The expansion of NFTs into a larger market demands analysis on the future of this crypto domain.
Non-fungible tokens, or NFTs, have recently experienced a surge in popularity and exposure, which begs the question: what even is an NFT? In technical terms, an NFT is a cryptographic token on any virtual commodity with perceived value; anything and everything online, from a viral video to a piece of digital artwork, can be assigned a unique and singular “ID” on a blockchain which gives the owner sovereignty over a derivative of that product. To put it more simply, they are analogous to a digital receipt; you do not physically own the online product, but you have inimitable proof that a rendition of it belongs to you.
NFTs have not been an immediate success. They were conceptualized in 2017 when artists Matt Hall and John Watkinson discovered the crypto platform Ethereum. Ethereum dealt in Ethers (ETH) which were easy to assign to a product and thus mint it on the blockchain to be traded. They placed a set of art pieces featuring pixelated characters titled CryptoPunks, which they hoped would be traded like collectible baseball cards, on Ethereum for free in 2017. They remained largely under the radar afterward, being resold for a couple of hundred dollars at most. Many simply struggled to comprehend the idea of buying something you could not physically own and which anyone could access. NFTs developed a reputation as a meaningless way to flaunt wealth destined to die out.
Yet recently, critics and naysayers have been biting their tongues at the boom in NFT demand and circulation. Those very same CryptoPunks are now being sold for up to $8 million apiece, and a flood of digital art and products have followed in their wake. Pak’s “The Pixel”, an image of a single, grey pixel, was sold by Sotheby’s for $1.4 million in April. The “Doge” meme, a viral picture of an excited dog, sold for $4 million in June. Beeple’s “Everydays” project infamously auctioned for nearly $70 million in March. The NFT market grew more than 50% in 2020, and many high-selling NFTs are now being fractionalized and resold in pieces, making them more accessible to the masses.
When NFTs are not being scoffed at, it becomes clearer how revolutionary they are in concept. They grant value to internet-based commodities typically seen as “free,” helping solve the economic dilemma of virtual goods being nonrival and nonexclusive. NFTs have afforded the art world a new medium to trade with. Most notably, they have provided a long-needed platform and unprecedented means of living for a growing class of unconventional, digital artists. Many also invest in NFTs as an alternate and seemingly more stable means to delve into the cryptocurrency world. When the product is at least semi-tangible, as opposed to a conceptual currency, it helps consumers feel more comfortable dipping their toes into an experimental market.
However, this recent ascendancy cannot last forever. Crypto markets are notoriously fragile and volatile, so one must consider how much longer the NFT bubble may continue to grow until it bursts. Benjamin Rameau, a high-market NFT investor, acknowledged that the sheer quantity of new NFTs entering the market makes it impossible for widespread success: “You’ve got a new NFT drop recently that’s been happening every two hours. There’s just no way you’ll have that many collections maintain value.”
Like Bitcoin or Dogecoin, the Ether and NFT market also pose a high risk in that they have no tangible assets to back their currency on. They rely entirely on the trust and continued investment of consumers, which many view as markets built on empty speculation. Those doubts could be solidified with some troubling data. The NFT world is a top-heavy market where the majority of wealth is held by a minority of lucky sellers who have broken through the glass ceiling. Most minted pieces, however, remain with little to no value. A study of 1.9 million assets sold on one of the largest NFT trading sites, OpenSea, found that ¾ of the products never resold within 90 days. Are the buyers holding out in hopes of spikes in value, or are they purchasing products with no true resale value? This is the very fear blocking NFTs from being fully embraced by financial institutions; as one of Rabobank’s market researchers put it, they view NFTs as akin to “lottery tickets” and bubbles that will “absolutely” pop.
Another worrying factor is the token’s detrimental environmental cost. Creating unique blockchain IDs for each NFT variant requires a process–nicknamed “mining”–which consumes copious amounts of energy over tens of thousands of computers. Minting a single NFT can consume as much energy as an EU citizen would in two months. In one year, Ethereum will consume as much energy as the countries of Libya and Hungary. Ethereum has responded by testing a new mining process, “Eth2”, which will cut energy consumption by 99% and is on the path to being fully rolled out in the near future. Still, for many consumers and artists alike, the environmental damage already inflicted is more than enough to turn them away.
Finally, the legality underlying NFTs remains a major concern. As the submarket continues to develop, national and international regulations have yet to catch up. Issues related to intellectual property rights, money laundering, and categorization hang in the balance. Many artists’ pieces have been essentially stolen and issued into NFTs without the approval of the creator, something the virtuality of and lack of verification in the domain makes all too easy. Many have struggled with global NFT transactions as there is no current NFT copyright infrastructure which can comply with international law. In fact, unless it is a work-for-hire situation or an external agreement is made explicit, copyright ownership is maintained by the creator in all cases. For many more, the larger problem remains that purchasing an NFT does not mean you own the actual piece–you just own a link to it; crypto engineers have yet to code blockchains advanced enough to store entire images or videos. If these legal headaches are not sorted out, the NFT market will very likely remain disreputable.
For many experts, NFTs are still viewed as a barely legal laughable fad. For many activists in the environmental and art fields, NFTs are just another example of a sector dominated by the wealthy at the expense of the environment and genuine artistic appreciation.
Nevertheless, all this doubt has not deterred countless collectors and hopefuls. They believe in the prosperity of the concept and view this era as a bumpy starting point for a market that is still in its pioneering stage. They remain attracted to the freedom from government intervention the crypto world provides and the infinite market the internet entails. Even if their emergence is tumultuous, proponents of NFTs are convinced they are the future.
At this point in time, which outlook is correct cannot be fully ascertained. Yet while the future of NFTs is uncertain, what is definite is the unprecedented potential and change their very concept implies. Countless items on the internet that were previously worthless can now be assigned a price. In the near future, your wallpaper, your favorite meme, or these very words you are reading may potentially sell for astronomical prices. NFTs could very well push the boundaries of our evolving world; they could change what we consider valuable, reshape digital assets, and modify the paradigms of our current financial structures. If they will be able to meet this potential and boom depends entirely on if enough people eventually choose to buy into their avant-garde proposal: will you?