Yuga Labs, the team behind the enormously successful Bored Ape Yacht Club NFT collection, held an NFT virtual land sale over the weekend of Otherside, a metaverse based game, which raised over $300 million in the biggest single NFT offering ever. The average NFT deed price was around $6,000. While it was a commercial success, the high demand slowed the Ethereum blockchain to a crawl and sent gas (transaction) fees to the moon.
The NFT sale has drawn much criticism. Yuga originally planned a dutch auction, a market clearing mechanism where bidders bid their maximum price, and winners are chosen at the highest price for which the entire offering can be sold. At the last minute they changed it to a fixed price sale, which created intense competition for buyers to get their transactions minted to the blockchain, which created a bidding war for gas fees, with some investors paying thousands of dollars to get their transactions minted. The fees totaled $180 million, and Yuga was subjected to further criticism for the difficulty in transacting, the negative impact on the Ethereum blockchain, and once again, their unsatisfying response to customer complaints. In hindsight, a Dutch auction may have been more equitable.
While there is much promise for investment opportunities in digital scarcity, including art, metaverse properties, and tokenized assets, the market is still nascent and subject to unpredictably high fees and slow transactions. Moreover, as we pointed out in a previous Friday Focus, the risks of a hack and/or theft. This sale shows that early investors are willing to pay many times the cost of the asset in gas fees to get an early foothold in the market. While scarcity can be engineered within one Metaverse environment, there will be many competitors to follow. Should the market for NFTs cool off, Investors should be cautious and weigh the risk along with the rewards of early investments as in the metaverse as the market evolves.