Future Applications and Challenges of NFT - 101 Blockchains

Future Applications and Challenges of NFT

The scope for virtual real estate has increased profoundly in recent times with the growth in popularity of NFT. At the same time, the world is also witnessing a radical growth in tokenization of digital art and music. Therefore, NFT applications are quite appealing, and anyone could find a way to learn about leveraging them for financial benefits. 

However, it is not cost-effective to use NFTs. It is essential to remember that NFTs are still an early-stage technology, and minting one NFT could cost over $100 in the existing environment, characterized by expensive gas fees. Only simple exchanges and transfers are marked with costs between $30 and $50. 

So, what does the future hold for NFTs? What are the challenges they would face, and how they would overcome them? The focus on best NFT applications has recently increased due to a $69 million sale of an NFT by digital artist, Beeple. On the other hand, there are multiple points of doubt regarding the long-term implications of NFT. Let us find out what the future holds for NFTs and whether they will survive the test of time. 

Enroll Now: NFT Fundamentals Course

Defining an NFT

Just before starting with an overview of the future implications for NFT, let us understand what NFT is. In the most basic sense, an NFT is actually a digital certificate for ownership of a particular asset. It proves authenticity regarding the fact that you are the sole possessor of an original digital or physical object. Digital art and collectibles are examples of digital assets with regards to NFTs. On the other hand, real estate could be an example of physical assets tokenized with NFTs. It is important to understand an NFT before exploring its potential applications in the future. 

NFT applications are often confused with cryptocurrencies, which is not the case. It is important to understand that cryptocurrencies such as Bitcoin and Ether are native to specific blockchain networks. Trading platforms can help in purchasing, holding and exchanging various cryptocurrencies. In addition, users can also leverage the platforms for using cryptocurrencies to purchase almost anything. 

On the contrary, NFTs are non-fungible, non-interchangeable and unique. They are not like other traditional currencies or commodities. For example, you can trade one dollar for another one because the value of both will remain the same always. The same is applicable in the case of cryptocurrencies such as Bitcoin. 

Also Read: NFTs In Enterprise Blockchain

The Mechanics of NFTs

The next important requirement to understand the NFT challenges directly refers to the working of NFTs. With a clear impression of how a new technology works, it is possible to draw suitable conclusions about its future. NFT is actually a unique token. It has to be created, and the inherent traits of Ethereum make it the ideal platform for creating NFTs. 

Ethereum smart contracts take care of governance of the NFTs and are responsible for transferring ownership attributed to the blockchain. Smart contracts include specific code, including all essential information for managing the significant actions related to NFTs. The actions include verification and transfer of NFTs. 

It is important to note that the actions related to NFTs are the fundamental principles for ERC-721 protocol on Ethereum. The protocol helps in defining uniqueness of a specific NFT through information housed in the NFT’s metadata. The metadata also includes a token ID pointing to an image, artwork, web domain or significant digital resource. Therefore, you can clearly see how the best NFT applications enable access to an immutable and unique certificate of ownership and authenticity. 

Curious about ERC standards? Enroll in our Ethereum development fundamentals course to learn more now!

The NFT Trend

Some examples of the applications of NFT could also showcase light on their future prospects. Platforms such as Arianee and WISeKey use NFTs for tracking the ownership trail of luxury goods. Another platform, yInsure, utilizes NFTs for creating tradable insurance policies. Most importantly, one of the best NFT applications is Ethereum Name Service using NFTs for tracking domain ownership. Furthermore, the prospects for future of NFTs are evident in the trading volumes of NFTs. 

As of September 2020, the monthly volume of trading in NFT has escalated by drastic boundaries. Within a short period of time, the monthly NFT trading volume has increased to $241 million. The NFT buzzword has been spreading fast through various fields such as traditional art, sports, insurance sectors, gaming and other markets. 

The most important advantage of NFTs in the existing market is their accessibility. Anyone can access NFTs by opening an Ethereum wallet and connecting to blockchain. New or vintage art collections and digital collectibles have found recognition in the NFT space, thereby drawing attention to NFT applications. People are using NFTs for trading with in-game collectibles as one of the notable use cases

Want to understand the difference between fungible and non-fungible tokens? Here’s a guide to fungible vs. non-fungible tokens that focuses on their differences.

The Existing Popularity of NFTs

Jack Dorsey sold his first tweet as an NFT for $2.9 million, and the sale of a LeBron James dunk fetched around $280,000 on the NBA Top Shots platform. Subsequently, the first NFT project which was capable of receiving success was CryptoKitties. It was introduced in October 2017. Cryptokitty owners could collect, purchase and sell distinct creators capable of living forever on Ethereum blockchain

CryptoKitties are one of the most promising examples of best NFT applications building the path of growth for NFTs. CryptoKitties became immediately popular after their introduction, leading the price of certain CryptoKitties to around a hundred thousand dollars. Interestingly, the volume of exchanges for CryptoKitties was adequate enough for clogging the Ethereum blockchain in 2017. Furthermore, it also resulted in the growth of transaction fees to all-time high rates. 

Canada-based organization Dapper Labs, the creators of CryptoKitties, entered into collaboration with the National Basketball Association (NBA) for creating its personalized version of collectible digital assets. The digital assets would feature video clips alongside other unique content regarding favourite players and teams. 

According to a recent study, the NFT market grew by almost 299% in 2020. The exceptional growth of NFT applications has ensured massive financial performance, with profits amounting to almost $500,000 in a specific year. Some traders have made profits exceeding $100,000 annually through NFT trading.

Here’s an overview of how to buy and sell NFTs

buy and sell nfts infographic

Please include attribution to 101blockchains.com with this graphic. <a href='https://101blockchains.com/blockchain-infographics/'> <img src='https://101blockchains.com/wp-content/uploads/2021/04/buy-and-sell-nfts-infographic-e1617931128716.png' alt='buy and sell nfts infographic='0' /> </a>

Where Does the Future Go for NFTs?

The existing situation of the global NFT market and relevant trends paints a favourable picture for the future of NFTs. However, it is essential to understand the factors for future growth of NFTs before diving into future challenges of NFT. It is interesting to note the arrival of many reputed brands in the NFT ecosystem. Subsequently, the brands could invest in the creation of profitable NFT-based assets. The notable examples include Nike, Turner Sports, Warner Music, Atari, Louis Vuitton, Formula 1, Ubisoft and BBC. 

  • Document Storage and Ownership

Just like the core blockchain technology, NFTs have the potential for different business use cases. The business applications have to be relevant for each use case alongside supporting the better digital transformation. For example, storage of documents securely is a promising factor for boosting future NFT applications

  • Asset Forgery Safeguards

NFTs can prove valuable assets in dealing with data modification and duplication. NFTs do not comply with just the fundamental functionalities of blockchain with robust encryption. On the contrary, they can also facilitate promising safeguards against data forgery and unverified exchanges. 

  • Expanding the Use of Paperless Transactions

Furthermore, the storage of all information regarding signatures and the individual in an NFT provides the scope for paperless transactions. Enterprises are no longer interested in following excessive paper-based documentation. In addition, NFTs can also be useful for individuals with their ‘paper-less’ advantage. Individuals who don’t have the need to provide documents for verification could carry them in digital formats. At the same time, they don’t compromise with authenticity while ensuring verification in real-time. 

Must Read: Why 2021 Is The Year Of Non-Fungible Tokens (NFTs)?

Challenges for NFT (Non-Fungible Tokens)

The final aspect in this discussion would turn our attention towards the challenges in the future for NFTs. While NFTs are financially attractive, they also have many prominent complications. For example, the high energy consumption, speculation bubble and seller tax. So, let us take a deep dive into an understanding of the challenges for NFT, which could restrict their growth.

      1. Environmental Impact 

One of the formidable NFT challenges comes in the form of the environmental impact of minting NFTs. The example of one of the most prominent crypto art transactions in recent times points to the collection of short films by a Canadian music artist known as Grimes. The artist produced the short films along with her brother. However, the NFT-based videos were able to achieve a price tag of around $6 million. Although this is a good implication for the future of NFTs, the event also showcases an important doubt about their environmental impact. 

An artist Memo Akten created a crypto art carbon footprint calculator, and it is defunct now. According to the defunct calculator, the whole energy consumption involved in the sale of the video collection of Grimes was radically massive. The amount of energy consumption was almost the same as that of an average EU citizen in a period of more than three decades.

Therefore, experts have pointed out the alarming implications of increasing volumes of NFT transactions. So, the need for addressing the issue has to be identified with a focus on developing greener sources of energy. 

Want to know about the top companies that are taking benefit of blockchain analytics in their scope of work? Here’s a guide of Top 5 Blockchain Analytics Companies 2021!

      2. Seller Tax

Seller tax is also another prominent challenge of NFT, which could affect its growth in the future. Buyers and sellers in the NFT landscape might discover the steep taxes as an undermining factor for joining the NFT revolution. For example, Beeple is apparently supposed to incur taxes in the amount of almost tens of millions of dollars. 

This came as alarming news for the digital artist and for many aspiring NFT traders. The US government considers the sales of NFTs as just the same as the sale of stocks. Sale of NFTs is considered as a representation of investment profits, thereby implying their dependence on capital gains tax. NFTs are basically collectibles and therefore incur the burden of higher tax rates up to 28%. 

The United Kingdom has imposed many steps for countering the NFT challenges of uncertainty in taxation. The HM Revenue & Customs or HMRC has issued guidance regarding taxation for cryptocurrencies, recently in March 2021. The guide focuses on approaches for consolidating previous guidance on crypto-asset taxation. It will provide a boost for new initiatives of HRM in taxing crypto-asset exchange token transactions involving enterprises and individual traders.

However, it is important to notice that such guidance is basically a manual for determining tax on NFT trading. It does not have any legal weight in the view of the UK government and may not hold well in the long run. Therefore, it is imperative to establish strict and precise taxation laws with the increasing presence of NFTs. It can improve the integrity of the market while encouraging the confidence of NFT traders.

      3. Ownership Rights

The concerns of ownership rights are also prominently evident as NFT challenges for the future. How can one of the notable benefits of NFTs present a challenge for their adoption and growth? The music industry has recently turned into a favourable platform for the popularity of NFTs. 

The topic of ownership rights with NFT-based music sales is quite controversial, just like the environmental impact of NFTs. Even if NFTs provide clear traceability of ownership, they don’t offer certainty regarding application of rights and ownership of original creators in an NFT-based music sale.

The increasing number of disputes in the music industry with artists seeking legal action against sale of their NFT-based music is a notable red flag for the future of NFTs. Since NFT is a new technology, lawyers have a tough time navigating such cases to help artists in resolving the issues. So, tighter regulations are definitely required for expanding NFTs in the future.

Enroll Now: Certified Enterprise Blockchain Professional (CEBP)

Final Verdict

It is quite evident that NFT applications may have interesting financial propositions. However, they are also subject to many setbacks. Celebrities are endorsing NFTs, and there is a huge market speculation bubble around NFTs. The trading volumes of NFTs increased by three times in just one year, which is a promising indication for their future. 

The understanding of mechanics of NFT along with the existing trends and the favourable environment for their growing popularity helps in obtaining a hands-on impression of the potential of NFTs. It can provide clear insights into the strengths of NFTs that could empower their future.

On the other hand, there are no specific regulations governing the trade of NFTs. Non-fungible tokens have the potential for expanding to trade of any physical or virtual item in the future. The successful resolution of challenges such as energy consumption and clarity regarding taxation could support future growth of NFTs.

*Disclaimer:  The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Do your own research!

About Author

blank

Innovation evangelist for blockchain technologies

Leave A Reply

Upgrade Your Blockchain Skills with 101 Blockchains