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NFT Ecosystem

The NFT ecosystem is an evolving space. Consisting of different layers like an excellent lasagna. Capturing the imaginations of technologists, educators, investors, and evangelists alike. Made up of a decentralized community. Digital creators and consumers who believe that economic freedom can be won through the industrial revolution in creative industries have come together to celebrate this phenomenon.

Blockchain ecosystem explained.

By creating a digital representation of assets, NFTs allow for unique items to be owned, traded, and more. The possibilities are endless. NFTs are still in their early stages of development. Nevertheless, a few use cases have emerged that show the full potential of this technology. People will discover ways to leverage NFTs and their properties to solve problems that previously could not be solved digitally. 

There must be a considerable amount of interoperability between platforms for the NFT ecosystem to expand and create a significant impact. Interoperable protocols empower blockchains to interact with each other, making it possible to integrate an item (or collection) into an entirely different universe, game, system, or platform. 

The NFT ecosystem consists of Layers Zero, One, and Two. Each layer serves a purpose and allows the layer on top to operate. Some additional layers and sidechains enable the functionality and operation of necessary aspects to run smoothly.

A diagram depicting the NFT ecosystem created by Messari.
A look at the NFT ecosystem compiled by Messari.

Layer Zero

Layer Zero is a layer that actually sits between blockchains. When mentioned, it’s referring to the connectors that link blockchains together. These links allow for the passing of information between one another. This passing of information is also known as interoperability. Having links like this in place makes it easier to scale new technologies. Polkadot and Cosmos could be considered Layer Zero or para-chain applications.

Layer One

Layer One is the bedrock of the NFT ecosystem made up of the central blockchain architecture. Bitcoin was the first blockchain and the original platform for early NFTs. The game was changed when Ethereum and decentralized apps came to market. Challenges with Bitcoin being a proof of work system were alleviated. Ethereum offered a new protocol, proof of stake. Making transaction verification and solving puzzles easier. But problems still persisted. 

Like Mexican food, the good comes with the bad. In this case, Ethereum’s downside is its HIGH transaction fees. Oddly though, $ETH is one of the more popular blockchains for NFTs, and collectors don’t mind staying on the Ethereum network. Its popularity is probably due to its extensive ecosystem and liquidity.

Ethereum’s consensus mechanism is a significant energy drain and received a lot of pushback due to environmental concerns. Token standards were improved to help reduce this, but it hasn’t completely eradicated the problem. Solana, Tezos, Polygon, and Flow have emerged with their own value adds, helping to bridge the gap. These additional blockchains have also grown to have a following. Creators and developers tend to flock to an NFT ecosystem as a way to make use of their unique features.

Layer Two

Layer Two blockchains and solutions help increase the speed of lower-level blockchains. They help make processing transactions faster. They also help with the storage of data. Layer Two is an overlaying network of applications on top of the underlying blockchain. Stateless channels like the lightning network act as two-way communication channels between participants. 

Typically occurring on the blockchain, they move things off, helping cut down the need to depend on a third party. Once the entire transaction is finished, the final state is added. Its processes don’t mess with the blockchain protocol making it easier to conduct micro-transactions.

Subsequent levels of the NFT ecosystem

Once we start to develop on top of Layer Two applications, we begin to see a divergence in the directions the space is growing. Storage solutions, verticals, applications, financialization, aggregators, and front-end interfaces are part of the evolving and growing NFT ecosystem. Each of these layers adds additional functionality and use cases.

Storage

Storage level layers allow for assets to be stored off-chain. Centralized servers operated by a single company or organization keep your data hosted in privately controlled locations. Decentralized storage systems consist of peer-to-peer networks that hold the overall data as a resilient system. When it comes to large amounts of data, it’s best to let the applications that do it best operate. Blockchain wasn’t developed with this specific purpose. Companies like IPFS and Pinata are popular in the NFT ecosystem to store digital art.

Verticals and Applications

Different verticals and applications have been established due to the evolving NFT ecosystem. As with most industries, new businesses begin to form. In meeting demand and serving the needs of the markets, gaming, sports, the metaverse, music, media, governance, and utility assets are at the forefront. 

A massive economy is already forming around gaming and NFTs. The term GameFi has been coined as play-to-earn economies emerge. Places like Decentraland have gained notoriety due to extravagant sales of digital land. While companies like Unstoppable Domains and ENS provide users a gateway into Web3.

Financialization

With all of the attention, NFTs and the NFT ecosystem get, you can ensure that the money follows. Finance has always been heavily linked to the blockchain, but it’s now finding a way into NFTs. Marketplaces give creators and consumers the ability to develop economies around their digital creations. Fractionalized funds and liquidity pools allow investors to get involved in the massive NFT trading market by taking advantage of a community of like-minded money-conscious participants. Community valuation and an appraisal are helping to establish pricing standards in a volatile market. Lending is finding its way into the space and using NFTs as collateral for unsecured loans.

Aggregators, Front-ends, and Interfaces

The top-level and probably the ones people know the most would be aggregators, front-ends, and interfaces. Sites like OpenSea and Raible provide a way for consumers to browse the wallets of others and see what the market has to offer. Cent is a social network bringing NFT creators and collectors together. Front-ends like Zerion make it easy to manage your Defi portfolio in one place. RabbitHole provides participants with rewards to those that use and contribute to decentralized apps.

The NFT ecosystem is consistently growing and will evolve as more and more people recognize the use cases and ways underlying technology can drive industries forward. With the adoption of non-fungible tokens in enterprise settings, we expect this list to be multiplied shortly.