Non-fungible tokens (NFTs) are non-interchangeable digital tokens that are unique and verifiable. Each NFT exists on the blockchain (Ethereum, Solana, Near, …) as a cryptographically-secured account. By using a distributed public ledger to store information, they can provide unforgeable guarantees of ownership. Each NFT is completely unique and incapable of being replaced unless authorised through a private key. NFTs enable a multitude of opportunities and possibilities, opening up whole new worlds of potential.
They provide a flexible, universal system through which we can interact with data, create smart contracts and trade on a mathematically secure market. Each token, unique and valuable in its own right, will revolutionise the way we interact with data, ushering in a new era of creative expression and financial revolution.
Copyright of NFT
Proponents of NFTs argue that it can be a boon to digital artists, giving them the opportunity to make money through their work. As there is yet no solid legal framework or precedent to enforce or validate true ownership or copyright of NFTs. This leaves the door wide open for people to tokenize someone else’s art and make a profit on it without repercussion. The downside is the potential for art to be copied and shared with no credit or recognition given to the original creator.
Lack of regulation
Since there is no established framework for the issuance of NFTs, there is a lack of standardized inspection for these digital assets. Due to their novelty and their association with virtual transactions, many people are unsure of their legitimacy, which could leave them exposed to fraudsters and scammers.
Difficulty
It can be challenging for the average person to comprehend the complex blockchain technology backbone of NFTs. This can make it hard to appreciate their value, as well as make it difficult to interact with them. Multiple NFT marketplace exists with multiple exclusive NFT to complicate the situation.
Restricted applications (yet)
NFTs are primarily employed for digital art and collectibles, which may not interest a large portion of individuals. Until NFTs can be used for a greater number of industries, it might be challenging to attain widespread acceptance. Disruptr GmbH maintains a list of all possibles NFT use-cases here.
Costly and speculation
The fees associated with buying and selling NFTs can be high, and people often purchase non-fungible tokens as speculative investments rather than for their intrinsic value. This could make it hard for the average person to join in the market and also skyrocket the market’s volatility.
The escalating costs of using the Ethereum network for NFT transactions is an obstacle preventing mainstream adoption. Gas costs are the fees associated with performing transactions on the Ethereum blockchain, including creating, buying, and selling NFTs.
The Ethereum blockchain is experiencing surging demand and is struggling with scaling issues, resulting in increased competition for block space and more expensive gas fees. This raises the barrier to entry when it comes to dealing with NFTs, making them less accessible.
Moreover, the operations related to NFTs require more computational power than other transactions, resulting in higher gas costs.
Software engineers have been attempting to tackle the problem by establishing layer-2 scaling solutions such as rollups and sidechains; these are designed to lighten the burden on the main blockchain and reduce gas fees.
Rollups are regular smart contracts on the Ethereum mainnet that serve as the relay between the mainchain and Layer 2, where computations occur. Rollups have become a popular Layer-2 scaling solution for blockchain networks.
A sidechain is a secondary blockchain that is connected to a main blockchain network. Its purpose is to enable the exchange of data and value between it and the mainchain. Often, sidechains use a different consensus mechanism than the mainchain does. Disruptr GmbH maintains a list of the major blockchain consensus as infographics or the consensus encyclopedia book.
Nevertheless, these solutions are still in their early developmental stages and may not be able to cope with the volume of NFT transactions necessary for widespread adoption.
Ethereum 2.0 aims to increase scalability by implementing shard chains, which can increase the number of transactions that can be processed simultaneously. This can help to reduce the competition for block space and should lower the cost of transactions.
Scalability
The current infrastructure for NFTs is not yet equipped to handle a large volume of storage and transactions, which can restrict usage and scalability. Ethereum 2.0 aims to increase scalability by implementing shard chains, which can increase the number of transactions that can be processed simultaneously. This can help to reduce the competition for block space
Lack of knowledge and understanding
Very few people comprehend the potential advantages and uses of NFTs, so they are not commonly used yet. But this will change soon.
Content is moved
The worth of a non-fungible token (NFT) is connected to its one-of-a-kind nature and the rarity of the digital asset it embodies. If the content of an NFT is moved, it may suffer a loss in value since its new destination is not proven to be original and could question the authenticity of the token. Furthermore, if it is moved to a less exposed or accessible place, it might become less appealing to potential customers, which could also lower its worth.
Underlying platform vulnerabilities
NFTs are built on top of blockchain platform and carry some risks like:
Platform influence: NFTs are dependent on the stability and security that blockchain platforms such as Ethereum can provide. Should something go wrong with the platform (speed, hard fork), it can have an impact on the functioning and worth of NFTs.
Platform risk: The value of an NFT is typically related to the value of the platform it’s built on. If the underlying platform’s worth decreases (Ether price), so too will that of the NFT.
Platform regulation: Regulations in place in the jurisdiction where the underlying platform is based can affect the legality and market value of any NFTs built on top of it.
Platform competition: As better alternatives may be developed or the platform may become outdated, an NFT built on a certain blockchain may lose its worth.
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