Written by: Ally Zach
Compiled by: TechFlow
Key insights:
Initially, PFP NFT projects emphasized community, but over time, many projects shifted their focus to financialization, with NFT holders prioritizing financial returns over community engagement.
Applications focused on decentralized social media, digital identity, and blockchain-based domain names have experienced a unique increase in user adoption in the NFT market, surging nearly 10x from mid-2021 to early 2022.
By prioritizing the natural network effects that arise through user connections and providing opportunities for meaningful connections and curated online identities, NFTs have laid the foundation for success for new consumer applications.
Historically, PFP NFT projects have emphasized "community" as a fundamental value. However, over the past year, many well-known NFT projects have become increasingly financialized, with NFT holders prioritizing financial returns over the emotional value of being a member of a community.
Considering the user perspective, the shift from community-driven projects to financialization can happen through two paths. Either the same users change their values, or new financially motivated users replace the original community-oriented users. The latter is more likely to happen, as the customer profile of early adopters of community-driven IP (NFT projects) is significantly different from individuals who trade tokens for financial purposes only. Assuming that community-driven users place higher value on early consumer projects, the question arises: where do these users turn once financialization develops?
In large part, these users will migrate to new consumer platforms that value participation in Web3’s foundational communities. These platforms include decentralized social media, digital identity solutions, and blockchain-based domain names. Not only do they fill the gap created by the shifting NFT landscape, they also usher in a new era of full participation. By studying user behavior across different NFT applications on the EVM chain, we can extract valuable insights into user migration and the sub-communities that are forming in this rapidly evolving industry.
The decline of the PFP community
In the early days of NFTs, they were primarily associated with digital art and collectibles. Artists and creators quickly adopted the concept to tokenize their works on blockchain-based platforms. Ethereum became a pioneer in facilitating NFT transactions.
However, the launch of Bored Ape Yacht Club in early 2021 marked a turning point in the evolution of NFTs. BAYC introduces a community-focused approach that combines unique artwork with membership privileges and a strong social component. Each Bored Ape NFT holder becomes part of an exclusive club with special events, virtual parties, and other perks. This community-focused model proved hugely influential, serving as a catalyst for many subsequent NFT projects to adopt a similar approach.
The success of BAYC and similar community-driven efforts has attracted the attention of retail investors, leading to a nearly 10x surge in user adoption in the NFT market from mid-2021 to early 2022. Community involvement, a promised roadmap, and the potential for continued value growth have attracted many investors to purchase these collectibles.
In late 2022, the narrative shifted with the launch of the Blur trading platform. The Blur platform, along with its ongoing, publicly promoted airdrop program, has quickly gained popularity and attracted a large number of users. This success has paved the way for other marketplaces, including industry giant OpenSea, to either adopt or launch their own professional trading platforms. As a result, this shift has also resulted in a significant decline in creator royalties, as new-age NFT traders shift their focus from valuing community and roadmaps to trading activities. The focus shifted from NFTs becoming representatives of digital identity and community to becoming major speculative assets.
A New Dawn for NFTs
PFP projects, especially those on Ethereum, used to be the main entry point for newcomers into the world of Web3. However, with the rapid rise of platforms such as Blur, this landscape has changed significantly, focusing more on catering to traders rather than the core participants that initially drove its growth, such as collectors, creators, and community members. As a result, PFP projects on various EVM chains have experienced a steady decline in attracting new users since January 2022, with adoption rates falling by almost 50%.
Over the past 18 months, there has been an increase in the development of consumer applications on various EVM chains, with a focus on decentralized social media, digital identities authenticated by certificates, and blockchain-based domain names. These applications have revitalized Web3 by providing users with opportunities for meaningful connections, self-expression, and collaboration. They provide a platform for individuals to curate their online presence, interact with peers, and foster a sense of community in a more inclusive way.
In order to provide a seamless user experience, consumer applications beyond traditional NFT markets require high throughput and low GAS fees. In response to this demand, many of these applications have sought Layer-2 scaling solutions and sidechains. This shift has prompted Ethereum-based PFP traders to explore new links, with approximately 80% of users exhibiting “nomadic” behavior between different networks.
Nomadic users tend to interact with platforms with similar purposes on different chains. For example, the decentralized social platform CyberConnect and Polygon’s Lens on BNB have more than 37,000 common users. In addition, new-age Web3 users have interacted with other new consumer applications without previously participating in PFP.
These emerging consumer applications have successfully attracted not only previous cryptocurrency users, but also entirely new groups of users. Notably, the likes of ENS, Galxe, Lens, and CyberConnect allow users to experience their first NFT interaction on their respective chains. This is a departure from the previous norm, where NFT marketplaces were the primary entry point for users.
While the narrative of PFP has changed, users still seek to build online personas. Beyond social media or identity symbols, users have discovered new tools and applications to replicate this experience. Notably, users who interacted with PFP in the community-centric era comprised the largest portion of new consumer application users, compared to early NFT traders or participants in the financialized era.
While still in its early stages, these emerging consumer applications have already managed to attract a specific cryptocurrency user base that is eager to see these platforms succeed. These applications offer a comprehensive representation of digital identity, a crucial aspect in an era where robots and artificial intelligence play an increasingly important role.
The core values of these consumer applications are so compelling that they are able to attract users from different networks. Users are willing to interact with these platforms on multiple chains, highlighting the importance of improving the interoperability of credentials, domains, and profiles. Supporting the preferences and trends of user bases is increasingly important to achieve seamless interoperability and cultivate a cohesive user experience across different ecosystems.
Looking ahead
Early NFT users were primarily looking to explore online identity and community. Initially, the PFP project met this need, but later shifted its focus to finance. Currently, participating users are primarily involved in decentralized social networks, identity, and credential projects. Looking ahead, it is expected that consumers will continue to seek meaningful connections and unique identities. As consumers strive to meet these desires, consumer protocols that facilitate user connections and identities are likely to flourish.
To succeed in the competition, protocols should prioritize building natural network effects through user connections. An example is Lens, which integrates profile NFTs and follow NFTs into the protocol platform to build connections between users. This approach integrates the network effects of user connections into the protocol itself. In contrast, traditional PFP or independent identity protocols rely on external platforms to facilitate user connections, resulting in reduced value of network effects captured within the protocol.
Profitability in this context is not limited to low-volume, high-volume markets such as DeFi applications. These new consumer applications offer promising opportunities by leveraging natural network effects and market positioning. They provide valuable experiences and services to users with a community-centric focus, promoting engagement and potential long-term growth. As the PFP NFT trading market dynamically develops, these applications play a vital role in providing users with alternative ways to connect, collaborate, and manage their online presence in more meaningful and inclusive ways.
