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Evolutions in the NFT Market Create Growth Opportunities

The market for NFTs has grown dramatically since it came into the public eye last year. The NFT market is estimated to be worth over USD$100B with a CAGR of 35.27%. Yet, this market faces systemic challenges and risks that necessitate caution within the sector and simultaneously offers remarkable opportunities for market problem-solvers.

As the crypto market faces yet another sell-off and market sentiment drops to historic lows, the broader crypto ecosystem continues to evolve, expand and innovate. NFTs are at the forefront of this innovation as we saw in 2021.

where NFTs become mainstream, building upon successes dating to 2017.

This, combined with increased public awareness to the extent where the majority of the people have some knowledge of “what an NFT is”. However, the space faces the same challenges as cryptocurrency faced in its early days; most notably scams, illegality, and under-delivery. In contrast to the cryptocurrency market, NFTs still remain in a relatively closed ecosystem with low relative liquidity and face native blockchain issues. The current market is inefficient, fragmented, and relatively primitive, but this is beginning to change.

To truly understand the NFT market we must look beyond the .JPG concept and answer the basic questions of any investment:

  1. What does it do and can this expand?
  2. Does it provide real-world solutions? (And are they needed?)
  3. Will the space promote positive change?

1. What does it do and can this expand?

To answer the first question, we must remove hype and market noise for a moment and simply look at the underlying technology. NFTs in their core form factor are a method of digital ownership, expedient proof of ownership within the digital realm. A simplified look at different forms of assets sets out fungible/non-fungible and physical/digital. Traditional cryptocurrency is a fungible digital asset. Whereas fiat currency, gold, and casino chips can be seen as fungible physical assets; stocks sometimes straddle this definition.

Imagine an app that represents an ownership stake in a real company with records existing in mostly just the digital space. Nonfungible assets in the physical world can include property, art, and tickets and in the digital space can include intellectual property, digital art, gaming assets, and so forth.

NFTs in practice, are a solution to one of mankind’s greatest needs, ownership. The ability to prove ownership in a trust-less, immutable, and efficient manner has the potential to expand far beyond the crypto world or even the digital world. NFTs will one day revolutionise physical art, property, tickets, gaming, IP, collectibles, music, entertainment, and media. The scope is truly limitless. However, the challenge at present is gaining the critical mass of users, and infrastructure, and need to reach the critical mass to bring this space outside of its current form.

2. Does it provide real-world solutions?

NFTs in their present form have, for the most part, haven’t strayed from their digital space and are marred by a bad image that turns adoption away from this space. Furthermore, there are numerous scams, bad actors and, bad practices within the space, so much so that it limits uptake confidence and reinforces the image of the “Wild West NFT market”. These factors alone discourage adopters but also highlight a greater need for self/state regulation within the sector. However, the amalgamation of the contemporary nature of NFTs and the potential they hold for real-world change may itself be sufficient for the market to both self-regulate and invent around a serious portion of its issues.

Self-regulation and good governance from projects within the sector create healthy ecosystems in which the assets can grow with market confidence behind them. Moreover, by solving prevalent problems with the forethought of NFT sector growth in mind, holders of these projects stand to benefit from ‘survival of the fittest’ in its truest form. Contemporaneously, growth is seriously limited by simple scaling issues of the ETH and BNB chains. XRPL validators have passed XLS-20D, meaning a new wave of XRP-based NFT growth heralds the onset of low fees, more liquidity, and increased marketplace robustness; the future of the NFT space is looking remarkably bright.

Defining real-world implementations can itself be quite the challenge, especially with new technology. Basically, as a holder, one is doing the often arduous task of predicting the future. 

Any new tech can be patched onto the current system and be labeled as “real-world change”, but a much more appropriate alternative is to ask what benefits will this bring? When looking at the ETH NFT ecosystem, we see a market leader that proved to the world the concept of the NFT, yet, continued innovation seems to have stalled shortly after that. XRPL-based NFTs look to lead the charge of a much more democratic and scalable market which could enable the .JPG NFT market to accommodate smaller lot sizes and far more democratised pricing. Beyond this, we begin to enter the realms of speculation about the future, but if we do not perform this task, we cannot truly innovate!

The original form factor of NFTs is digital ownership, when done correctly, this could augment almost every area of both physical and digital ownership- the possibilities become endless. For example, your concert ticket could itself be an NFT with a much more ‘smart’ smart contract built-in to address secondary sales, transfers, and rights. .JPG NFTs with better contract writing will have clearer guidance on ownership as a first requirement, covering aspects such as royalties, prints, sales royalties, copyright, trademark, and licensing. It’s a grave risk to NFT owners as many own nothing more than a limited copyright contract.

With this in mind, some may take the view that the extant ‘way of doing things’ is just fine, but this logic is deeply flawed pursuant to the historic trends of innovation. The solutions NFTs bring forward can only ever be as good as the people, the companies, and the code behind them and with infrastructure in mind, the future looks bright for NFTs!

3. Will the space promote positive change?

Environmental, social, and governance (ESG) investing is quickly becoming mainstream on Wall Street, evolving into becoming an outright requirement. Nicholas Dodd of KPMG stated “No ESG, no capital”, and this is becoming the law of the land in traditional money markets. As digital assets become more popular, they will eventually encroach on the boundaries and norms of regulated markets, making ESG investment particularly essential in the field. Fortunately, Ripple Labs and other companies in this field are well-versed on this topic and encompass all three pillars of ESG investing. Conversely, the same cannot be said for the broader digital asset market, and decentralization only adds to the complexity. When an ESG test is applied to PoW chains, they fail in practically every way. Using ETH as an example, the following are its major flaws:

1. Environmental

  1. Extreme power usage, comparable to several large cities or a small country. By design, PoW is highly inefficient and carbon-intensive. In 2021, each Ethereum transaction produced 103.42 kilograms of carbon dioxide. With more than 460 million transactions on the network in 2021, the carbon emissions for the year amounted to 47 million tonnes.
  1. The environmental management system of the Ethereum foundation does not exist.
  2. The proposed transition to PoS is not a solution, it is a damage control measure, which does not solve inbuilt environmental risks.

2. Social

  1. ETH does not provide equitable chances, with minimum NFT minting fees of roughly $70. This prevents a large portion of the world’s population from participating, resulting in a wealth divide that undermines equal opportunities and invalidates most social value arguments…
  1. Customer protection is basically non-existent in the NFT industry, with no measures in place other than “exchange goodwill” to “protect clients.
  2. Failures of ETH-based NFTs to implement KYC/AML have opened the NFT space to criminal activity; these failures have deceived clients, tarnished the market, and inflated the price of ETH, putting both legal and ethical issues in jeopardy

3. Governance

  1. From sanctions-busting to questionable commercial tactics, the Ethereum foundation has been embroiled in a number of high-profile issues. This demonstrates, at best, a lack of corporate ethics and, at worst, a lack of compliance..
  2. If we consider the ETH foundation and EEA to be token-holders, we can see that they have a history of dumping millions of dollars worth of ETH on the market during highs, just before large sell-offs. This demonstrates a dubious and legally problematic stance towards holders.
  3. If you consider that JPM has critical stakes in ETH infrastructure like MetaMask and Infura, board independence becomes even more doubtful. While a board’s lack of independence may be totally reasonable, taking numerous steps to conceal it is clearly malpractice…

Bearing this in one’s dome, we can see that the NFT ecosystem’s flagship is unsuitable for Wall Street’s ESG paradigm, prohibiting a substantial share of capital from investing in the ETH segment of the NFT and crypto markets. To foster a thriving ecosystem for NFTs, the industry must move toward strict compliance that provides multiple safeguards for stakeholders and customers alike.

To actually bring a dramatic shift to this field, it must first begin to comply with ESG investing, which will open the door to much more investment and confidence. This will allow crucial weaknesses to be rectified and new functionality to be added, but it will need infrastructure businesses to embrace both technology and comprehensive compliance checks.

Conclusion

In summation, the NFT ecosystem is nearing the end of its first cycle, and additional breakthroughs in the sector will threaten incumbents while also providing solutions to the ecosystem’s ongoing vortex of issues.  Risk remains high in crypto, but when NFTs progress beyond their present phase and address real-world concerns, organic and sustainable growth will occur, giving financial and social value to the broader financial markets and clients alike. NFTs have a promising future as long as vital challenges are resolved.

Charlie
Charlie