Key Challenges in the NFT-Metaverse Landscape
The NFT-Metaverse landscape is relatively new territory. The industry is still evolving and most of the developments until now have been carried out with a limited scope. As a result, there are many glaring gaps in the processes as well as features that are available to the community.
The rising popularity of the concepts of NFT-Metaverse landscape, combined with the associated FOMO has resulted in a rush that has allowed the early creators to benefit from it. Meanwhile, individuals taking part in the ecosystem are presented with limited options with no clarity on future returns on their investment or participation. In addition, most of the NFT metaverse ecosystems follow a hybrid centralized/decentralized model which further restricts community participation and reduces transparency.
A few key challenges of top priority that need to be addressed in the NFT-Metaverse landscape are as follows.
The NFT marketplaces were supposed to make it easier for artists to gain wider exposure and a fair value for their artwork. However, as it has turned out, most of these platforms are no different from a conventional art gallery or an exhibition.
Most of the NFT sales that make it to the news are popular ones by reputed personalities. An ideal example is the Christies’ record sale of Beeple’s Everyday—The First 5000 Days which was sold for $69 million. There are many such instances where popular artists have sold their art NFTs for millions of dollars. While it makes it seem that every artist can get rich by selling their NFTs, the reality is very different.
In fact, the median price for NFTs across protocols is extremely low. A study indicated that 50% of all the recorded NFT sales were under $200, which brings the question, are the artists getting any benefit at all?
Buying an NFT is just the first part of the problem. What will happen after someone successfully purchases an NFT? A buyer may purchase an NFT for multiple reasons, which could range from their desire to own a collectible to the investment opportunity. Some buyers purchase art as an investment with the aim of selling it later at a higher price. Meanwhile, there could be NFT owners who would wish to liquidate their NFTs to meet funding requirements.
At present, those who are planning to sell their acquired NFTs have a huge problem due to the absence of a robust secondary market. Almost all the sales figures indicated in reports are from primary sales where the creator has sold their NFT to a buyer. Unless the NFT is from a popular creator like Beeple or someone of similar stature, the probability of an NFT owner getting a fair deal or at least recovering what they spent for acquiring it in the first place is very low. It is estimated that 86% of all NFTs sold are illiquid while 67% couldn’t be sold on the secondary market.
Some of the reasons include the absence of adequate infrastructure to enable secondary sales and overvalued purchases in the primary market.
A direct relation to the first two challenges, the current landscape involves two stakeholders – buyers and sellers in the NFT marketplace. The price of each NFT on any NFT marketplace is currently defined by either of these parties. The seller may list the NFT at a price or put it up for an auction. The buyer will either make a purchase by paying the list price or place the lowest possible bid to acquire the NFT. A majority of times, in both cases, there is no way to determine whether both the stakeholders got a fair deal. The seller may have sold it at a higher price than what it is actually worth, or the bidder may have benefited by bidding for a much lower value than its actual worth.
This issue calls for the establishment of a clear methodology to determine the price of each NFT. In its absence, the fragmented business model will continue to prevail, creating an unstable foundation for the entire NFT -Metaverse landscape.
Many first-time NFT buyers and sellers aren’t aware of the hidden high fees associated with NFT transactions. The transaction fees or the “gas fees” associated with NFT transactions depend on the underlying blockchain on which the asset is created. Most of the NFTs today are ERC-20, ERC-721, or ERC-1155 standard tokens and are based on the Ethereum protocol.
The Ethereum protocol is known for high gas fees and purchasing an Ethereum-based NFT means the buyer must incur those charges in addition to NFT’s cost. It creates an additional burden and discourages many from acquiring them. The gas fees are also incurred by the creators while minting the NFTs
To give an example, during the Adidas Originals NFT sale, over 680 ETH worth close to $2.6 million was lost as gas fees due to failed mints.
Once the NFT is sold to the bidder, it holds little to no intrinsic value as there is no real utility defined in most cases. The current NFTs market is undoubtedly hype-driven, with most projects relying on pure speculation and a niche audience of investor-collectors. Such value cannot sustain in the long term. A need to derive proper utility will lead to a sustainable foundation of value-creation.
The current architecture of NFT marketplaces is solely focused on sellers and buyers, which has effectively left out other stakeholders who can add value to the entire process. The exclusivity ingrained in these ecosystems has resulted in not just unfair valuation of the NFTs which exposes the participants to potential losses, but also stifles future growth. For example, when it comes to art NFTs, the existing NFT marketplaces do not consider art connoisseurs or appraisers as stakeholders. Without their participation, the NFTs lose out on the most relevant metrics in the form of reception and feedback.