How can we interpret the short, volatile history of NFTs to predict their potential and future? Sergio Muscat dusts off his crystal ball in the final installment of his series about non-fungible tokens.
I’ve been following the evolution of the blockchain, cryptography, non-fiat currencies, and metaverse for the last few months as I wrote this series.
From a personal and professional standpoint, I’ve delved in these topics. I’ve also advised clients and developed a few web3 projects. My initial scepticism towards technology has been put to rest and I now have a more positive view of the field.
Mixed results have been achieved by the exercise. Technologistically, the NFTs are exciting, but as an artist, they have the ability to change the way digital art is created, perceived and consumed. The NFTs could bring a fairness to the distribution of royalties, and change the market from its very core. I am an analyst and realist. However, as a rationalist and analytical, there are still too many unanswered questions, too many complications and too much fluff to make me a believer.
In my future projections, these technologies are bound to become a part of our everyday lives. I think it’ll be quite different from what we see today and will not reflect the original spirit of blockchain.
Bitcoin’s whitepaper made it clear that its goal was to develop a system of payment which would allow “online payments from one party directly to another, without having to go through a financial institute.” [1] The entire crypto world has evolved in the spirit of technological democracy or anarchy, depending on who you ask. This is an important and noble cause. The centralisation of power, the centralised nature of government, and financial institutions, as well as other powerful, large and centralised organisations, have played a major role in our current situation. The greedy environment is created when powerful institutions can act without repercussions against the interests of working class people because they’re “too large to fail”.
It is human nature, but I do not think that creating an independent decentralised system without safeguards will solve the problem. It is something I, and many others, would like to know the answer to. I usually respond to these conundrums by saying that we should find a compromise – or a place in the middle – between complete decentralisation and extreme centralisation.
You may wonder where all this came from and if it’s just an opinion, a gut feeling, or if there’s some substance behind it. In the last few months, I’ve had many discussions in both a public and private setting with people of all backgrounds. Some very important aspects, such as my personal experiences, have shaped my perspective. This will allow you to formulate your own opinion.
The ubiquity of the aforementioned is far from universal
In the end, blockchain is still a niche technology, even though it has become popular enough to affect global markets. Around 300 million people are expected to own at least one cryptocurrency wallet by mid-2022[3][4]. This is just over 4%. This growth is steady and it’s possible that we could reach 1 billion people by 2022 (14 % of global population), although I am a little hesitant about the number. Comparing this with the 76% who had a bank in 2021[5], we can see the long way ahead.
In 2022, a study of 1,000 US citizens found that 4% had traded or created NFTs[6]. Despite the fact that this has doubled from year to year compared with last year, we remain far away from considering NFTs ubiquitous. Online art sales are still very small compared with the offline market, even though NFTs tend to be used for collectibles and not art[7][8].
Simple? Not at all
This brings us to our second point. Decentralised financial systems are not always well organised.
Comparing the traditional financial systems to this, they’re in direct competition. To open a bank, to deposit money and to store or retrieve that money, you don’t need to know the banking system. A meta-layer is placed on top of the system to simplify and hide it enough for people to understand. The money we have is also safe, and there are well-established security measures and processes in place.
Cryptocurrency is a bottomless pit. Binance, for example, has become more user-friendly, but there are still some rules and regulations that surround them in order to maintain a certain level of safety. It is still important to understand why and how blockchain works. The focus is still on stock trading and not banking.
Even the most popular cryptocurrencies have a value cap that is only a small percentage of fiat currencies. They also lack safeguards against their collapse, making them very vulnerable to market manipulation. Even the value caps of the most popular crypto currencies are only a fraction of the fiat currency, with very little protection against collapse. This makes them vulnerable to manipulation.
The lack of clarity, uncertainty, accessibility and volatility in the market are major obstacles to greater adoption. This situation is unlikely to be solved as long as the system remains decentralised.
It is not safe
Cryptocurrency has been dubbed “unhackable” or very safe. The blockchain technology, which underpins it all, is indeed very secure mathematically. Lack of controls, insufficient processes, and the piecemeal design of web3 wallets have created several security holes that allow for hacking, scams, and other cybercrimes. Hacking incidents were double the amount in 2021 and 2022, resulting in almost $2 billion in assets lost[10][11]. This does not include scams or personal wallets that are hacked using “sweeper robots”[12] or other methods.
Decentralisation is a sword with two edges. The removal of trusted intermediaries, such as banks and financial institutions, provides more freedom in owning assets. However it means we give up protection provided by these entities. Bottom line: We must accept the entire package. The majority of people won’t want to take the risk that comes with freedom.
There is currently no blockchain, wallet or NFT Smart Contract that can truly be trusted. The people who regularly invest in the blockchain will have a hardware wallet. This keeps all sensitive information of their wallet completely off-line. The hardware wallet is an important step, but the public is still not aware of the importance of it.
It’s not over yet
It will be fascinating to watch the next few months. As I write this, Ethereum is getting ready for the merge that will transform the blockchain to a consensus based on proof of stake, which should reduce the environmental impact of the transaction and its exorbitant cost[13], provided it goes smoothly[14].
The number of NFTs on Opensea has dropped by 95% since their peak[15], which raises several questions regarding their viability and, most importantly, relevance. All the sceptics have come out to say “I warned you” proudly. NFTs and blockchain aren’t entirely incorrect, but they still don’t have the most important ingredient: a purpose. These technologies will only be viable if they have a practical application.
But they’re not completely wrong, and it’s not all doom-and-gloom. Recent collapses, increased security breaches and an increase in awareness at both the individual as well as government level are all signs that this industry is maturing. In the past, revolutionary new systems such as the Internet and stock exchanges went through periods of abuse, hype and failure before achieving greater stability and acceptance. Blockchain is not an exception. In the coming years, we’ll see a greater acceptance of the inevitable regulation and control. While we may like to think we can manage on our own and don’t need a centralised authority for direction and control, I am afraid that is not the case. There will always be bad actors in a system, and technology cannot control them. We may be forgetting the fact that human nature is a major factor in any system’s mechanics, which can be stabilized only through social structures.
The tendency for governments to control everything is (sometimes) through extreme regulation. This is evident in the US, where the SEC has listed some cryptos as securities[16][17]. It is a normal part of any industry that’s evolving. The future of the industry is still uncertain, as the blockchain (much like the Internet) was created to provide a degree of immunity from regulation.
This means the future remains unpredictable. Unpredictable also means exciting – which leads to opportunities. Bottom line, we’re still at the beginning of an industry that is rife in potential. It is at this point that innovation occurs, when those with vision bring something new to the table and those willing to risk can chart their path to success.
In the coming months and years, society will change in a fundamental way. I am eager to see what will happen.
[1] https://bitcoin.org/bitcoin.pdf
Personal note: I try to avoid using the term anarchy because it’s often misinterpreted by people as lawlessness and violence. I interpret it as giving as much control as possible to individuals, while retaining as little government as is feasible. It does not necessarily lead to chaos, but the nuance and discussion surrounding these interpretations will not benefit this article.
[3] https://earthweb.com/cryptocurrency-statistics/
[4] https://buybitcoinworldwide.com/cryptocurrency-statistics/
[5] https://www.worldbank.org/en/publication/globalfindex
[6] https://www.security.org/digital-security/nft-market-analysis/
[7] https://www.statista.com/statistics/1236560/online-and-offline-sales-share-fine-art-auctions-in-selected-global-countries/
[8] https://www.statista.com/statistics/1299636/sales-value-art-and-collectibles-nfts-worldwide/
[9] https://corporatefinanceinstitute.com/resources/knowledge/valuation/store-of-value/
[10] https://finbold.com/crypto-hackers-loot-2-billion-in-h1-2022-as-cybercriminals-thrive/
[11] https://blog.chainalysis.com/reports/2022-defi-hacks/
[12] https://community.trustwallet.com/t/what-is-crypto-bot-sweeping-everything-about-this-scam-strategy/488179
[13] https://nftnow.com/features/ethereum-merge-heres-what-to-expect-from-the-groundbreaking-move/
[14] https://decrypt.co/108791/ethereum-merge-almost-here-what-could-go-wrong
[15] https://stephenmoore.medium.com/the-nft-boom-is-over-trading-volume-on-opensea-falls-99-a31e00f109b0
[16] https://www.forbes.com/sites/ninabambysheva/2022/08/02/binanceus-delists-cryptocurrency-sec-deemed-a-security/?sh=4533f3f314ac
[17] https://www.bloomberg.com/news/articles/2022-07-29/why-crypto-flinches-when-sec-calls-coins-securities-quicktake#xj4y7vzkg
Sergio Muscat founded Oxygia – a boutique consultancy that specialises in human insights, strategic and operational advice. Oxygia has several years’ experience in business analysis, project management, payments, and operations.
Image by JD Photography via Unsplash
