NFTs are a digital revolution.
They have the power to bring scarcity into a world of abundance, to fairly compensate digital artists for their work, and to revolutionize the ownership of digital assets.
And the potential for NFTs goes further than just the digital world, with applications in the real world as well.
But NFTs and blockchain technologies aren’t perfect (yet?) as they face several challenges that they will need to overcome if we ever want to see global adoption.
Here are the main challenges.
NFTs are issued on the blockchain and their value is set using cryptocurrencies. At the moment, the main blockchain used for issuing NFTs is Ethereum, which means the value of these NFTs will depend on the value of ETH (Ethereum’s cryptocurrency).
ETH has been showing strength, but as with most cryptocurrencies, it’s not uncommon that its value sees 10% fluctuation in a day. And sometimes, it can take weeks to go back up…
So, let’s say you bought a NFT for 1 ETH, which was worth $3000 at the time of buying, but a few days later, the ETH drops to $2000.
Well if you “panic sell”, you might just have lost $1000…
High cost and “hidden” fees
All these headlines with crazy NFT sales make many people want to sell and buy NFTs, and too many do so without being aware of the costs.
As a NFT creator, minting and selling an NFT on the most famous platforms (using blockchains such as Ethereum) can cost up to $1000! And as a buyer, you’ll have to pay fees as well, such as buying fees and in some cases, conversion fees.
In fact, every interaction with the blockchain involves a fee, called gas fee. As the name suggests, you can compare gas to the “fuel” needed for any interaction with the blockchain. It’s the compensation paid to the miners providing the required computer power for that interaction to happen.
Each interaction needs a different amount of gas, depending on the complexity of the computational work required, and how fast you want that interaction to happen.
And as you can imagine, interactions involving NFTs tend to be more “greedy” on gas.
Cherry on the cake? Gas prices are not set in stone and they fluctuate depending on factors such as Ethereum’s network congestion.
These fees are a barrier for many digital creators to enter the NFT space, but also for many buyers as NFT prices usually reflect the high minting fees.
Is it just a bubble?
This is a question most people are asking themselves when considering investing in the NFT world. And many decide not to take the plunge.
Let’s illustrate this with CryptoPunks.
The attraction of CryptoPunks is in their collectibility, as well as semi-automated features with actual visual scarcity.
Owning one of those Punks as an NFT and setting it up as your Twitter profile picture is the ultimate flex at the moment. Plus, the number of CryptoPunks being finite creates a sense of urgency to own one.
But isn’t it just a craze destined to fade away, leaving your 100k CryptoPunk worth less than a penny?
I’d like to put in my two (crypto) cents here. As far as I am concerned, I am confident it isn’t just a bubble. Yes, NFT sales have fallen by 90% between May and June 2021, but at the same time, the number of weekly users of NFT platforms keeps rising.
And this sounds like good news!
NFTs’ purpose isn’t to create a buzz thanks to 6 figure sales of memes and pixelated images. New NFT use cases and projects keep launching, and a drop in sales value, coupled with an increasing number of users simply means the market is stabilizing, with more users interacting on smaller projects.
The crypto world has been facing some backlash lately for their environmental impact, as the way blockchain technology operates is generally energy intensive.
A well known example is that a single NFT transaction could power an average American household for one and a half days.
But as always, nothing in life is ever black or white.
There are several valid counter-arguments in favor of NFTs and blockchain technology being young, improvements are already on the way.
Risk of theft
An NFT is unhackable, but it doesn’t mean it can’t be stolen.
NFTs are “stored” in your wallet, and if someone hacks your account to transfer your NFTs to his own wallet, he’ll become the owner, and you’ll end up with nothing.
But there are ways to secure your NFTs and make it close to impossible for a hacker to get inside your wallet. It’s a topic we’ve covered here.
Do you really own your NFTs?
If you buy a NFT one the Ethereum blockchain, for example, you buy it through a decentralized ledger that gives you the ownership of that NFT, and allows you to prove it. But in most cases, transactions still happen on centralized websites (ie. marketplaces) and NFT files are generally too big to be stored on the blockchain, meaning that they are stored in centralized data servers.
What does it mean?
If the owner of a centralized marketplace or data servers “disappear”, so does your NFT.
Have a look at our article on NFT ownership for more information.