NFTs are undoubtedly one of the hottest topics today. There is a lot of interest and excitement with the opportunity to connect collectors and creators in new and more efficient ways. Buying and selling digital art and other collectibles using NFT technology is making millions for some individuals.
However, like with any new technology, some difficulties will need to be addressed as the technology and market dynamics mature. These concerns will be rectified eventually, leading to what I believe will be a bright future for NFTs—until then, having awareness and insight into the current issues will aid users in navigating this growing market.
What are Nonfungible Tokens (NFTs)?
Before we go too deep into the issues surrounding today’s use of NFTs, it is essential to level set on what an NFT is. The meaning of the term “fungible” is crucial to comprehending nonfungible tokens. When a good or asset is fungible, it may be exchanged for another of the same type; it is not unique. Fungible currency includes everything from dollar bills to bitcoins. On the other hand, nonfungible items are those that are unique. A nonfungible good such as a work of art is one of a kind. They may be anything digital from videos to photographs to audio to documents and even items within a video game. Essentially, NFTs are collectible digital items with limited supply that can be bought, sold, and traded utilizing Blockchain technology.
The blockchain, a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems, is the underlying technology that permits both cryptocurrencies like Bitcoin and NFTs to work. This digital ledger that makes up the blockchain is a decentralized system that indelibly records transactions due to its dispersed nature and lack of centralized management.
The nature of blockchain-based NFTs enables the notion of smart contracts that allows the creator to programmatically define details of how relevant events and actions will be automatically executed, including receiving royalties for future sales of their NFTs.
What Are the Potential Benefits of NFTs?
NFT technology has enabled a new collectible market of digital assets that only existed with physical assets. NFTs can help content creators sell their assets efficiently and guarantee ownership to collectors. When content creators develop a digital asset, an NFT allows them to demonstrate authenticity and profit from it. In the past, it was challenging to assign ownership to a digital asset. NFT technology can now enable a new money stream for creators by giving exclusive rights to their digital assets during a transaction and even setting up royalties payments.
From a collector’s point of view, the thrill of acquiring a one-of-a-kind or a scarce digital object offers all new opportunities to collect digital collectibles and even sell them for a profit using NFT technology.
Although NFTs enable all-new value for digital content creators and collectors, it is still emerging. As with any new technology, everything is not perfect. It is essential to understand some of the limitations and concerns around NFTs as one starts to delve into this space.
Here are the top seven concerns with NFTs and how to effectively deal with them.
1. Lack of Regulations and Governance
Decentralization is an essential part of NFTs; Many people like the idea of decentralization since it eliminates the need for a central bank or institution to run everything. However, no regulating body or agency means that if you have an issue and need to contact customer support or initiate an investigation, you are essentially on your own. We’ve grown accustomed to having a customer service representative, a court system, or another institution keeping an eye on us. So be aware that there isn’t much aid available if you need assistance navigating an issue. Although NFT marketplaces are trying to provide governance and support, these early stages of the NFT technology require you to do some due diligence when buying or selling and NFT. For example, you should investigate if the person who created the NFT is the actual creator and has the right to sell their NFT content. One can repackage digital content they do not own into an NFT and sell it as their own. Despite this issue, I believe that there will be better tools, systems, and platforms over time that will enable the market to self-police itself and provide the right level of assurance to all parties involved.
2. Crowded and Confusing Marketplaces
The interest in NFTs has created tremendous growth in marketplaces that buy and sell NFTs. Some of these marketplaces can be congested and disorganized, and valuable art is getting drowned out. These websites are not arranging pieces and making it simple for purchasers to find specific types of art. As a result, it is the artists’ responsibility to promote their work and build a community around their NFTs; I am confident that this will improve in the future as marketplaces provide better processes, curation, and best practices.
3. Contractual Obligations
As mentioned before, one of the key aspects of NFTs is the notion of smart contracts enabled by blockchain technology. A smart contract is a simple program stored on a blockchain that runs when predetermined conditions are met. Smart contracts can be a tremendous opportunity for the content creator to monetize and collect royalties. As a buyer, when purchasing an NFT, you must be aware of any contractual requirements. If the NFT has a smart contract royalty structure in place, when you sell an NFT, you may have to share some of your proceeds as defined by the built-in smart contract. So, make sure that you know all the contractual obligations you have when you buy an NFT.
4 Environmental Impact
NFTs are primarily created, purchased, and sold on the Ethereum blockchain network. To verify an NFT transaction, computers on the Ethereum network (known as miners) compete to solve a numerical puzzle. The winner updates the Ethereum blockchain with verified transactions and rewards the miner with a predetermined amount of Ethereum cryptocurrency (called Ether) for their work. The reward miners receive payment for by the built-in transaction fees (called gas) when items are bought and sold on the Ethereum network. The downside of this process (called proof-of-work) is incredibly inefficient by design. Thousands, if not millions, of computers worldwide compete to solve these mathematical problems as quickly as possible to receive their rewards from mining.
Meanwhile, a massive amount of electricity is squandered. Although this environmental issue exists with any proof-of-work cryptocurrency, it is exasperated by the popularity of NFTs. The good news is that the Ethereum network is planning to switch to a proof-of-stake system, where a miner can mine based on how many coins they contribute – or “stake” – in exchange for a chance to validate a new transaction and receive a reward. Ideally, this will significantly reduce electricity consumption and environmental impact. In addition, a growing number of proof-of-stake type cryptocurrency technology are being used for NFTs today.
5. Expensive Gas Fees
As discussed, the Ethereum network was designed to compensate miners for validating transactions utilizing the gas fees paid as part of the transaction costs of NFTs. When creating, buying, or selling an NFT, there is an associated gas fee. These gas fees fluctuate drastically with network demand and with the price of Ethereum, so it can become costly for an artist or content creator their NFTs (called minting), especially if they have an extensive collection. It may also dissuade potential collectors from purchasing their art if the gas fees are too expensive. However, some marketplaces allow you to list the NFT before it is written to the network, so you only pay gas fees when there is a transaction. In addition, some marketplaces are using alternative token technology that has lower fees, and eventually, when Ethereum implements proof-of-stake authentication, gas fees will drop dramatically.
6. Ownership Rights
NFTs technology will assign ownership of a digital asset, but what if someone copies an image of your work, mints an NFT, and sells it? Nothing is preventing this from happening today. However, Most NFT marketplaces offer a mechanism to report counterfeit art, and with an artist website, it would be clear which artwork is authentic.
Another contentious topic is intellectual property rights. Simply put, the agreement of sale should state whether the buyer is purchasing intellectual property or only obtaining a license to use it; by extension, the issuer must have confirmation that they own the intellectual property being sold or licensed. These are merely a few of the legal and ownership aspects to consider, as one might expect.
Therefore, whether you are issuing, selling, or buying NFTs, you should do your homework. If large amounts of money are involved, it is always wise to consult a lawyer.
7. Unrealistic Expectations
Many artists think that just creating and NFT will guarantee a wealthy buyer will immediately purchase their work. Most people who have tried to sell NFTs will tell you that this is not the case. NFTs make it possible to assign ownership of a digital asset, but that doesn’t mean it will automatically cause someone to buy your NFT. Artists that make money from NFTs are, for the most part, are those who already have a large following. Artists that have secured exclusive listing partnerships with marketplaces like Nifty Gateway and others are also finding excellent sales. If you’re considering selling NFTs, I think you need to consider that people will pay for perceived value like any other commerce transaction. This is why when selling and NFT – marketing, branding, and building a following for your creative content will be essential.
The Future of NFTs
While the NFT market is early, some aspects of the technology and processes are still maturing. They’ve filled a gap in the industry that has created a new opportunity for collectors to buy and creators to sell digital assets. And as time goes on, the user experience and implementation of NFTs will continue to mature. There will always be problems and issues to address with any emerging technology. However, the future of NFTs is bright, and the opportunity to change forever the way creative content is bought and sold will revolutionize e-commerce forever.