Where are China's "Boring Apes"? Opportunities and Challenges in the Digital Collections Market

In 2021, a "bored ape" stirred up the world of Web 3.0. As an NFT project, Bored Ape has been listed since April of that year, with a total transaction value of over $2 billion, and in March 2022, Yugalabs, the creative team, was valued at over $4 billion in funding.

NFT is one of the hottest Internet topics of the year 2021.Sales for the year reached a record $17.7 billion, up more than 200 times year-over-year, and the average price rose sharply to $807.52 from $49.18 the year before. The growth in the number of buyers and sellers driven by the soaring market has also brought to the surface the potential risks in this area.

The booming NFT market has been hit hard since 2022. With global inflation expectations high and the Federal Reserve entering a path of interest rate hikes and tightening market liquidity, the NFT market has cooled rapidly as investors have left risky financial investments. So far this year, the NFT market has seen a significant contraction in trading volume of about 90% compared to 2021, with some of the most popular NFT prices falling by 50%. In addition, the crypto asset market, including NFT, has raised concerns from U.S. regulators regarding money laundering, illegal financing, insider trading, fraud, etc.

China's NFT began with "digital collections", which means that for specific cultural commodities and artworks, digital technology is used to generate corresponding digital credentials to achieve authentic and credible digital distribution, purchase, collection and use on the basis of protecting their digital copyrights. What kind of imagination is there for digital collections? How should the value brought by digital collections to brands, consumers and enterprises be brought into play and risks be avoided?

Overseas NFT market development and risks

What is NFT (Non Fungible Toke)? It is a digital asset entitlement certificate, usually mapped to physical assets or virtual assets such as digital images, music, game props, etc. stored by a digital artwork custodian. nft is based on blockchain technology and its owner keeps the digital entitlement certificate of nft through a digital wallet.

NFT provides a brand new mechanism to protect and verify the ownership of digital assets without intermediaries, giving rise to numerous innovative cases in the digital asset space.

Figure 1. NFT casting, flow process (Source: Guoxin Securities)

Note: Domestic NFT (digital collections) cannot be transferred and traded twice

In overseas markets, purchasers acquire NFTs through direct purchase, competitive bidding or by accepting airdrops.The international NFT market, dominated by the U.S., has developed 3 major characteristics after accelerated development from 2020 to 2021, as follows.

First, the public trading market is becoming increasingly mature. Created in 2017, theOpenSeaThe NFT public trading market, represented by the NFT, accounts for 58.7% of current trading activity, with an average daily turnover of over $100 million through August 2021.

Secondly, public trading platform and meta-universe multi-chain are developed in parallel. opensea can trade NFT category range covers more than 800,000 kinds of artwork, collectibles, sports, music, set-exchange cards, virtual world, etc., and the number of NFT exceeds 30 million. Boring Ape and other projects are issued in the public market while building their own blockchain system, which can realize cross-chain transactions.

Third, overseas NFTs are usually managed as securities. The U.S. Securities and Exchange Commission (SEC) considers NFTs to be securities in nature, and purchasers may also use them directly as intangible assets such as intellectual property.

Figure 2. Boring Ape NFT purchased by Li Ning for design and branding activities

Data source: Li Ning official microblog

Most of the overseas NFT transactions are with virtual currencies as well asEtherThe public chains such as NFT are linked to the relevant technical architecture without real names and risk control mechanisms, resulting in many risks in compliance such as financial bubbles of malicious speculation and money laundering. How to explore a new development model to make NFT out of the transaction style of virtual currency and public chain and establish a more complete regulatory system is the prerequisite to ensure legal compliance as well as healthy development of the domestic market.

Status and Challenges of China's Digital Collection Industry

Compared with overseas NFTs, Chinese digital collections do not allow secondary trading of digital collections in order to avoid risks, and purchasers only have the right to collect and limited transfer rights.

On May 20, 2021, Taobao Ali auction launched the first national digital artwork special session. In June of the same year, the Ant Group's "Ant Chain Fan Grain" app (now upgraded to the Whale App) offered a limited number of Dunhuang Flying Sky and Nine-Colored Deer themed payment code skin digital collections.

In addition, many state-owned capital and related institutions have also started digital collection attempts. For example, Hangzhou International Digital Trading Co., Ltd, a state-owned enterprise in Zhejiang Province, launched the first digital collection trading platform supported by state-owned capital, the Void Macaque Digital Collection, and offered a variety of digital collections on Ali Asset for the first time. Shandong Province also launched the first state-owned digital collection trading platform "Seal Digital Collection".

In the context of avoiding bubbling, domestic digital collections are more often tied to industrial transformation, brand value-added and other development goals. For example, Badaling will issue a digital collection of Winter Olympics digital commemorative tickets at the end of 2021 in the ant chain. Many brands also hope to stimulate the interest of young consumers and build brand awareness through the sense of technology and modernity shown by digital collections. Wuliangye and Xiaopeng Auto have put up digital collections for sale.

In summaryChina's digital collection market is showing three major characteristics of the Internet first, state-owned capital and institutions to follow, and closer connection between digital collection and real industry.

Figure 4. Patagonia, Xiaopeng car digital collection

According to the joint statistics of Ali, WhaleQuest and other digital collection platforms and Cai Tong Securities Research Institute, theThe total issue value of the digital collection for a single month in April 2022 alone reached $300 million, already exceeding the issue value for the whole year of 2021.

However, in the field of digital collections, not all regions are suitable for "going big and fast". The development of digital collections requires influential IP resources, an industrial base that combines digital collections to realize premiums, and digital technology that plays a fundamental supporting role. In the process of accelerating the development of digital collections around the world, there is also a need to calmly consider and address the important challenges posed by the digital collections industry.

First, the healthy development of digital collections should be achieved under the premise of compliance.The explosive growth of global NFT trading volume in 2021 has attracted a large number of market-based players to the NFT space. Overzealous pursuit should be wary of the risk of asset bubbles. The development of digital collections must be realized under the premise of avoiding the bubble of virtual assets and achieving the regulation of the emerging field in order to achieve healthy development.

Second, to establish a healthy industrial ecology and encourage the exploration of innovative profit models that combine digital collections with the physical industry.At present, many projects of digital collection development are in the "testing" stage, and there is a need to find more digital collections that integrate with the real economy and brands.

Third, we should accelerate the layout of next-generation Internet frontier technologies in the process of developing digital collections, especially accelerating the development of digital technology circulation base technologies such as encryption computing.In March this year, the IEEE unanimously approved the first international standard for privacy computing all-in-one machine project, which was prepared by Ant Group, domestic and foreign experts, with the goal of lowering the threshold for the use of privacy computing technology.

How to build a healthy digital collection market?

First, we should guide NFT services to the real industry to become a new grip to promote consumption.China defines digital collections as "collections" and encourages them as a new model to serve the innovation and development of traditional industries and brand building. Enterprises with business innovation capability will gain a head start in this trend, and the real value should be generated by digital collections serving the upgrading and transformation of traditional industries.The development of digital collections needs a good industrial ecology. It is suggested that digital collections be used as an innovative grip for the recovery of consumption of cultural tourism, catering and accommodation, etc. and the recovery of consumption of commercial brands and shopping malls in shopping districts, and that the recovery of consumption be driven by digital collections activities.

Secondly, we should take advantage of cultural and technical resources to promote the in-depth application of "blockchain+".For cities with rich traditional cultural resources, consideration can be given to accelerating the digitalization process of culture, art, scenic spots and commercial brands in batches and categories deeply embedded in an autonomous, controllable and trustworthy blockchain.Achieve orderly circulation and trading of high-quality digital artworks.

Third, the formation of the government-led, trading institutions as the support, science and technology enterprises and other diversified subjects to participate in a benign interaction mode of operation.The competition mechanism of the market should be given full play to promote the release of digital copyright resource capacity, and also to avoid the emergence of sky-high copyright prices and vicious competition. At the same time, the service platform should be gradually opened to small and medium-sized institutions and enterprises after adjustment based on the pilot experience in large institutions and enterprises. And further improve the construction of relevant laws and regulations to adapt to the background of the era of new technology, new network and new consumption.

Fourth, to establish a consensus mechanism for the value of public interest and green digital collections.The casting and trading of digital collections all require arithmetic resources. The most direct and effective way to achieve green NFT is to use new green energy to replace the high emission electricity obtained by burning fossil energy. At the same time, green capital needs to be introduced into the blockchain market to help NFT projects operate in a "low-carbon" or even "zero-carbon" manner. It is recommended to introduce policies to support institutions, enterprises or individuals to actively participate in digital collections for public welfare activities, explore digital collections of carbon assets to offset related emissions and achieve carbon neutrality, and give more temperature to technology while innovating public welfare models.