What Is in Your NFT?
The potential, concerns & solutions surrounding NFTs
What is inside an NFT?
“Even though the word ‘token’ suggests that it is a thing, it’s really many layers of many things within this bundle.”
– Chris Tse, Cardstack Founder
In the past, NFT transactions were done on a Bitcoin blockchain. With Ethereum’s programmability and the emergence of the non-fungible token standard called ERC-721, you can now create more complex, interesting, and standardized transactional records — about who owns the NFT, what it is, the ownership history, and how to transfer and keep track of it.
Learn more here.
What are the problems and how can we solve them?
1. High carbon footprint
Problem
For current NFTs, especially ones minted on Ethereum, there is a high carbon footprint associated with the creation of blocks by cryptocurrency miners.
Solution
The solution is to move to a blockchain based on proof of stake, where the number of validators and the amount of energy they consume is many orders of magnitude less than that required by proof-of-work blockchains like Bitcoin or Ethereum.
Cardstack believes that layer-2 solutions, such as xDAI chain and Matic — which are both based on a proof-of-stake consensus algorithm — present a good opportunity for more ecologically sustainable NFT issuance.
2. Duplicate tokens for the same work
Problem
Currently, the same underlying creative work can be minted under various NFT platforms — meaning that this same creative content can be two different NFTs on two different minting platforms. This can create uncertain value, due to the resulting duplicative tokens.
Solution
The solution is to have a standard way to “hash” various media types and leverage indexing platforms like the Graph to query multiple issuing platforms across layer-1 and layer-2 chains, to check for possible duplication of existence.
This information will protect buyers in case they are buying works that are minted without permission. To catch some of the other cases, a perceptual hashing, which looks for similar visual characteristics, could also be added.
3. Reliance on custodial wallets
Problem
Many of today’s NFT minting apps or marketplaces improve usability for new users by offering a custodial wallet. A custodial wallet manages the private keys, which in turn control the non-fungible tokens on the chain. Custodial wallets are more convenient, as users have to log in and sign up for the platform like a regular Web 2.0 app, but they don’t provide the true ownership that a self-hosted wallet ensures.
Solution
The solution is to continue improving the usability of Web 3.0 wallets — especially mobile applications that leverage biometric authentication like Touch ID or Face ID as a way to unlock the wallet and approve transactions.
Since NFT minting should move to a less expensive proof-of-stake blockchain, sometimes known as layer 2, mobile wallets should seek to support new protocols like WalletConnect 2.0.
These new protocols would allow users to seamlessly interact with assets on multiple chains simultaneously, without switching networks manually. This interaction will reduce the need to host wallets on the users’ behalf, like what is done on NBA Top Shot.
4. Alterable metadata
Problem
Current NFT minting platforms create a particular type of metadata tailored for media support — whether it is art, music, or 3D objects. These metadata records are either stored on hosted servers or additionally published to decentralized protocols like IPFS. Due to the way IPFS works, these metadata records can be altered or deleted — intentionally or because of lack of interest in the network.
Solution
The solution is to allow the owner of the NFT to provide an additional storage service. The owner will take partial responsibility to ensure that the metadata records are kept on the network — either through an IPFS pinning service, which incurs an on-going hosting fee, or by keeping a copy in local storage in a USB thumb drive.
5. Limited content type support
Problem
Current NFT platforms support most media types with default playback capabilities on modern operating systems, such as audio, video, images, and text. Beyond standard media files, there is currently no standard to support more complex mixed-media expressions or a way to download the source file, giving full resolution and editability.
Solution
The solution is to use the Web platform, including JavaScript, HTML, CSS, and 3D technology like Web GL. The native content type allows a broader expression of interactive experiences to be minted as NFTs. This would allow for software-driven media — such as generative AI, spatial experiences, and augmented-reality lenses — to be minted as NFTs.
6. Deteriorating NFTs
Problem
NFTs contain on-chain records that store neither the metadata needed to describe the work nor the actual content asset — usually a byte stream consisting of the work. Therefore, an NFT can deteriorate over the years, as the NFT minting app’s persistence scheme at the birth of that NFT either goes out of business or goes through a fork or a change in architecture. This deterioration will make the NFT not playable and possibly destroy its value.
Solution
We should allow the NFT to migrate its persistent scheme from one storage method to another, similar to how a person can move some files from an old hard drive to a newer, solid-state thumb drive as part of an act of preservation and archival. This way, the NFT can evolve to retain its metadata and content to the up-to-date technology choices, which could be future versions of IPFS or other competing protocols yet to be invented.
7. Proprietary content players
Problem
The current generation of NFT minting platforms is deployed as traditional centralized websites. These platforms provide Web templates or mobile apps that render the associated content in a specific user experience, designed by the minting platform’s product engineers. Most of these platforms are not open-source, relying on continual upkeep of that hosted service for the NFT to be viewable, either on their website or in a mobile wallet.
Suppose the minting platform changes its application to support a new format. In that case, old templates that were minted years ago may cease to be supported, causing certain videos not to play or certain games not to be loadable or interactive anymore.
Solution
The solution is to demand for the players, which render the interactive content around the NFT, to be open-sourced and published to a public source code repository like GitHub or a module registry like npm. This way, the entire codebase underlying the player of a content type depends only on the open-source Web browser and JavaScript libraries in the open-source ecosystem. This will allow developers, who are interested in preserving the history of NFTs, to continue to maintain the rendering architecture, so as to ensure that the whole classes of NFTs remain active and viewable for decades to come.
8. Not honoring creator shares
Problem
NFT platforms like Zora are adding features to support creator share or sell-on share, giving the creator or a famous owner a share of the upside when their work sells in the future. However, these marketplace features are not supported by any NFT marketplace, making it possible to transfer an NFT manually and omit the percentage specified in the original minting process. This is due to the fact that the payment system for buying the NFT is sometimes separate from the on-chain ownership transfer function that is part of the ERC-721 standard.
Solution
The solution is to integrate the payment method more deeply with the triggering of the transfer, so that a neutral protocol running in the blockchain is responsible for transferring the title of the work only if the preconditions of paying out the creator shares and sell-on shares are satisfied. This integration allows for more complex business rules — for example, require a quorum of fractional owners of the sale before the transfer. Thus, a combination of a Decentralized Autonomous Organization (DAO) with a payment processing and escrow workflow will ensure that contractual on-chain terms are honoured, even as the assets move across marketplaces and different chains.
9. Fragmented marketplaces
Problem
NFT marketplaces are currently fragmented. Each one has its own terms, fees, and conditions, creating a huge variety of choices based on the type of media to be minted or the platform’s exclusivity, as some platforms are still invite-only. As a result, the market and the associated prices do not reflect a fluid and liquid market to ensure that the buyer is paying a fair market price.
Solution
We should take a page from the book of the Decentralized Exchange movement in the fungible-token space, to explore ways to aggregate these marketplaces through an on-chain protocol, where buyers can seamlessly find, buy, and sell NFTs within one cohesive interface, across an aggregated market pool. This way, the new composable dynamics of swapping NFTs or bundling them could emerge without requiring each platform to support them within their specific silos.
10. Lack of contractual rights
Problem
When you buy an NFT today, it is not clear what permissions you have, based on the on-chain record ownership. Do you have the right to use that artwork in an advertising campaign? Do you have the right to create a derivative work of your own by changing the colour? These are what intellectual property lawyers call “IP rights”, and they are not currently part of the discussions around the ownership of NFTs.
Solution
The solution is to specify more clearly— either as a related sub-token or in the metadata — what rights and privileges come with the ownership. This way, platforms like community chat rooms or photo editing tools could inspect such digital statements associated with the NFT ownership and give the owner permission to access a private area, download additional premium content, or create derivative works. By being more explicit about the permissions given with the NFT, there is a more transparent way to evaluate the NFT, based on existing IP asset valuation techniques used in the commercial music/film industry.
The Cardstack team has a lot of experience with these issues and is working out some of these problems — especially around rendering and the persistence of content & metadata — using our open-source application framework. NFTs are one of the key building blocks of Web 3.0 alongside DAOs and DeFi. Buying an NFT is likely the first experience that mainstream users have with owning a self-custody digital asset.
We should not miss the opportunity to make this experience as smooth as possible, but explore the possibilities of the decentralized way of interacting, transacting, and communicating with other people in this new space.
Learn More
If you would like to hear more about NFTs, watch Chris Tse talk about the points mentioned above and much more in this video:
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