But can they compete with the likes of OpenSea in terms of volume?

In June 2021, Binance NFT was launched with three distinct product lines: (i) Marketplace for
NFT trading, (ii) Events enabling users to purchase NFTs from creators (e.g. digital artists,
athletes, or musicians), and (iii) Mystery Boxes, NFT boxes with different rarities. Only with
the mystery boxes Binance generated $360m in trading volume in 2021*. Originally only
integrating the Binance Smart Chain, the marketplace quickly expanded to add multi-chain
support for Ethereum.

Coinbase, the second-largest crypto exchange globally with roughly 100m verified users,
officially launched its NFT marketplace in April 2022. According to data on Dune Analytics
there were 7,100 users and volumes have only exceeded 50 ETH per day (c.$60k) in three
days out of the first 50 days post-launch*. To put this in perspective, ​OpenSea’s volume was
over 5000x higher than Coinbase NFTs even in the first two weeks after Coinbase’s NFT
marketplace launch*.

Similarly, other major exchanges such as Kraken, FTX, and crypto.com have recently
launched their own NFT marketplaces. Although these initiatives help to increase mass
adoption of NFTs and onboard new users, the vast majority of NFT trading is still taking
place on dedicated (and decentralized) marketplaces.

*Sources
1 https://www.binance.com/en/blog/nft/binance-nft-2021-our-milestones-and-what-awaits-in-2022-421499824684903248
2 https://dune.com/nathanmars7/coinbase-nft-analaysis
3 https://techcrunch.com/2022/05/06/coinbases-nft-marketplace-is-off-to-a-lackluster-start/

7
web3 Studios | Research Report: NFT Infrastructure

3. Vertical Marketplaces
New forms of markets and asset classes usually evolve from broad, generalized
marketplaces as we have seen in e-commerce with the likes of Amazon or eBay. As a market
matures and reaches critical mass, more specialized subtypes emerge to offer fit-to-purpose
curation and discovery as well as tailored UX and features for new product categories. We
are currently seeing the first wave of verticalized marketplaces being built along with initial
use cases and NFT categories.

One of the first (and most obvious) examples of verticalized marketplaces have been art-
centric marketplaces, which are often targeting digital art collectors with higher average
transaction value. This segment is fairly fragmented with multiple marketplaces across
blockchains and specialized subcategories, e.g. generative art or photography. Notable
examples of art-centric marketplaces are Nifty Gateway, Makers Place, Known Origin,
SuperRare, and Foundation.

As the application layer of NFTs expands from digital art into other categories, new
independent verticalized marketplaces evolve: Parcel* is building a marketplace for virtual
land, for example. In April 2022, Twitch co-founder Justin Kan raised $35m to build Fractal,
a marketplace dedicated to gaming NFTs*. Similarly, LimeWire raised over $10m in a private
token sale to grow its music-focused NFT marketplace*. Other sub-verticals with early-stage
verticalized marketplaces are digital fashion (e.g. The Dematerialised) or videos (e.g. Glass).

“Vertical NFT marketplaces can provide a tailored set of tools,

resources, context, and insights for buyers and sellers of a specific
sector. Beyond that, they can provide complementary and ancillary
products to expand their value proposition amongst that userbase.“

Noah Gaynor
Co-Founder of Parcel

*Sources
1 https://venturebeat.com/2022/04/01/justin-kans-fractal-raises-35m-for-game-focused-nft-marketplace/
2 https://www.theblock.co/post/142661/limewire-raises-10-million-in-private-token-sale-to-grow-music-linked-nft-platform
Disclaimer: web3 Studios is invested in Parcel

8
web3 Studios | Research Report: NFT Infrastructure

4. dApp Native Marketplaces

As interest in NFTs and their use cases soared, projects started to build their own marketplaces
tailored to individual collections and user needs. Native marketplaces can have several advantages
such as a more seamless user experience and the ability to determine secondary volume royalties. It
also allows the project to control a larger share of the overall customer journey. That said, building
an integrated marketplace can be challenging and adds another level of technical complexity.
Hence, several white-label NFT platforms and no-code solutions (e.g. Mojito, nftify) have emerged to
simplify and streamline the process of building marketplaces.

While generally increasing in relevance across verticals, the arguably most notable dApp native
marketplaces have emerged in the gaming and sports NFT space. Both Axie Infinity and NBA
Topshot developed their own blockchain infrastructure and integrated NFT marketplaces. Numerous
other projects developed native marketplaces across smart contract platforms and scaling solutions:
Sorare (Starkware), Dogami* (Tezos), The Football Club* (Flow), and Aavegotchi (Polygon) have all
built native marketplaces for in-game assets and collectibles.

5. Other
Besides the aforementioned different forms of marketplaces, there are several adjacent business
models. As fragmentation increases, marketplace aggregators have a role to play in allowing users to
trade NFTs across different marketplaces. In April 2022, OpenSea acquired Gem, a leading NFT
marketplace aggregator, for an undisclosed sum*. Reservoir addresses fragmentation by building an
open NFT order book that aggregates all liquidity into a single shared pool. Another example of
adjacent solutions is discovery platforms / tools as described in chapter 3.2.

"We recently launched a trading app allowing users to buy & sell NFTs
using any token further lowering entry barriers for new users."

Mounir Benchemled
Founder of ParaSwap*

*Sources
1 https://opensea.io/blog/announcements/opensea-acquires-gem-to-invest-in-pro-experience/
Disclaimer: web3 Studios is invested in Dogami, The Football Club & ParaSwap

9
web3 Studios | Research Report: NFT Infrastructure

II. Storage
There is a common misconception when it comes to the underlying data of NFTs and where
they are stored: Many people believe that an individual NFT automatically contains all
relevant data and is hence stored on the source chain. For example, in the art world, the
associated smart contract would contain the medium (e.g. picture, artwork), as well as
relevant metadata (e.g. title, description, characteristics), and can always be retrieved
directly from the blockchain. This is actually not true - given the limited storage capacity on
for example Ethereum’s base layer, fully ‘on-chain’ NFTs (like Cryptopunks and Aavegotchi)
are rather the exception and a hybrid model with some (or most) of the data being stored
off-chain is currently the norm.

As storage and data availability are at the core of frankly any digital ecosystem, let us take a
high-level look at the status quo, the different forms of storage, and the key players:

10
web3 Studios | Research Report: NFT Infrastructure

1. On-chain Storage
Representing the entire data set of media and/or metadata on-chain (e.g. Ethereum, Solana)
is currently the only way to fully ensure the permanent co-existence with the token itself.
However, as storage on these blockchains is limited and media files, as well as complex
metadata, can be too costly to store on-chain, generally speaking, the token contract will
contain a link to another data source, off-chain.

2. Off-chain Storage
2a. Centralized Storage
When it comes to off-chain storage solutions there are varying degrees of centralization
available to issuers of NFTs.
The easiest way would be to directly store the data on a centralized server, potentially even
hosted by the issuer of the NFT, or a cloud service solution, such as Amazon Web Services
(‘AWS’). This bears greater risks for NFT holders in the long-term as in this instance, the
person or entity with access to the server could not only change the data as they like but
also could the data disappear, if the project or the server host goes offline. To avoid this
some larger market participants, like OpenSea, are caching selected metadata on their own
servers to ensure a backup is available to users in case the original hosting solution fails.

2b. Decentralized Storage

To prevent potential seizure, alteration, and censorship possible in a centralized set-up
many projects have decided to use decentralized storage solutions. The two most popular
options are the InterPlanetary File System (‘IPFS’) and Arweave:

11
web3 Studios | Research Report: NFT Infrastructure

IPFS - the main off-chain storage solution for NFTs on Ethereum.

IPFS is a peer-to-peer file storage network that allows content to be hosted across
computers, called nodes, such that the file is replicated in many different locations. Pinata
and Filebase are making this network more user-friendly and accessible to everyone.
However, the weakness of IPFS is that persistence is not guaranteed per se as the data must
be hosted intentionally by a node in the network. In fact, many NFT marketplaces utilizing
IPFS currently act as the node hosting their own files thereby again creating a certain
reliance. Filecoin aims to solve this issue by incentivizing the long-term storage of data for
other people. It has created a marketplace where larger nodes can rent out their storage
space and get rewarded for it, allowing marketplaces to pay for the storage in IFPS through
third parties.
Protocol Labs (the developer of IPFS and Filecoin) has further launched NFT.Storage which
utilizes both, IPFS and Filecoin, to achieve a greater chance of persistence.

Arweave - the main off-chain storage solution for NFTs on Solana.

Arweave is a decentralized storage network with persistence at its core: users pay a one-
time fee to cover the cost of 200 years of storage (the duration is an estimate based on the
decreasing price of physical data storage and could even be longer). This is achieved by
incentivizing computers in the network to replicate and store copies of data that few other
computers are storing. Arweave further bridges IPFS and incentivizes users to double-store
information through both Arweave and IPFS.

"Within gaming, storage is one of the major key obstacles towards fully
decentralized development. Games take a ton of space, and, without a robust on-
chain storage solution, web3 games will be stuck relying on centralized non-
persistent entities."

Sam Peurifoy
Partner at Hivemind
& CEO of Playground Labs

12
web3 Studios | Research Report: NFT Infrastructure

III. Data and Analytics

As the NFT trading space is growing, and with it the exposure of retail and institutional
money to it, so is the need for tools to optimize that activity. The blockchain, due to its
transparent nature, opens the playing field for tools to be built catering to these needs,
which resulted in an ever-growing wave of companies developing solutions in this segment.
Similar to the web2 world of investing, people have a range of fundamental needs when it
comes to NFT trading: tracking and analyzing NFT transactions, identifying NFTs to buy,
making informed NFT buying/selling decisions or gaining overview of value and managing
NFT holdings.

We currently see the following categories fulfilling these needs in the NFT market:
1. Analysis: Insights into NFT trading activity
2. Discovery: Suggestions for NFT purchases
3. Metadata Analytics: Guardrails of NFT value differences
4. Valuation and Management: Status check and steering mechanism

13
web3 Studios | Research Report: NFT Infrastructure

1. Analysis
As the space matures and trading activity increases over time, investors become more
sophisticated in their actions. With every transaction being publicly visible on-chain,
opportunities for granular analysis of market and project data as well as insight generation
can be taken to a new level.

There is a broad range of analytics tools making use of these opportunities mostly differing
in scope, use case focus, and UX. Leaders in the space such as nansen ($750m valuation),
icy.tools (recently acquired by QuickNode), and Dune Analytics ($1bn valuation), just like
new entrants, such as NFTGo (raised $6.8m in venture capital) that focuses on user
experience through a project-based live feed, cover core functionalities such as sales trends
with info on floor prices and volumes, specific details on individual transactions or agents in
the market through wallet analysis, and holder fragmentation*.

While the large players are trying to become the all-in-one-place go-to analytic tool, smaller
players emerged with a specific focus, e.g., flips.finance, focusing on tracking delistings,
floor increases, and volume increases, Ninjalerts, building a wallet tracker with alert
functionality for web a mobile, or SPR3ADSH33T’S insights, a discord-only insight tool.

*Sources
1 Crunchbase

14
web3 Studios | Research Report: NFT Infrastructure

With the NFT market taking off in 2021 the analytics platforms used this momentum by
onboarding users with a freemium model, providing a version with basic functionalities
open to the public. For more advanced functionalities most platforms are charging a SaaS
membership fee. People can leverage these tools to trace complex trades on a very granular
basis. This activity becomes especially exciting in the case of impactful, market-moving
events such as the recent Terra Luna crash, or large-scale hacks targeted at big sums of
capital - where people uncover activity priorly not accessible to the public. Looking into the
future this ability to gain an information advantage based on analytics can constitute the
basis for institutional-grade market moves.

The core data layer for many of the data and analytics tools built is pulled through the
Etherscan API that derives data from Etherscan’s Ethereum (ETH) Block Explorer - the
leading Blockchain Explorer. This level can be seen as the rawest form of tracking -
providing a real-time snapshot of all transactions happening and a historic record of past
transactions. Additionally, Etherscan’s platform enables end-users to read and interact with
a smart contract, enabling end-users to audit a contract before interacting with it or to
directly mint from it avoiding unnecessary paths via project landing pages.

*Sources
1 Chainalysis

15
web3 Studios | Research Report: NFT Infrastructure

Most analytics tools use the API of Etherscan as a data feed, getting it into shape and
building a more intuitive UX on top to enable end-users to work with it. With these tools at
hand, end-users can expand their set of trading strategies ranging from tracking wallets of
specific high net-worth wallets, so-called whales, over spotting early minting activity in new
contracts, to hedging against downward price spirals with instantly following sell
movements of large volume trades.

To facilitate the time-consuming process of retrieving NFT metadata from the blockchain,
incl. developers identifying each smart contract, reviewing its metadata schema, and
normalizing it within a local database, NFT API solutions like NFTPort, which raised $27m in
funding, arose to take on some of the heavy lifting and make the NFT data searchable and
accessible*. Larger blockchain infrastructure companies like Blockdaemon, which is valued
at more than $3bn, as well as Quicknode, which raised $40m in funding, further offer NFT
APIs as part of their products*.

*Sources
1 Crunchbase
2 Chainalysis

16
web3 Studios | Research Report: NFT Infrastructure

2. Discovery
With its incredible growth trajectory and early financial success of project creators, the
market for NFTs has been overflowed with projects. While every new wave brings out a
handful of projects with unique and innovative edges, there is a long tail of derivative
projects deemed to lower quality value propositions. This situation makes the NFT trading
environment dangerous, particularly for retail investors that are not equipped with extensive
knowledge, experience, or the ability to make data-based decisions.
Currently, the process of searching for and identifying NFTs to purchase is not intuitive
especially to newcomers in the space. Given the early stage of technological innovation and
an oftentimes limited amount of data, a seamless search experience like with Google has
not yet been established.

The current discovery and decision-making process with regards to buying NFTs are based
on personal judgment, somewhat random exposure to Twitter tweets, and alleged insider
information on trades with a high success likelihood - so-called alpha - that is spread
between discord channels and private messages. This area naturally is very noisy - looking
at the incentive drivers of participants. Given that new projects don’t have any historic
volume or price reference that develops when a project is trading on the secondary market,
the discovery stage can be really hard to figure out.

pulsr.ai is working on a social platform for NFTs that focuses on visual exploration and price
discovery powered by an AI-powered NFT search engine. Other than that this sub-vertical is
still largely owned by bootstrapped projects and small-scale solutions such as cryptoscores
or mintyscores developing their own NFT drop scoring system regularly publishing on
socials, NFT Evening, a more traditional news outlet to educate buying decisions, and a
broad range of NFT Drop Calendars that all face incentive misalignments of offering paid ad
spots for upcoming projects.

While some of these tools show promising dynamics, there is still a long way to go to
facilitate the discovery process to a level that is intuitive for new retail investors and
similarly protects them from being taken advantage of.

17
web3 Studios | Research Report: NFT Infrastructure

3. Metadata Analytics
A large number of NFT art and Profile Picture (PFP) projects have rarity dynamics baked in,
i.e., releasing larger collections with individual NFTs consisting of multiple traits with
different characteristics. Besides creations that are created with intentionally rare trait
combinations, the supply level of a characteristic mostly determines its rarity, and thereby a
lower supply level creates more demand driving the price of an NFT.

Many times, collections don’t predetermine any formula on how to compare overall traits of
an NFT and there are different parameters to look at like rarity based on the rarest trait,
statistically assessing the rarities, or even taking an average of the rarity of traits. Now,
constantly calculating the rarity score for each NFT would take a considerable amount of
time for humans. To solve this, two market leaders emerged in ETH NFTs, rarity.tools and
rarity sniper, which people are largely using to check rarities on their individual websites, as
well as integrated as discord bots. In the Solana universe space is owned by rarity sniffer
and howrare.is. Furthermore, there are a range of chrome extensions that enhance the
experience on marketplaces with rarity functionalities such as SuperSea for OpenSea (ETH)
and SolSniper for Magic Eden (SOL).

Looking into the future, the real value here is that these tools rank/determine rarity based
on NFTs metadata, which can be extremely useful also for future NFT use cases.

4. Valuation and Management

“Just as with fungible tokens people want to monitor the state of their NFT
portfolio. While price estimates for inherently illiquid and unique items are
challenging we are continuously optimizing as we collect more and more data.“

Evgeny Yurtaev
Co-Founder of Zerion*

Disclaimer: web3 Studios is invested in Zerion

18
web3 Studios | Research Report: NFT Infrastructure

For retail investors in the space keeping track of NFT transactions can be challenging at
times. The higher the number of trades the more complex tracking gains and losses can be,
especially when trading on different chains, platforms, and with ever-changing market
prices of the underlying currencies. Having a clear view of your personal finances can not
only benefit you in terms of optimizing your strategies but is similarly important when
looking at NFT trading activities as tax events in most jurisdictions.

To grant an overview of the current value of one's holdings, past transaction history, and
further specific insights on trading activity, several NFT-specific tools emerged. One of them,
NFT Bank, has moved beyond the valuation and appraisal functionality, and expanded to
include links to crypto tax filing solutions. Its competitor Upshot has expanded its core
product by offering its API to third-party platforms wanting to integrate its functions. Other
players in the space include Abacus and Taker, which use peer-to-peer mechanisms for price
appraisal. Beyond that, a range of tools that have historically emerged from tracking and
managing user activity in DeFi or other verticals, have expanded their product offering to
include NFT portfolio tracking as it is based on the same underlying functionality. Examples
here include Zapper, funded with $17m, Zerion*, funded with $10m, and DappRadar, funded
with $7m*.

"NFTs are the centerpiece of web3, which provided an entry gate to the space
for millions of mainstream users and successfully established a new asset class.
While we watch the growth of the space with excitement, we see the need to help
market participants make informed decisions based on NFT prices - NFT
investors, creators, guild managers, and scholars alike.
The need is only growing as NFT-backed lending scene takes off, and all protocols
needing an accurate price for the NFT collateral. Leveraging machine learning to
integrate large amounts of data, such as historical sales and NFT metadata, to
power the accurate NFT price feed, is critical to achieving this goal."

Daniel Minsu Kim

Founder of NFTBank

*Sources
1 Crunchbase
Disclaimer: web3 Studios is invested in Zerion

19
web3 Studios | Research Report: NFT Infrastructure

IV. NFTs as Financial Assets

With the appearance of high-value items in the NFT ecosystem, the financialization of these
assets has become one of the overarching topics of the last two years. In the physical real
estate world, for example, investors would typically not just own a house worth several
million but instead, use it as collateral and/or lend it out. Over time as selected NFTs have
become worth more than some houses, demand for these products on-chain has naturally
emerged. Furthermore, the transaction ability and transparency of NFTs have opened up an
exciting opportunity to bring instant liquidity into markets that used to be inherently
illiquid. In comparison to the other sections, we see this vertical as only just emerging and
less mature than some of the other segments, such as marketplaces.

We currently see the following categories providing some form of liquidity to the NFT
market: Collateralization, Fractionalization, Renting, and Automated Management.

20
web3 Studios | Research Report: NFT Infrastructure

1. Collateralization

Lending markets are the foundation of our traditional financial system and likewise, we see
them as foundational infrastructure in the NFT space. Pioneer in this field is certainly peer-
to-peer lending platform NFTfi with a total loan volume of $209m at the time of writing*.
The largest public NFT collateralization of 104 Cryptopunks was facilitated by the
marketplace in collaboration with MetaStreet - a recently launched liquidity scaling protocol
to algorithmically underwrite, aggregate, and execute NFT-backed loans.

"The leading marketplaces in every ecosystem have been successful when the
foundations have been centered around enhancing the user experience. This is
one of our core principles and will always be the heart of what we do. That's how
you create great network effects to build an engaged and active audience."

Jonathan Gabler
Co-Founder of NFTfi

*Sources
1 https://dune.com/rchen8/NFTfi

21
web3 Studios | Research Report: NFT Infrastructure

JPEG’d (current TVL c.$7m*) set out to offer peer-to-protocol lending. This is achieved
through the introduction of “floor price” oracles launched in collaboration with Chainlink.
Users can currently draw loans against their Cryptopunks, EtherRocks, BAYC, and MAYC with
a maximum loan-to-value ratio of 32%. Lately, also MakerDAO (the overcollateralized DeFi
lending protocol with c.$8bn TVL at time of writing*) has famously entered the lending
markets for non-fungible assets by providing Tesla with an $8m real estate financing*. In a
similar fashion Teller Finance has recently enabled the first crypto mortgage for a Texan
house-buyer.

But not only crypto-native protocols are active in this field. We are starting to see custodians
for fungible tokens and even the first banks entering the NFT custodian space - essentially
paving the way for traditional bank loans collateralizing NFTs.

"The largest driver of innovation in the world isproperty rights - the creation of
enforceable property rights for digital goods will drive a Cambrian explosion in
innovation and value creation for the digital economy over the next decade. As
some of the market hysteria cools off and the macro backdrop shifts from bull to
bear, look to financial infrastructure improvements (particularly the enablement
of robust credit markets) to catch up to market demand and introduce the
plumbing necessary to fuel further growth and innovation in digital assets.“

Conor Moore
Co-Founder of MetaStreet

2. Fractionalization
Imagine you could instantly sell your car at any point in time for the lowest price within
your brand, model and year - this is roughly what automated liquidity pools from NFTX
(largest index Cryptopunks with $13m TVL*) and nft20 (largest index is Cyberkongz $146k
liquidity*) are offering to holders. Obviously, the sellers to these pools would only do these
when they know their NFT should be valued close to the floor price of any given collection.

*Sources
1 https://jpegd.io/, as of 20.06.22
2 https://www.defipulse.com/projects/maker
3 https://blogs.gartner.com/avivah-litan/2022/04/13/tesla-gets-7-8m-in-real-estate-financing-using-makerdao-real-world-assets-meet- defi/
4 https://dune.com/nftx/NFTX-Dune-Dashboard-Single-Vault-View?Vault_Address=0x269616d549d7e8eaa82dfb17028d0b212d11232a, as of 20.06.22
5 https://nft20.io/assets, as of 20.06.22
22
web3 Studios | Research Report: NFT Infrastructure

Therefore, the resulting basket of NFTs in the liquidity pool is considered a reasonable index
for the floor price of that collection and thereby allowing separate users, who might not
have the means to acquire a full piece to gain exposure through acquiring index tokens.

When it comes to fractionalizing ownership of an individual NFT or a collection of NFTs, the

go-to-places are Fractional ($34m reported market cap across vaults*), SZNS (home of the
MeebitsDAO Pool with 92 Meebits valued at around $280k*) and unic.ly. These platforms
have streamlined the collective ownership and governance processes for any given NFT(s).

3. Renting
The idea of letting NFTs have been as old as the first metaverse worlds with the most
awaited use cases being the renting and letting of virtual land. However, it was the uptick in
play-and-earn games and the creation of player collectives, called guilds, that ultimately led
to the first viable use case of renting NFTs. The most famous guild Yield Guild Games (YGG)
compasses a network exceeding 27k players*. Typically, the guild would buy gaming items
(in form of NFTs) required to efficiently play the game and then rent them out to scholars so
they can work with them; the resulting profits are shared.

Against this movement some projects, for example, move-to-earn giant STEPN, have
signaled they would prohibit the renting and borrowing of items outside of their platform
and only make this available through their own platform.

Other 'more traditional' renting model marketplaces include EnterDAO, reNFT & IQ Protocol.

4. Automated Management
Uniswap is the pioneer and largest automated market maker. With its v3 upgrade, it changed
the form of the depositors’ liquidity position from a fungible to a non-fungible token. The
resulting liquidity pool NFTs are the most prominent NFTs of a purely financial nature.
Projects like Charm and Visor are managing these liquidity positions automatically on behalf
of their depositors and making the interactions as liquidity providers as uncomplicated as
dealing with Uniswap’s v2 fungible LP tokens.

*Sources
1 https://dappradar.com/nft/fractionalized, as of 20.06.22
2 https://dappradar.com/nft/fractionalized, as of 20.06.22
3 https://medium.com/yield-guild-games/yield-guild-games-network-smashes-major-milestone-to-onboard-over-20-000-axie-infinity-
scholars-3d91f7a6c9ca

23
web3 Studios | Research Report: NFT Infrastructure

V. Infrastructure for the NFT-

....enabled Metaverse

Lastly, we are exploring the main NFT infrastructure that is currently driving the metaverse
and will likely shape its form in the future. No matter how broad or narrow we define the
metaverse, NFTs as the most transparent digital proof of ownership is and will be at the
core of it. In its most basic form, Twitter’s latest move to verify ownership of profile pictures
for users is the first proof of that; Meta aggressively investing through Facebook, Instagram,
and Reality Labs (company segment of the virtual reality hardware maker Oculus and virtual
space Horizon Worlds) is another.

"The Metaverses have found in digital events a very powerful use case, thanks to
a superior UX compared to traditional digital offerings. Also, we started RLTY to
build the right infrastructure in order to allow anyone to easily create such
Metaverse events. Digital twins of physical events, gatherings of web3
communities, online conferences are only few of the verticals already showing a
strong traction in this booming market."

Jerome Guilmet
Co-Founder of RLTY*

*Sources; Disclaimer: web3 Studios is invested in RLTY

1 https://www.smartinsights.com/social-media-marketing/social-media-strategy/new-global-social-media-
research/#:~:text=58.4%25%20of%20the%20world's%20population,27%20minutes%20(January%202022)
2 https://www.weforum.org/agenda/2022/04/social-media-internet-
connectivity/#:~:text=On%20average%2C%20global%20internet%20users,trends%20differ%20widely%20by%20country
3 Decentraland, Voxels, Somnium Space, NFT Worlds. https://analytics.wemeta.world/metaverse/welcome

24
web3 Studios | Research Report: NFT Infrastructure

1. Digital Identity

Since the introduction of online social media platforms, people have naturally adopted a
digital representation of themselves. As more and more parts of human interaction become
virtual and we develop an increasing number of purely digital use cases we are each
creating our own digital identity. For some of us, this can be fairly decoupled from the real,
physical identity. The rise of popular anonymous online accounts is an example of that.
Highly desirable avatars and profile pictures from Yuga Labs, Genies, RTFKT, and Ready
Player Me have proven the demand for digital communities. At the end of the day, the
human desire to belong to a group and affiliate with a bigger mission does not end in the
physical world.

*Sources
1 https://blockworks.co/silver-lake-leads-150m-funding-round-in-web3-avatar-company/
2 https://www.businesswire.com/news/home/20220322006088/en/Yuga-Labs-Closes-450-Million-Seed-Round-of-Funding-Valuing-the-
Company-at-4-Billion-Confirms-Plans-for-Metaverse-Project
3 https://news.nike.com/news/nike-acquires-rtfkt

25
web3 Studios | Research Report: NFT Infrastructure

2. Visualization
Augmented or virtual reality (AR/VR, often referred to as extended reality) is certainly a
separate field from NFTs and a huge opportunity in itself. In the NFT space, projects have
started to create applications tapping into this field, like Snapchat filters aiming to extend
the usage of their digital items into an augmented world. Similarly, showcasing digital art in
virtual galleries has gained in popularity. As AR/VR headsets become more user-friendly and
more widely adopted (see sales forecast) we expect the display of digital goods and thereby
NFTs to move away from simple screens to an increasingly immersive setting over time.

3. Transition Enablers -
from Physical to Digital
While there are inherently digitally native use cases, we believe that the transition from
predominantly physical aspects of our lives will take time and we are still in an early phase
of ‘complementing’ the physical world through the digital extension. That is why many
brands are seeking a presence in the metaverse through offices, stores, and events like the
Metaverse Fashion Week in Decentraland which included over 70 brands (e.g. Estée Lauder,
Tommy Hilfiger, Dolce & Gabbana). RLTY*, a business creating the infrastructure for
metaverse events, has recently hosted the Cannes’ first NFT movie festival in parallel to the
traditional film festival.
Disclaimer: web3 Studios is invested in RLTY

26
web3 Studios | Research Report: NFT Infrastructure

With regards to physical products, there are many experiments ongoing with different
approaches on how to bridge these into the metaverse and to what extent the physical and
digital should co-exist. There is no clear school of thought yet but this will be an interesting
area to follow.

4. Virtual Worlds
Decentraland, Sandbox, and OpenMetaverse are among the most well-known virtual worlds
that represent the currently accessible forms of the metaverse. These are not only
dependent on integrating users’ NFTs (in form of art, wearables, and other items) into their
worlds, in fact, many of them have even bootstrapped their growth through tokenized land
sales.

Over the last two years, many virtual worlds have emerged, all varying slightly in use cases,
target audience, and functionality. It is too early to tell, but very well possible that we are
heading into segregation not too dissimilar to the one we have undertaken for marketplaces
- with worlds positioning differently in terms of centralization, verticalization/focus, and
ultimate use case.

27
 web3 Studios | Research Report: NFT Infrastructure

Concluding Thoughts & Why to

Get Involved Now?
While writing and researching for this report it has
become clearer than ever that it is not only the
media but also our communication as an industry
that has led to the overly simplistic classification
of NFTs as pixel art and profile pictures.

Going forward we believe we need to do a lot

better in educating, as well as showcasing the
tremendous opportunities a decentralized, digital,
and transparent ownership system has. Even the
thought leaders in the space very generously use
the term ‘NFT’ as a category for art, collectibles, or
community tools – whereas that is drastically
limiting the broad reach of applications that NFTs
will enable: After all, saying “I own a lot of NFTs”
is literally the same as saying “I own a lot of
unique items” in the physical world...

We, therefore, encourage everyone,

including ourselves, to look through
the technical concept of ownership
and focus on the individual application
– in ten years, with many more use
cases being added, no one will use the
term ‘NFT’ anymore but the sooner
we start with it the better.

Image credit: Alexander Andrews

28
 web3 Studios | Research Report: NFT Infrastructure

End-users, web3 companies, corporates, and institutions alike will have to collaborate to
further develop the existing institutional use cases, carve out new innovative ones and
shape the NFT infrastructure of the future together.

The great thing about the infrastructure currently being built for the early use cases of NFTs
is that they will be easily applicable to all the ones that follow – an NFT lending protocol is
not just a digital art lending protocol, but can adapt as more assets move on-chain.
Therefore, we are following the establishment of the first infrastructure pillars with much
excitement and urge everyone to get involved now to not get left behind.

6
29

Image credit: Alexander Andrews

web3 Studios | Research Report: NFT Infrastructure

web3 Studios Outlook by Vertical

Marketplaces: Marketplaces have a well-known and understood business model - that’s why
investors love them. Also, the network effects are real: not only do they become the go-to
place for customers but they further accrue so much data the whole industry ends up using.
After the first wave of general NFT marketplaces which have become established players of
scale, we are expecting to see a second wave of verticalized marketplaces.

Storage: The opportunity for decentralized storage is huge. Similar to web2 cloud services,
network effects are extremely strong as trust and track record are key in a ‘no room for
mistake’-environment. There are less than a handful of sizable players in the web3 space
despite no crystal clear direction of travel - we will continue to monitor developments in
this segment very closely.

Data Analytics: Institutional investors entering the web3 space love second-order bets
without asset price exposure and this is why data providers and analytic tools have enjoyed
so much demand. There are currently many smaller NFT-focused projects emerging - in a
market where there are already larger, broader competitors we would expect to see some
take-overs and consolidation.

Financial Assets: We are in the very early innings of the crossover of NFTs into Decentralized
Finance. So far there has been limited traction, potentially because the target audience of
NFT buyers/holders is not yet educated enough and the platforms need to gain more trust.
Regardless, we are seeing many new teams building in this vertical and are excited to see
how patterns change when NFTs go beyond art, collectibles, and gaming items.

30
web3 Studios | Research Report: NFT Infrastructure

The web3 Studios Team

Acknowledgements
A special thanks to all contributors and experts who generously shared their perspectives on
the current state and future outlook of NFT infrastructure, namely:

Xiao-Xiao J. Zhu Jonathan Gabler

Blockchain Lead KKR Co-Founder of NFTfi

Mounir Benchemled Evgeny Yurtaev

Founder of ParaSwap Co-Founder of Zerion

Sam Peurifoy
Daniel Minsu Kim
Partner at Hivemind
Founder of NFTBank
& CEO of Playground Labs

Noah Gaynor Conor Moore

Co-Founder of Parcel Co-Founder of MetaStreet

Jack Lu Jerome Guilmet

Co-Founder of Magic Eden Co-Founder of RLTY

A huge thank you to each and every one of you!

31
web3 Studios (“w3s”) is a financial advisory and investment
firm dedicated to accelerating the world’s transition to
web3. Founded by Blackstone and McKinsey alumni, we
started w3s with a mission to bridge the gap between the
institutional world and the web3 space:

w3s advisory: we provide a full spectrum of financial

advisory services to all stages of companies, including
M&A, later-stage equity and token fundraising, strategy
& corporate development, and tokenomics

w3s ventures: our team has collectively invested in 25+

early-stage web3 startups over the last years and we
partner with exceptional web3 founders to drive value
through hands-on operational support in areas such as
strategy & business development, recruiting, and
fundraising

w3s fellows: w3s fellows is a top-talent program for

business students, graduates, and young professionals
who are interested in starting a career in web3. We built
a community of high-caliber candidates and help our
partner companies to hire the smartest minds in web3

team@web3-studios.com
web3-studios.com
@web3_studios
company/w3_studios

© 2022 web3 Studios

All rights reserved.
© 2022 web3 Studios Fusion by Pak &
All rights reserved. Trevor Jones (2020)
Disclaimer
This report is for informational purposes only, and is not intended to provide financial, or
investment advice. Recipients should consult their own advisors before making investment
decisions.

This material contains links to third-party sites that are not under the control of web3
Studios. Access to such information does not imply association with, approval of, or
recommendation by web3 Studios, and web3 Studios is not responsible for the products,
services, or other content hosted therein.

web3 Studios does not guarantee the accuracy, completeness, timeliness, suitability or
validity of the information in this report and will not be responsible for any claim
attributable to errors, eliminations, or other inaccuracies of any part of such material.

This report reflects the opinions of the authors from web3 Studios who have invested in the
private rounds of the following companies mentioned in this report: RLTY, Parcel, SZNS, The
Football Company, Zerion, ParaSwap, and Dogami.

2
We'd love to hear from you!
Please contact us if you have any
questions or feedback about the
report.

Thank you!