Why would 99% of NFTs fail?
In economics, the concepts of fungible and non-fungible tokens are pretty old. Apparently, as tokens for brothels or games, coin-like objects were traded as long back as the Roman Empire. English monasteries utilized tokens known as “Abbot’s money” to pay for services rendered by foreigners during the Middle Ages.
Merchants dealing in the British Isles and North America between the 17th and 19th centuries frequently employed fungible tokens, which served as a commitment redeemable for commodities when state coinage was scarce.
Fast forward to more recent times, when arcade games and casino slot machines began to use fungible tokens that could be exchanged for cash. The premise of tokens hasn’t changed in the crypto era: they represent something concrete (physical) or intangible (non a service) within an ecosystem. Fungible tokens in a blockchain are cryptocurrencies like Bitcoin (BTC). Non-fungible tokens are data units that represent a single digital asset that is confirmed and stored on the blockchain.
In this post, we will discuss non-fungible tokens (NFTs), what difficulties creators and SMEs encounter while dealing with NFTs, and why would 99% of NFTs eventually fail?
Introduction to NFTs
To understand non-fungible tokens, let’s compare them to non-fungible assets. Non-fungible assets are one-of-a-kind and cannot be divided into separate units. Instead, they should be viewed as a form of deed or ownership title for a one-of-a-kind, non-replicable item. For example, an airline ticket is non-fungible because it contains unique data that cannot be duplicated.
Non-fungible tokens, like photographs or intellectual property, represent a unique and indivisible entity — physical or intangible. Blockchain technology is the foundation for proving an intangible digital property’s ownership. Since 2012, when the concept of colored coins first appeared on the Bitcoin blockchain, non-fungible tokens have become popular. Colored coins allow the attachment of metadata (additional information about the precise data utilized) to Bitcoin transactions rather than establishing alternative blockchains as sidechains.
Nonetheless, colored coins haven’t found much use in the cryptocurrency world. On the Ethereum blockchain, the first non-fungible tokens were created, which were used to identify a product, service, or person uniquely. CryptoKitties first surfaced in 2017 on the Ethereum blockchain. The game was the first real-world use of NFTs in the crypto sector, and it went on to become the Ethereum protocol’s most popular decentralized application.
For the first time, artists and content creators may monetize their work using blockchain technology, and they can do so without the help of a third party. Physical galleries and auctions are also eliminated, allowing artists to migrate to the digital world for more convenient and smoother interactions. Celebrities such as Paris Hilton, Grimes, and Snoop Dogg have all helped to popularize NFTs by revealing their involvement in the space.
Recently, John Legend, an American singer-songwriter, has joined the ranks of celebrities flocking to the realm of NFTs by assisting in the launch of OurSong, a new NFT platform for artists and other entertainers. The NFT market was worth $2.5 billion in the first half of 2021. Given the astronomical selling prices of some of the artworks, this should come as no surprise.
Through Christie’s auction, digital artist Beeple sold “Everydays: the First 5000 Days” for $69.3 million. Meanwhile, Twitter CEO Jack Dorsey sold an NFT of his first tweet for $2.9 million during an auction. However, as NFTs are rare collectibles based on demand rather than fundamentals, people’s interest in the sector and how much they are prepared to pay for an NFT drive asset prices.
Issues faced by early NFT creators or SMEs
Since NFTs are still in their infancy, creators and SMEs face various challenges, as listed below.
Owning the NFT vs. the Ownership rights
Creators buy digital rights to the original copy when they buy an NFT. Purchasing digital rights to the original document implies that the author retains ownership of the digital item they are buying, whether a meme, image, tweet, or piece of art. You can’t utilize an NFT to a digital image to sell printed versions of the same manifestation under current copyright regulations. For example, suppose you collect a historic ‘The Starry Night’ painting. In that case, it will stay the Museum of Modern Art collection in New York City until the museum relinquishes ownership rights to your collection.
Anti-money laundering regulations and NFTs
NFTs, like other digital money and asset transactions, are exchanged anonymously, and their selling implies price volatility. Because of their anonymity and instability, NFTs are excellent avenues for money laundering, but they also pose a continual threat of terrorist funding and money laundering. Italy, the United Arab Emirates, Germany, and China are among the countries that have explicit restrictions on NFTs and cryptocurrency use. While some states lack legislation controlling NFTs, they have clear guidelines for whether NFT transactions are covered by current cryptocurrency legislation. The Netherlands, the European Union, the United Kingdom, and Singapore are among these countries.
For instance, the Financial Conduct Authority (FCA) requires all crypto asset enterprises, including wallet providers, to register with the FCA to prevent money laundering and terrorist financing through cryptocurrency trading. Therefore, the SMEs looking to enter into the NFT space are subject to a regulatory fee ranging between £250 and £200,000 depending upon the extent of the business activity.
Price evaluation challenges
The unpredictability in estimating the price of the NFT is the main difficulty in the NFT market. The price of every NFT is determined by its uniqueness, innovation element, scarcity of buyers and owners, and various other factors. Because there is no established standard for any NFT, prices fluctuate significantly. As a result, sellers cannot predict the factors that may influence the price of NFT. Therefore, price swings remain constant, making NFT price evaluation difficult.
Cyber security and fraud threats
The exponential surge in popularity of NFTs, combined with the digital world’s expansion, has resulted in significant cybersecurity and fraud issues. This includes the risks of fake NFT stores that look identical to legitimate NFT stores and have the same logo and content (i.e., creators will own fake NFTs). For example, some companies created NFTs from artworks in the digital collection of public domain paintings on display at the Rijksmuseum in Amsterdam without the museum’s permission. Furthermore, malevolent agents can mimic well-known NFT artists and sell counterfeit NFTs in their names. The instance of hackers taking NFTs from Nifty Gateway users is one of the most recent examples of the NFT cybersecurity concern.
NFTs cannot be treated as securities
One of the most prominent non-fungible token concerns is the consideration of NFTs as securities. According to the Chairman of the Securities and Exchange Commission, most NFTs on the market are sold as securities. However, the Supreme Court has linked NFTs to the definition of an investment contract. As a result, to demonstrate their eligibility as securities, NFTs must adhere to the Howey Test’s unique requirements.
Why would 99% of NFTs fail?
Skeptics frequently compare NFTs to the Dutch Tulips of the mid-1600s, one of history’s most catastrophic market disasters. The mania was predicated on the Greater Fools Theory, which states that buyers buy assets solely intending to resell them at a higher price later. This can only go on for as long as buyers are willing to pay the higher price for the asset. This is where things start to create problems for NFTs, especially while selling them (as explained in the above section). Gary Vaynerchuk, a significant player in the NFT field, predicts that 99% of NFTs ventures would fail and be worthless shortly.
Here are some of the reasons behind the failure of NFTs in the future:
High energy consumption and minting costs
Proof of work (PoW) allows an NFT to be created and recorded on a blockchain. It allows a network of miners to compete to validate transactions on a blockchain by solving cryptographically formidable challenges. Unfortunately, computationally challenging issues necessitate massive quantities of processing power, which equals increased energy usage. According to some estimations, the amount of energy required by cryptocurrency mining is similar to the energy generated in a single year by the London metro region.
Furthermore, when the Ethereum network is overburdened, one of the most significant difficulties NFT creators may face is the high transaction costs. When the network is congested, transaction rates can increase as users pay more fees to miners to encourage them to prioritize their transactions. This is referred to as the “gas war.” During new NFT minting, gas wars are prevalent, with users rushing to obtain a piece of the initial mint. For instance, during the TIME NFT minting, the gas charge increased to nearly 3 ETH only to mint a 0.1 ETH NFT.
The complexity of an NFT creation vs. difficulty in maintaining and selling them
The lengthy and complex procedure of making and purchasing NFTs is another difficulty creators face. Similarly, managing private keys, substantial transaction fees, and setting up a wallet, among other things, are all herculean chores for SMEs just getting their feet wet in the NFT or crypto seas. However, even if you can create NFTs after going through a complicated process, you may not sell them. For instance, if an artist isn’t well-known, there’s a high chance that their work will be overlooked, even if it’s good.
Furthermore, social media drives a large portion of the NFT arena to the point where if an artist doesn’t have a social media presence, people may question the validity of their project. Additionally, a potential collector coming upon an ample supply is a significant impediment to sales. Suppose a wall of “unpurchased” NFTs greets the collector when navigating to a collection. In that case, he may opt to leave because an ample supply may appear to be a positive thing at first since it gives people a choice, but the collector may assume it to be of inferior quality).
Similarly, maintaining NFTs secure is challenging when plenty of hackers keep an eye on exploiting the vulnerabilities in the crypto protocols. For instance, the theft at the Poly Network Protocol resulted in a loss of about $600 million, portraying serious flaws in smart contract security. Therefore, blockchain requires the same professional, commercial-level usability efforts that have previously helped other technologies like the internet. And it will happen when the number of users increases.
If you still want to start an NFT business, you might find it helpful
To address the issues concerned with high minting cost and complex procedure of NFT creation, the Blockchain-based Service Network (BSN) has soft-launched (with eight platform operators and seven open permissioned blockchains) Distributed Digital Certificate (BSN-DDC) Network (ddc.bsnbase.com), an infrastructure dedicated to NFT adoption in China. As NFTs go beyond digital art and copyrighted content, BSN has renamed NFT technology to Distributed Digital Certificate or DDC for their application to universal digital certification.
Benefits of BSN-DDC for NFT adopters:
- The BSN-DDC Network provides DDC-related business platforms in China with the most credible, transparent, diverse, sustainable, and dependable environment where they can mint and manage their DDCs.
- In addition, businesses can design and maintain user portals or apps for all types of DDC applications using the BSN-DDC Network, which provides essential APIs, network access, and SDKs.
- Gas fees are paid in fiat money through BSN-DDC portals, with minting fees as low as 0.05 yuan (0.7 US cents), substantially less than public chains.
- The BSN DDC Network is currently available in China via ten OPBs, but we also want to connect with global users. The BSN-DDC Network will enable cross-chain services among all OPBs and one-way transfers from OPBs to the Ethereum mainnet and other public chains so that users from other countries can access NFT assets minted in China.
Final thoughts
It’s unclear whether the NFT craze of 2021 will endure. If NFTs are here to stay, they will undoubtedly result in a slew of new legal issues. As a result, NFT issuers and buyers should keep a careful eye on these developments, as many regulators have already taken notice of the rise of NFTs. We anticipate that intriguing copyright-related conflicts will occur, providing additional clarification on dealing with NFTs.