The NFT market most used by artists and collectors of digital art is mainly developed on the Ethereum blockchain, which, due to the current price of its network fees, entails a high cost (up to USD 100) to mint a single non-fungible token.
Thank you for reading this post, don't forget to subscribe!The non-fungible tokens (NFT) market has reached a tremendous boom and an ecosystem in constant evolution. However, there are still several challenges to making its massive use and legal adoption a reality. It is what a ShapeShift report, published on May 28, 2021, says.
The report “Enter the Metaverse: Challenges and Opportunities in NFTs” was written by Kent Barton, who heads the research and development of cryptocurrency exchange ShapeShift.
In it, he addresses the main challenges facing this market and the problems that make it inaccessible to many creators worldwide.
One of the problems is its cost, which prevents many artists in impoverished countries from participating in the industry due to economic inequality in the world.
The NFT market most used by artists and collectors of digital art is mainly developed on the Ethereum blockchain, which, due to the current price of its network fees, entails a high cost (up to USD 100) to mint a single non-fungible token.
Some NFT markets, such as OpenSea, have adopted the strategy of paying the user for the cost of minting their non-fungible tokens. But maintaining these costs in the long term is a costly challenge, so sometimes these platforms make other types of charges, such as a commission at the time of sale.
Still, users are not running away from gas when they send their tokens over the Ethereum mainnet.
4 reasons why the NFT market “sucks”, even though it has raised millions of dollars
For Barton, non-fungible tokens “suck” today for four reasons. Besides being too expensive to create and transfer, he says that “it is a waste of time to find what you are looking for”; furthermore, they do not have a link to the actual legal world of copyright ownership.
Finally, add that you cannot share the NFT property with other people or entities.
He refers to a “waste of time” since he considers it difficult to find work to his liking due to the immensity of crypto artworks and NFT markets that have emerged, which confuses artists, and other problems, such as duplicated works on different platforms.
This goes against the essence of this type of token, which is created to guarantee or control their scarcity. That is, the NFTs are unique or limited.
On the other hand, there is legality. The current NFTs do not guarantee copyright ownership unless they are part of a prior agreement. An example of this is Charlie biting my finger, a video with millions of views sold as an NFT for $ 700,000.
The previous agreement stated that the owner of the NFT has no use rights to the original video or image, only owns the non-fungible token, and can sell it.
Another problem that Barton points out is that the most widely used standards do not allow shared ownership, which closes many opportunities, especially for musicians. The document exemplifies that they could have sponsors and other investors involved who help spread the tokenized works more widely.
Even with Barton’s remarks about NFT’s flaws, the commercialization figures are highly interested in tokenized digital art. In May 2021, the NFT market peaked at $ 100 million in a single day.
Another example is the Cryptopunks marketplace, which inspired the ERC-721 standard (the most used). Today, it is the third market with the highest volume, with total sales to date of 186 thousand ETH, equivalent to USD 531 million.
In addition, two of the most expensive sales in the NFT market have been from Cryptopunks, exceeding $ 7 million each, according to information from DappRadar.
Scalability to reduce costs: one of the great challenges of NFT
Addressing high transaction fees requires greater scalability. For this, various proposals have emerged, including first layer or layer 1 (L1) and second layer (L2) solutions in Ethereum, creating new blockchains or sidechains (sidechains) and rollups.
Although it offers higher performance in transactions due to its everyday use, new blockchains for this specific market usually come with the cost of centralization.
It has happened in the case of Dapper Labs, one of the pioneers of NFT, creators of the blockchain game Cryptokitties.
During the last market cycle, he created his own blockchain called Flow. Through Flow, NBA Top Shot was brought to life, one of the most significant collectibles projects in the non-expendable token market with $ 582 million of historic market volume, according to DappRadar.
Flow has 350 nodes, and the platform maintains control over the supply of the token. It means that, for the moment, it is centralized.
While it might not matter for NBA Top Shot collectors, this does count for those seeking greater openness, market neutrality, and avoiding censorship.
The sidechains and centralization of security
Another solution has been the side chains, which are more integrated with the base chain. Among the most used sidechains in Ethereum, Polygon (previously called Matic) can be mentioned.
This network works with proof of stake, is compatible with the Ethereum virtual machine, and can reduce costs for minting and transferring NFTs. However, they do not have the guarantees of the security of Ethereum.
Its official portal has only 100 validators, making it a much more centralized blockchain than the native Ethereum layer. There are already games projects and NFT markets, such as Nanakusa, developed in this network.
Matic’s security does not inherit the security guarantees of Ethereum, and it depends on its validators. The ShapeShift report is centralized since five addresses contain 65% of the tokens created.
The rollups could end up with costly rates
The rollups, according to Ethereum.org, are characterized by executing transactions outside layer one, which has inherited security properties. The ShapeShift report ranks rollups as one of the most decentralized second-layer solutions to congestion.
There are two types of rollups: the so-called zero-knowledge (ZK-Rollup), which executes off-chain transactions and sends proof of validity to the chain ( cryptographic proofs). And the so-called ‘optimistic rollups’ assume that the transactions are valid by default and only run the calculation through a fraud test in case of inconvenience.
The ZK-rollups outstrip the optimistic speed validation. Optimists can take up to two weeks, while ZK-Rollups can perform 20,000 transactions per second.
These options help reduce end-user fees. In addition to having open participation, they have faster transactional performance.
An example of the rollup implementation to end the costs of NFTs is Immutable X, which, according to a post on its official Twitter, will end gas. In addition to having instant and non-custodial confirmations, it has the security of Ethereum, and its users can choose between Validium-zk proof and ZK-Rollup to keep their assets.
Beyond costs, interoperability
It is of little use to mint a non-fungible token for free or have free fees in a market with no customer. Or, it does not allow to transfer of the tokens created, received, or acquired to other wallets compatible with the Ethereum virtual machine (EVM).
The interoperability issue is still a challenge for most Dapps, as there is uncertainty between the ability of some second-layer solutions to transfer the NFTs to the Ethereum mainnet for greater security or to send them to other compatible markets with Ethereum.
Those with full compatibility with the Ethereum Virtual Machine would not have significant problems establishing bridges between the leading network and other blockchains compatible with EVM.
It should be noted that even with the challenge of interoperability, some L2 markets have the potential to be so significant and widespread that their users rarely need to transfer them outside of these platforms.
The future of NFTs with fractional properties and joint ventures
In general, the ERC-721 standard has been implemented so far, which cannot allow multiple owners. But, the development and implementation of new standards can imply significant changes in the NFT ecosystem, and the ERC-1633 standard comes to add these options.
The ERC-1633 blockchain standard was published in 2018. The so-called “tokens re-fungible” (RFT, English re-fungible tokens ) are compatible with previous ERC-20 and ERC-721, but with the possibility of adding the option of multiple owners, or co-investors, through fractional properties.
This feature can bring new opportunities to crypto art collectors and artists. Barton deduces that having multiple owners or investors involved in an NFT work adds more effective options for distributing an NFT work.
The legality of NFTs
Finally, another of the most critical challenges for NFTs is that they have no legal relationship with copyright ownership.
Although smart contracts can be used as a tool that provides essential elements for certification, in practice, this depends on their institutional adoption.
NFTs are currently unrelated to major copyright institutions. None of these innovations can bridge the legal reality of this technology without its institutional adoption.
Although there are already projects that could briefly give an overview of what is coming for non-fungible tokens, they are still private initiatives with a cost.
For example, a service offered by Cxip facilitates registering a work with the United States Copyright Office. In addition to authenticating the non-fungible tokens, it allows you to sell your work along with copyright in any market.
Another attempt to certify copyright is the Italian Society of Authors and Publishers, which, last March 2021, announced more than 4 million NFTs on the Algorand blockchain to register the works of more than 95 thousand creators.
These implementations can bring greater legal certainty to NFT collectors in the future and expand the possibilities of its commercial utility.
