Author: CloudY, Sihan

Editor: Vincero, YL

Reviewer: Crystal

The sizzle of non-fungible tokens (NFT) has been surging since 2020. Cyptopunk comes first and PFP NFT projects spring up such as BAYC, Doodle, Azuki, etc. NFT becomes visible and known to the public at a breakneck rate. BAYC recently has launched APE tokens and Otherside Land, bringing record-high popularity to PFP NFT. The rise and fall of GameFi projects, such as Axie, Farmerland, Radio Caca, Crabada, Mobox, Mines of Dalarnia and StepN, has attracted a high level of interest. That tide also enables users to know what is NFT and attracts a flood of traders, especially outsiders, to the NFT market. Thus the market is wondering why NFT can be so buzz-worthy in a big and enduring way. Since the enduring popularity of NFT is the result influenced by many factors, we put our focus on how many funds NFT can raise. This paper will elaborate on how NFT develops an emerging market as a new form of fund-raising, and what makes NFT stand out. Before coming to the point, we’ll first untangle and introduce the way crypto raises funds and how it evolves to make the paper accessible.

I. How the way Crypto raises funds evolves

The way crypto raises funds evolves frequently from the shambolic market at early days to a sizable market. At infancy, cyrpto raises funds in a similar way to traditional finance. That can be revealed from the initial coin offering (initial ICO), private sales ( including angels, seed round, series A, series B, etc.), and the evolved initial exchange offering (IEO), initial dex offering (IDO), initial farm offering (IFO) and other forms of launch, and even grant&private forms such as gitcoin and hackathon. Project providers hence have more choices to acquire funds in the most suitable ways.

• ICO

ICO in the crypto industry has a likeness to IPO in traditional finance. IPO is the process where companies issue private shares to the public by offering new shares and acquire funds by issuing shares in the primary market. However, companies as IPO candidates must meet the requirements of the Exchange and the Securities and Exchange Commission (SEC) before launching an IPO. Also, companies generally engage investment banks to launch marketing campaigns, evaluate demands, price IPO, and set dates. On contrary, ICO set fewer restrictions. When using ICO to raise funds, companies directly issue their tokens which will be purchased by the public with BTC, ETH or stable tokens (such as USDT, USDC, DAI, etc.). Free of review by exchanges and promotion by investment banks, fundraisers usually publish a white paper among investors to introduce projects. Because it is made directly available to the public, the entire cycle is shorter than private placement, which avoids the rehashing of values to investors. ICO is a favorite for start-ups because its costs are lower and its smart contracts can speed up the process. The reality that investors have to spend tons of time and effort to know the projects undergoing ICO on white papers and smart contracts undoubtedly increases risks, consumes time, and also results in potential fraud, thus requiring extremely high credibility. This is exactly what the chaos during ICO shows.

A security token offering (STO) is a special fund-raising form designed based on ICO. STO combines traditional IPO and ICO by collateralizing certain assets to issue securitized virtual tokens. Similar to IPO, this process is regulated by security law, which makes STO highly credible, but the issuance has to go through complicated procedures and regulatory restrictions. The strict restrictions force most projects to abandon the use of STO, and then STO is out of the spotlight.

• Private Sale

Experiencing unregulated ICO, investors and project providers switch to choosing private fund-raising. Crypto also shares or directly copies the similar way of private financing as traditional finance, including angel, seed round, series A, and series B, to name a few. In each round of financing, a single big sum is raised only from a small portion of institutional investors or individual investors at all stages of projects. The advantage of the private placement is that project providers can raise funds several times by convincing investors of the quality and value of projects with prospects. Investors may inject different resources other than capital. Although private placement can offer a big sum, it lasts for a longer cycle and attracts small investors in the single series, and project providers need to lobby investors repeatedly. Even if investors are asserted to support the projects, the investment has slim contributions to valuation, especially when projects begin to raise funds.

• Lanuch

Following the private sale, IEO, IDO and IFO evolve from ICO but address the issue of trust, save time in project screening, and are open to more investors. The main difference is whether fund-raising activities are based on the centralized exchange (IEO) or decentralized exchange (IDO). The exchange acts as an intermediary between investors and project providers to promote projects for money-raisers and screen projects for investors - that is also named Launch by the exchanges. As a variation of IDO, IFO changes the subscription of project tokens. Instead, investors need to pledge the quantity and times of mining to subscribe for project tokens. IFO, on the one hand, avoids unrestricted token issuance which could happen in ICO, and, on the other hand, raise the costs of project providers who must pay the launch fee to the exchange. In addition, since tokens issued by the exchange are required for subscription, investors have to consider the pressure of token price swings. The possibility of inside-trading also concerns investors.

• Grant & Prize

Grant & prize such as gitcoin or hackathon donations or bonuses are simpler and more direct. When project providers only need to sign up for the current activities, investors give donations or votes if they like. Despite a long process, project providers neither bear costs nor provide certain tokens. Quality projects will get more grants & prizes and attention than other projects and more importantly, attract a fresh batch of highly active early adopters, which is conducive to financing. Therefore, more projects choose gitcoin or hackathon to build up resources since the beginning of the launch.

In general, different forms of fundraising have their positives and negatives:

ICO can help raise fund fast without restrictions on the amount and process, but it leads to high costs to building trusts and necessitates experience and efforts to screen and determine projects.

Private sale help solicits a single big sum and non-monetary support from investors, but it is an inefficient and demanding job. Generally speaking, it will be difficult to acquire funds equal to valuation unless it is an extraordinary project.

In IEO, IDO, and IFO, intermediaries can maintain project quality somehow but also increase fundraising costs. In addition, the credibility of intermediaries is the key.

Grant&prize is the least efficient with a long cycle and small amount, but the nearly-zero cost, early resources, and active crypto communities are big draws to project providers.

II. Types and Evolution of NFT Fund-Raising Forms

Unlike traditional forms such as ICO, IEO and IDO in the crypto sector, the initial NFT offering (INO) means that project providers issue NFT to raise funds. INO is mostly used in PFP NFT projects, GameFi, metaverse, SocialFi and financial NFT, but seldom used in infrastructure, public chain and DeFi - which largely depends on whether NFT has use cases in specific projects. INO can be mainly divided into three main categories:

• Asset INO (Asset NFT):

This type of INO resembles the traditional ICO and IEO in the crypto industry, but the fund-raising model has shifted from traditional FT to NFT. Asset NFT is mainly used in GameFi, metaverse, SocialFi and financial NFT, such as pets in Axie Infinity, Metamon in RACA, and lands in the sandbox. There are defined rules about how to use funds and also defined profit-making expectations and mechanisms for investors. For example, holding NFT will be rewarded with FT in the game and with income in the metaverse.

• Profile Picture INO (Avatar NFT/PFP-NFT):

Beginning with Cryptopunk, PFP NFT brings about a terrific amount of impressive projects, such as BAYC, Azuki, Doodles, etc. PFP NFT is issued under the form of a combined public offering with a white list. Different from asset NFT, this type of NFT is mostly profile pictures whose investment motives are decided by the community consensus and project background, and thus community is an essential ingredient to the PFP NFT project.

PFP projects at an early stage often offer INO at a lower price and free airdrop, such as Cryptopunks, and are dominated by the community later. This type of NFT changes from a community-led one to a project-provider-led one as the NFT industry prospers. The project providers pursue more professionalism and capitalization. As the price of INO keeps rising, the investment motives also focus more on profits rather than memes and mementos. As PFP NFT project providers become increasingly powerful, bars are rising much higher, investment rules are more transparent, and the profit-making mechanism is clearer, investors are more able to anticipate their returns and understand the mechanism behind them.

Ⅲ. INO（Initial NFT Offering）

1. Forms, Scale and Efficiency of Fund-Raising

Different from conventional financial routes, NFT fundraising targets a wider range of the population in a faster and more efficient manner. INO can better meet the diversified needs of capital raising among project providers than other forms of fundraising such as ICO and IEO in the crypto industry.

Traditional financial routes adopt a form of top-down fund-raising where the project providers or developers directly reach investors for targeted fund-raising or allow IEO, IDO and IFO through intermediaries whereas NFT fundraising is freer and more diversified. In the most frequently-used form, the financing quota of a project includes the white-listing quota and the public offering quota. The white-listing promises a certain predictable amount while the public offer maximizes the financing through public engagement. Project providers can set their criteria for white-listed investors. Besides, Dutch auction targeted airdrop, and other fund-raising approaches can be combined. INO fund-raising is safer because NFT itself is non-fungible and less liquid. FTs can be laundered by mixing them with tornado cash after being stolen, but NFTs are less stolen because there are many ways to mark the stolen NFT, which makes it difficult for the thief to monetize them.

INO is also continuously improving scale and efficiency of its financing. In April 2021, BAYC raised 800ETH only in nine days, and in April 2022, the newly-emerged blue chip MoonBird shortly acquired nearly 20000ETH with a higher profile. As the public becomes more accustomed to and accepts such a form, PFP INO quickly becomes larger and more efficient thanks to the endorsement by project providers and the overall advancement of the fund-raising environment.

Table - Financing of mainstream PFP NFT projects:

2. Sense of community and social component

As stated above, private fund-raising is relatively closed because it is directly initiated by project providers or developers towards only a few investors or investment institutions. NFT financing naturally pays more attention to the community and is more open than other forms of fundraising such as ICO and IEO. Project providers attach importance to communication and interaction with community members.

First of all, in terms of RoadMap, the proposal mechanism, and events, NFT project has its own culture and identity, so in a more active community, members are more ready to voice their opinions in the project proposal and social media. The interaction between community members and project providers increases stickiness between the community and NFT and enhances the sense of community. For example, RoadMap provides a variety of unique benefits to holders, making them feel more satisfied and reinforcing their sense of identity in the community. Another example is the proposal mechanism, where community members can introduce their proposals to co-build the future development of projects, delivering a sense of ownership as project providers to users. Also, the community will regularly hold online and offline activities to maintain and expand itself. Most of the currently issued NFT projects have official Discourses, and appoint personnel to chat with community members and issue announcements on Discourses to keep it hot. Unlike ICO and IEO, discussions in NFT project are deeper, including not only how price rises and falls, but also how to plan projects in the next step, how to understand projects and their fundamental cultural meanings, or their passions for NFT, which is a feature of NFT project itself.

Before the NFT project casting, most projects will require users to obtain the white list. To do so, users need to complete tasks and procedures as required. In this process, time and energy devoted by users to those tasks and procedures will drive them to pay more attention to the follow-up development and planning of NFT projects, in the hope of gains for previous pains, and thus the stickiness between users and projects will be enhanced; in addition, when users manage to qualify themselves for the white list, their moves will promote the projects and encourage a flood of outsiders who have little knowledge over the projects to have a try and join the community as new users. The community is initially formed at the stage of becoming whitelisted.

NFT project itself and the community building and maintenance ensure stable communities to project providers, which can boost the development of projects. Almost all blue-chip NFT projects are equipped with super-high-quality communities. In addition to marketing components, those communities continue to send the NFT price higher, increase NFT trading volume, and secure project providers the royalties. More than that, communities give back to projects in all aspects, including but not limited to formulating or optimizing project routes, enabling NFT, giving NFT new consensus or meanings, and extending benefits into real life. In addition, project providers can continue to promote projects and finance on current users and scale in the subsequent fund-raising, so as to make it more continuous.

3. Consensus and narrative

Traditional financing has defined mechanisms and rules around profit-making. For example, funds are distributed and used under clear and transparent mechanisms and rules. Although raising funds by issuing NFT is essentially for making profit, there are distinctive differences in how to realize it. Traditional projects seek to finance mainly for better prospects, optimized projects, and larger market share and profits. However, for some reasons, such as the MEME component, limited real profitability, and weaker long-term project planning, PFP NFT projects prefer an ALPHA community with the strong consensus after fund-raising, so the consensus is a vital and even cardinal part of PFP NFT project. For most PFP NFT projects, they will establish a strong community-wide consensus in the early stage, through which the community and project providers work together to make common profits for investors and project providers. This means that NFT fund-raising becomes an effective measure to build a high-quality consensus community. For example, Bored Ape Yacht Club, known as the club of the nobleman, has a priced-higher NFT and lacks defined profit-making logic and other elements in the infant age, which has become good criteria to join the club, find like-minded friends and build consensus.

Moreover, NFT has a totally different consensus from FT. People buy NFT and FT for different reasons, perhaps because they are optimistic about the future of the project, or because fomo comes into fashion, but NFT investors will accept the loss from investment more peacefully than FT investors. As PFPs and artworks themselves in NFT can form a basic consensus or value, NFT investors can change their consensus from investment to a collection when NFT prices continue to fall, which is impossible for FT.

Apart from the transferability of consensus, NFT also has great extendibility and extensive versatility, which promises huge potential and allows project providers to create ambitious narratives. Solv Protocol, for instance, casts NFT into an automatically-performed vesting voucher, so users can deposit ERC-20 tokens into it and flexibly set the approach and rate of releasing ERC-20 tokens. The tradable and negotiable vesting voucher can be split in due time - which means not only expanding the financial functions but also transferring the original power of the blockchain. NFT also has unique cases of use: such as the domain name, unleash liquidity from locked position, and separation of rights to own and use. Project providers can tell gorgeous stories to attract users and investors, and this brings more appealing envisions after they implement the original plan step by step. Another obvious direction for NFT is the metaverse. Almost all INO project providers will eventually shape a story that they will usher into the metaverse. The NFT they are issuing now is the ticket to the metaverse. They will also promise airdrops or white lists after the metaverse is launched. Therefore, as NFT goes further, NFT-based innovation can create more possibilities for the entire industry and inspire the public to give greater expectations to the NFT projects. In other words, it is widely believed that NFT projects will have larger prospects and more phenomenal growth.

4. Extensible to tangibles

Different from traditional FT, NFT can be turned into tangibles. On such a basis, NFT can be greatly extended to the real world, and therefore, project providers have diversified options to build brand and IP, and bring more benefits and new experiences to investors.

NFT financing can be expanded to physical objects, mainly in the following aspects:

 (1) Project providers can build a proprietary IP to extend its influence in the cultural industry - for example, creating a label, shooting movies for IP, and even establishing a theme park;

 (2) NFT re-creation by followers - for example, animating NFT, creating generative music, or building we-media;

 (3) Widely used in the retail and service sector - this also holds true for project providers and holders, such as NFT bars, NFT designer toy shops, NFT fashion, etc;

 (4) Social groups and activities - offline gathering for fans, NFT player club, etc.

If NFT is born to change the game and break boundaries, Bored Ape Yacht Club may be the Trojan horse that breaks through the wall. Being only a year old though, BAYC has set an example in breaking the boundaries between crypto and the real world: BAYC grants its holder full copyright, which means that holders can create their own brand and start business activities based on BAYC, including but not limited to NFT merchandise, movies, games, and even bands, and all incomes from that are owned by holders. This strategy is undoubtedly a great success. Devolving icopyright and rights to re-create comes to be an important component for standard and model NFT financing.

Here are examples of how BAYC is extended into the real world:

APE-IN products, co-founded by Grammy winner Timbaland and BAYC members, will expand, launch and promote Bored Apes as a top musician in the virtual world; besides, Myth Division produces anime for BAYC; Apesthetics is one of the first streetwear brands to combine the tangible product with BAYC. Its owner can use the unique smart contract sewn on the fabric to verify whether the products are authentic, so it becomes as a real NFT; by the way, Greenland Group also buys BAYC as its digital strategic NFT image, and Li-Ning has BAYC4102 under its belt to issue brand derivatives around the NFT.

In addition to BAYC, it is not uncommon to extend NFT into physical ones: Azuki permits holders to re-create and will launch Azuki stores in the real world to sell streetwear, toys, and statues. Azuki will also hold meetings, exhibitions, music festivals and other on-site activities; besides, Doodles plans to apply its IP to music, animation and other fields, and allow holders’ business activities worth less than $100,000 dollars; CloneX and Nike jointly launch physical clothing in hope of enabling holders to use NFT in different digital platforms, even their own games, and VR/AR virtual worlds.

This broader application in the real world as a result of features of NFT creates more value for NFT investment than traditional channels of investment, which is undoubtedly extremely attractive to investors. Meanwhile, this new paradigm of financing has served many useful purposes.

5. Compliance-compatible

Another advantage of NFT financing is that it is quite compatible with current laws and regulations. Of course, seeing in another way, that is because both counties temporarily have no specific laws and regulations, which help formulate specific rules for NFT financing. As the NFT industry keeps progressing, and NFT financing takes off, countries will further improve laws and regulations for the NFT industry and financing to protect investors' income. That progress will also expand and standardize NFT financing.

According to the full account and analysis above, INO has manifold features and advantages: highly efficient fund-raising, strong communities for project providers to facilitate financing, accessible consensus, and expectations, and easily extendable to the physical world and compliance-compatible. However, as a new form of raising funds, there are some problems for INO:

First, its fundraising is not tremendously sustainable. For project providers, raising funds via PFP NFT is less sustainable because the issuance of multiple rounds of NFT faces headwinds and threatens consensus. Therefore, the fundraising is concentrated in the first round of NFT issuance.

Secondly, the benefits of INO investors are nebulous and less protected. Unlike traditional financial fundraising forms and traditional ICO or IEO in the crypto sector, the concepts of fundraising for most PFP NFT projects are in between sales and conventional fundraising. Project providers neither promise nor guarantee any benefits to investors. Rules on how to use funds are either absent or undefined. What most projects can provide is only a rough RoadMap. Project development and management are not transparent. The high centralization will easily result in the issuance of additional NFT/FT and dilute investors. Furthermore, investors don't know much about the basic facts about the NFT projects during fundraising, so they can't predict the next route and risks. For instance, derivative NFT or FT issued by some projects after the initial public offering of NFT may dilute investors who enjoy benefits in name only.

At last, financially speaking, NFT is less liquid and lacks the same stable value-adding measures as Staking and LP Farming to mitigate sell-off. In addition, the vague rules make it difficult to assure the benefits of investors.

New things come for reason and also come with limitations. As a new form of fundraising, INO can satisfy the diverse demands of project providers for fundraising. It boasts manifold qualities rather than simply issuing assets to collect funds. The advancement in industry and technology will optimize and address current problems. We dare say INO will be a better form of fundraising.