NFTs are the Future… but also a Mess

Incredible user growth in 2021 on the largest NFT marketplace: OpenSea

2021 has been the year of NFTs. Shorthand for non-fungible tokens, NFTs represent almost anything that can be digitized. With celebrity creations by Paris Hilton, digital artists like Beeple fetching $69M for their work, and six-figure purchases on single NFTs in popular projects like CryptoPunks and Bored Ape Yacht Club. So why all this attention and money for expensive JPEGs?

The Future

Creator Revenue — I grew up in the 1990s, in a world where you paid to own a physical copy of media: video games, music, books etc. As the internet made it almost free to copy and distribute media, the creators (and their intermediaries) lost out. NFTs solve this problem. Now creators can distribute their media broadly and freely, then make long-term money from NFTs by charging hefty prices to their most committed community members. Popular musicians have used a similar model for decades: creating music builds a fanbase, but they make most of their revenue from selling concert tickets.

Digital Status Becomes Important — Your friends and audience now see your profile picture on social media much more than they see your actual face. In the same way people wear a Rolex for the brand vs. time accuracy, we’re now seeing many celebrities & enthusiasts “flexing” with NFT profile pictures worth $100k+. Given Epic’s ~$6Bn revenue in 2020, mostly based on in-game item sales, we know mainstream consumers will also buy these electronic goods.

Ownership Rights — NFTs have transferred major ownership rights into the consumers’ hands. Unlike when you buy a “Harry Potter” book, you only have the right to read it, but not to repurpose that book and use elements of it for whatever you see fit, like writing a “Wizard’s Cookbook” based on the characters. With most NFT projects, you own the rights, and thus, can reuse it on any digital *or* physical medium you’d like — for example Universal Music is creating a redux of Gorillaz.

The Mess

Prohibitive Entry Fee — Even outside of the premium NFT projects’ eye-popping costs, most charge $500+(USD) in Ethereum, plus transaction costs, to get started. Play-to-earn games like Axie Infinity solve some of this by allowing owners to earn better NFTs within a game but the game’s success still drives up entry costs for new players. Flaunting your disposable income may create an initial market boom but it’s not necessarily a great trend.

Transaction Costs — Also called “gas fees”, are the costs associated with registering your transaction on the Ethereum blockchain, which confirms your NFT ownership. As Ethereum’s growth has outpaced its technology, these transaction fees have gotten out of control and now often dwarf the price of the NFT you’re buying by orders of magnitude. For example, to register: SterlingRoad.eth on the Ethereum Name Service for 1 year was $5 for the registration and over $175 in transaction costs! With Ethereum gas fees unsustainably high, competing blockchains with lower transaction costs, have seen incredible growth in 2021; for example Solana’s market cap grew 800x to ~$65Bn.

Scams — The NFT market is loaded with bad actors. Leveraging the bad UX of most digital wallets and the absence of verified communication channels, it’s easy for people to fall victim to scams — both losing their NFTs and buying fakes at a price that’s too good to be true. Unlike a credit card, fraudulent transactions can’t be rolled back on these blockchains, and the inevitable horror story headlines will understandably slow mainstream adoption.

The NFT market is the wild west: an exciting vision of the future, but fraught with pitfalls. I think most of these problems will be resolved as adoption grows, but expect it to take years, not weeks. I hope you’re enjoying watching this market develop as much as I am.

Disclosure: I own cryptocurrencies and NFTs in a variety of collections including the Ethereum Name Service, mentioned above. This is not an endorsement, recommendation nor investment advice. Do your own research.

Thanks to Kaego Rust for their help with this article.

Sterling Road invests in pre-seed B2B startups based in the US and Canada.
Full investment process. Contact: ash@sterlingroad.com

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Pre-seed Investor. Email: ash@sterlingroad.com. B2B, US only. I work with founders for 3 months before investing. More info: http://SterlingRoad.com/process

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Ash Rust

Ash Rust

Pre-seed Investor. Email: ash@sterlingroad.com. B2B, US only. I work with founders for 3 months before investing. More info: http://SterlingRoad.com/process

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