Nonfungible tokens (NFTs) remained an integral part of the Web3 ecosystem in 2023, with many community members continuously braving new waters and constantly trying to figure out solutions to the space’s challenges throughout the year.
While critics regularly write obituaries for NFTs, users trading the asset class prove that the space is very much alive. In the last 30 days alone, the top 10 blockchains used for NFTs have recorded a collective sales volume of over $1.5 billion, showing that there is still demand.
While so many things happened within the NFT space in 2023, some changes stood out more dramatically than others. These include historical developments for the industry, like the creation of Bitcoin Ordinals, the first United States Securities and Exchange Commission case against NFTs and the divide regarding creator royalties.
The rise of Bitcoin Ordinals
Software engineer Casey Rodarmor created Bitcoin Ordinals in 2023. Following a blog post on Jan. 21, the developer deployed the program on the Bitcoin mainnet. The protocol created Bitcoin’s version of NFTs, described as “digital artifacts” in the Bitcoin network.
you know what this ordinals thing just might work
— Casey (@rodarmor) January 16, 2023
Traditional NFTs often only hold metadata that points to off-chain storage containing NFTs. This approach has sometimes led to issues such as NFTs showing blank images or, worse, porn. In December 2022, the collapse of crypto exchange FTX affected NFTs hosted on its platform. As the company restructured, the NFTs broke apart, displaying blank images instead of the original artworks.
On Jan. 4, the third-party hosting service used by NFT marketplace Magic Eden was compromised. At the time, users reported seeing some pornographic images on the NFT thumbnails instead of the NFTs’ artworks.
With Bitcoin Ordinals, the assets’ contents are stored on the blockchain. While this saves the Bitcoin NFTs from being vulnerable to having their data erased and morphing into blank images, it doesn’t save the platform from people minting unsavory images onto the Bitcoin network.
In addition to people arguing that Ordinals clog up Bitcoin’s block space, the decentralized nature of Ordinals allowed a bad actor to inscribe a picture of a man manipulating his private parts shortly after its launch. The image was taken down from the Ordinals almost immediately, but the inscription will forever live on the Bitcoin blockchain.
Despite the negatives, many still believe that the emergence of a new use case for Bitcoin was good for the network. Throughout the year, there were back-and-forths among Bitcoiners on whether Ordinals have a place in the ecosystem. However, it was clear that the protocol’s adoption had already taken off.
In May, the Bitcoin network overtook Solana in monthly sales volume as a direct result of Ordinals transactions. In December, the network took the top spot for most sales in 30 days, bringing in over $744 million, while the Ethereum network garnered $391 million.
Regulatory issues surrounding NFTs
NFTs also saw the first unregistered securities sales claim with U.S. regulators in 2023. On Aug. 28, the SEC charged Los Angeles-based entertainment company Impact Theory for allegedly selling unregistered securities in the form of its NFT collection, Founder’s Keys.
According to the SEC, the company encouraged investors to purchase the NFTs as an investment in its business. The SEC alleged that the NFTs were investment contracts, and because of this, they were securities. The regulator’s actions imply that the company violated the law by selling the NFTs without registration. The securities regulator also issued a cease-and-desist order, which the firm agreed to.
How it started How it’s going pic.twitter.com/REUcdwwY0k
— ZachXBT (@zachxbt) August 28, 2023
After charging Impact Theory, the SEC sued another company for selling NFTs. On Sept. 13, the SEC charged Stoner Cats 2 (SC2), the creators of the Stoner Cats animated series, with conducting an unregistered offering of crypto asset securities. As with the first case, the SEC issued a cease-and-desist order for SC2, and the company acceded.
Hollywood actress Mila Kunis spearheaded the Stoner Cats project and collaborated with several NFT creators to make the animated series. The cast in the series included big names such as Kunis, Ashton Kutcher, Chris Rock, Gary Vaynerchuk and Ethereum co-founder Vitalik Buterin.
According to the SEC, the company marketed the NFTs as having the potential for secondary sales. The SEC also noted that the ads implied that the credentials of the people involved in the project would cause the NFTs to rise in value.
Many disagreed with the SEC’s crackdown on NFTs. On Aug. 28, SEC Commissioners Hester Peirce and Mark Uyeda published a dissenting statement against the SEC. The duo argued against the SEC’s assertion that the company and purchaser statements cited by the SEC are not the type of promises that form an investment contract.
The SEC filed and settled its first NFT enforcement action today: https://t.co/RwaMGueBZK Here's Commissioner Uyeda's and my dissent: https://t.co/WhLKX3Tl8X
— Hester Peirce (@HesterPeirce) August 28, 2023
In a Cointelegraph interview, Oscar Franklin Tan, chief legal officer of NFT platform Enjin, said that the lack of clear rules would discourage creators from trying Web3 models and lead to the space never discovering the full potential of NFTs.
NFT creators lose out on royalties
Earning royalties after releasing NFT collections is one of the best benefits of NFTs for artists and creators. With royalties coded into smart contracts, original owners earned a percentage of the sales whenever an NFT was sold and resold. However, things changed in 2022 when NFT marketplaces started experimenting with the optional royalties model.
Under optional royalties, buyers can choose to set the royalties they want to contribute to an NFT project. With this model, there’s always a chance that creators might not receive royalties whenever their NFTs are sold.
In 2023, the effects of the optional royalty trend started to be felt within the industry. Research data revealed on March 29 that Web3 creators were losing out on royalties. The data showed that, in just two of the leading collections made by NFT company Yuga Labs, the Bored Ape Yacht Club (BAYC) and Mutant Ape Yacht Club (MAYC) NFTs, the losses were already around $20 million.
While Yuga Labs did not cite the losses in royalties as the reason, the company laid off employees in October as it announced a restructuring effort. The NFT firm will focus on its core goals with a smaller team.
We support royalties.
— Rarible (@rarible) August 22, 2023
We always have.
And we always will.
By September 30th, https://t.co/xjSw1Jg8bV will no longer aggregate orders from OpenSea, LooksRare or X2Y2. pic.twitter.com/BfOWVTCboT
Despite some NFT marketplaces going into the optional royalty direction, some took the other direction, doubling down on supporting creators and ensuring they get paid royalties. NFT firm Rarible launched an Ethereum Virtual Machine testnet with royalties embedded into its code to cement its commitment to supporting creators.
Meanwhile, NFT platform Enjin launched a mainnet with NFT transfers and royalty enforcement integrated into the blockchain’s foundational code.
NFT space in 2024
As NFT marketplaces continue to compete for market share in NFTs, the products in the space are set to improve in the next year. After all, a competitive market demands greater products and services from its providers.
In addition, with new innovations like Bitcoin Ordinals and the U.S. SEC continuing its crackdown on Web3, the NFT space is set for another colorful year in 2024. While there may be ups or downs, as long as NFT users are willing to “hodl,” the industry is here to stay.
