Exploring NFTs: Promises and Perils - An Insight from 'The Everything Token'

• Maximizing the Potential of Non-Fungible Tokens
• Infrastructure Challenges
• Consumer Access and Protection
• A more intuitive user experience
• Need for more safeguards
• Diversity, Equity, and Inclusion
• Regulation
• Decentralization

Maximizing the Potential of Non-Fungible Tokens

The full social potential of non-fungible tokens (NFTs) isn't immediately realized. There's a significant amount of work to be done, particularly around high-value applications that drive innovation. This was the state of play heading into 2023, but we could already see progress being made.

Infrastructure Challenges

Blockchain, the technology underpinning the NFT revolution, relies on decentralized networks for secure transaction processing. Unfortunately, this approach comes with high transaction costs. For instance, in early 2022, Ethereum$2,315 -2.42%, the predominant blockchain for creating and exchanging NFTs, accounted for 0.34% of all worldwide energy consumption due to its computationally demanding transaction recording system.

While Ethereum's switch to a proof-of-stake (POS) architecture in 2022 reduced its environmental footprint by over 99%, transaction costs remained a problem. The cost of sending an NFT to a friend, for example, could be more than a dollar in certain situations. As these costs rise with network activity, peak trading times could drastically increase transaction fees.

Fortunately, improved blockchain infrastructure and rapid transaction processing solutions were being developed to address these issues. This effort was geared towards reducing the cost of executing transactions, much like how the wide availability of cloud computing decreased processing and storage costs.

Consumer Access and Protection

A more intuitive user experience

Consumer digital wallets were often self-custodial, granting users total control over their digital assets and personal security. However, this also meant that users had to have a deep understanding of the technology they were using to avoid errors. The need for more intuitive interfaces for both wallets and transactions was being recognized.

Need for more safeguards

The instant and irreversible nature of crypto transactions meant they lacked many of the protections people expect from online services. Mistyped addresses could lead to lost assets, while hacking or account compromises could result in irretrievable losses. This issue has led to the development of improved accessibility and security solutions by wallet service providers, who saw these enhancements as driving wider consumer adoption.

Diversity, Equity, and Inclusion

Access to NFTs isn't only a technological issue. The cost and complexity of getting involved in crypto technology presented significant barriers to many potential participants. Furthermore, the technology industry has struggled to ensure representation in its workforce, leadership, and investment recipients, a problem that is also apparent with Web3.

However, with decentralized access and user control being central to Web3, the NFT space has the potential to be more diverse than previous technologies. The first step towards resolving these issues is recognizing their existence. Projects like House of First, World of Women, People of Crypto, and Miss O Cool Girls are helping make strides towards improving equity and representation in the NFT space.

Regulation

Like any new asset class, NFTs raise questions about regulation. It can be difficult to determine what type of asset an NFT is, and the answer may vary depending on the NFT's format and functionalities. The challenge of disentangling various types of NFTs and determining how they should be regulated and taxed was ongoing, with the added complexity of evolving NFT assets adding to the challenge.

Decentralization

One of the main questions surrounding Web3 is the degree of decentralization it will ultimately support. Concerns have been raised about potential centralization in the infrastructure underlying NFTs and other digital assets. There were also worries about potential platform centralization and market power at the application layer, as seen in Web2. Despite these challenges, there were indications that individual control of digital assets was impacting market structure, easing the process of switching platforms, and thus reducing the dominance of any single platform in the market.

Edited by Jonathan Stoker