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Challenges to Address

Part of our special research report

State of the NFT Market | Q1 2022

In partnership with CryptoSlam

The rapid rise of NFTs has sparked concerns about speculative bubbles as well as the negative impact on the environment.

As discussed earlier, China permits trading in NFTs so long as there is a holding period after each purchase. The country’s state media have also warned against speculative behavior surrounding NFTs. 

In places such as Japan and South Korea, NFT issuers need to address concerns about the carbon footprint.

According to research conducted by artist and computer scientist Memo Akten, mining an NFT requires at least 35 kWh of electricity and that the process from clicking on the mouse to claiming the right to produce the block emits some 20 kilograms of carbon dioxide. 

For comparison, sending an email produces just a few grams of CO2, while watching an hour of Netflix produces only 36 grams, Akten said.

Other studies of NFTs and Bitcoin have found even higher carbon emissions.

While Ethereum is slowly moving away from the energy intensive proof-of-work consensus algorithm to proof-of-stake, it’s still years away from completion. Other networks like Solana already use more energy efficient networks, but the vast majority of NFTs still reside on Ethereum. 

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Unsplash

There are also doubts about the amount of new revenue NFTs can generate for traditional companies in the consumer space, despite the large numbers that have entered the market.

Bernard Arnault, chief executive of French luxury conglomerate LVMH, said that while the metaverse and NFTs could be a business opportunity, “we also have to be wary of bubbles”.

“At the beginning of the internet in the 2000s, there were all sorts of things popping up and then the bubble burst,” he said during the company’s earnings call on Jan. 27, 2022.

Other challenges facing NFTs include guarding against copyright infringement, which marketplaces such as OpenSea must do more to prevent.

Finally, there is the inevitable question about taxation, given the NFT market’s potential. Chainalysis warned that U.S. holders of NFTs may face billions of dollars in taxes and rates as high as 37% as the Internal Revenue Service starts policing the NFT space. 

“NFTs are maturing into an asset class that, at its core, functions as the best digital proof of ownership the world has ever seen.”

CryptoSlam’s Calpu acknowledges the challenges, but said NFTs would be able to overcome them given the growing number of use cases and the increasing interest shown by brands, celebrities, musicians and other content creators who have the ability to offer new experiences and attract billions of users.

“​​NFTs are maturing into an asset class that, at its core, functions as the best digital proof of ownership the world has ever seen,” Calpu said. “Combining that with art appeal, uniqueness and censorship resistance, it’s not a surprise that NFTs are finding innovative use cases, and seeing more and more unique buyers every day.”

“There will be challenges, including scams, fakes, forgeries, and of course bubbles. But at the end of the day, NFTs are facilitating human needs for ownership, belonging and uniqueness and that is not going away.”

Like cryptocurrencies, NFTs are generating millions in wealth for early adopters. But scams, fakes, forgeries and potential bubbles still give new investors reasons to think twice before going all in on these assets. 

Seven of the top 10 cryptocurrencies from February 2017 have fallen off the list, with four of them dropping out from the top 50. Today’s top 10 cryptocurrencies present stronger utility compared to just a few years ago in the form of smart contracts, decentralized finance, NFTs, gaming and the metaverse. 

As NFTs mature, their function as digital proof of ownership will present valuable and creative use cases in future digital economies. While digital art and collectibles currently rule the NFT world, this is just the tip of a massive iceberg.