What if anything does NFT’s short and volatile existence tell us about their future development and potential? Sergio Muscat dusts down his crystal ball for the third and final instalment of his series on non-fungible tokens.
Over the past several months, even as I have been writing this article series, I have followed the development of blockchain technology, including crypto, NFTs and the metaverse.
I have delved into these from a professional and personal standpoint, advised clients and helped develop a couple of web3 projects. I have tried my best to put aside my initial scepticism about the technology and its development and formulate a positive outlook towards the future of this field.
The exercise has yielded mixed results. As a technologist, I feel excited about the potential of the field, while as an artist I feel that NFTs have the potential to bring an evolutionary step to the way we create, perceive and consume digital art. They could also bring an element of fairness and control to royalty distribution, changing the art market to its core. As an analytical and rational realist, however, there remain too many questions unanswered, too many complications, and too much fluff for me to yet become a true believer in the field.
When I project myself well into the future, I have no problem seeing that these technologies will become ubiquitous in our lives. In my view, though, it will be in a way that is quite different to what we are experiencing today, and not really in the spirit of blockchain technology as it was originally intended.
The bitcoin whitepaper was quite clear as to its intention – to create a payment system allowing “online payments to be sent directly from one party to another without going through a financial institution.” [1] It is in this spirit of anarchy or, as some might put it, technological democracy, that the entire world of crypto has been created. It is a noble and worthwhile cause. Governments, regulators, financial institutions and other large, powerful and centralised entities have been a central part of the cause of where we are today. When powerful entities are able to act against the interest of the working classes with impunity, because they are "too big to fail", it fuels an environment of greed.
Having said this, it is unfortunately human nature to be this way, and it does seem to me that creating a decentralised financial system on its own, without any safeguards, is not really solving the issue. Whether there is a workable solution at all is a question I – and undoubtedly many others – wish I had an answer to. My usual reaction to such conundrums is that we need to seek a balance – a middle ground – somewhere between extreme centralisation of power and complete unencumbered decentralisation [2].
At this point, you may be wondering where this all came from, and whether it is purely an unfounded opinion – a feeling – or whether there is some substance to it. Over the past months I have had discussions with several people from all walks of life, both in a private and public setting. There are some very key aspects that have led me to construct my outlook, including my own experiences. I will try to synthesise these facts, to allow you, as a reader, to form your own view.
Far from ubiquitous
First and foremost, although blockchain technology has gained enough popularity to start affecting global markets, it remains, in the grand scheme, a very niche field. By mid-2022, it is estimated that around 300 million people own at least one crypto wallet [3][4]. That represents just over 4% of the world population. The growth has been steady, and indications are that this might reach 1 billion by the end of 2022 (14% of the global population) – although I have some reservations about this number. When comparing this to the 76% of the world population having a bank account as of 2021 [5], it is clear to see that there is a long road ahead.
When it comes to NFTs, research involving 1,000 US citizens showed that around 4% of the population had created or traded in 2022 [ 6]. Even though this doubled year-on-year compared to the previous year, once again we are very far from NFTs being considered ubiquitous. The share of online art sales (which includes non-NFT sales made online) compared to the offline art market is still negligible, although NFTs are mostly used to purchase collectibles rather than art [ 7][8].
Far from simple
The above brings us to the second point. One of the disadvantages of having a decentralised finance system is that there is still a lack of organisation.
I compare the situation with traditional finance systems, as in essence they are in direct competition. In order to have a bank account, deposit money, store it and retrieve it, one does not really need to understand the underlying banking system. There is a meta-layer on top which simplifies and essentially hides the process enough to make it accessible. There are also well-established processes and securities in place to ensure that our money is safe and accessible.
When it comes to crypto, we’re delving into a pretty much bottomless pit. Granted, exchanges such as Binance have become much more user friendly, and there are some regulations surrounding them to ensure a level of security. However, it still remains clear that one has to have some understanding of why blockchain exists, how it works and how to use it. It still remains more in the realm of stock-trading rather than banking.
The general instability of cryptocurrencies (including those that are supposedly stable) means that in reality they fail the "money" test, particularly when it comes to it being a store of value [9]. Value caps for even the most popular cryptocurrencies are only a small percentage of fiat currencies, and have very few safeguards against their collapse, making them very vulnerable to market manipulation (in a similar way to stock exchanges in the 1920s prior to regulatory bodies being introduced – a situation that pretty much led to the great depression).
This lack of simplicity, the uncertainty, inaccessibility and volatility of the market is a major hurdle towards greater adoption. I am doubtful that this situation will ever be resolved while the system remains entirely decentralised and unregulated.
Far from safe
Crypto has always been pegged as very safe or "unhackable", and indeed, the blockchain technology that underlies it all is very secure from a mathematical point of view. However, a lack of control, lack of processes and piecemeal development of web3 wallets has opened several holes allowing for various hacks, scams and general cybercrime to take place. The average number of hacking incidents in 2022 was around double that of the same period in 2021, leading to a total of almost $2bn in lost assets [10][11] – and this excludes scams and personal wallets being hacked with the use of "sweeper bots" [12] and other means.
The decentralisation of finance is clearly a double-edged sword. Removing the trusted intermediaries such as financial institutions clearly provides for more freedom to own and control assets, however it also means that we are giving up the protection that these entities provide. Bottom line: we must take the whole package. Most people will not want to accept the risks that come with the freedom, even (and maybe even more so) if they have the time and technical aptitude to understand the intricacies of the system itself, its flaws, and its dangers.
As things stand right now, there is no wallet or blockchain or NFT smart contract that can be truly trusted. Those who invest in blockchain regularly will use a hardware wallet, keeping the wallet’s sensitive details completely offline. It is a step in the right direction, but there is not enough awareness of its importance within the general public to make enough of a dent, not to mention the potentially off-putting technical knowhow required to use one.
Far from over
The next months will be interesting to observe. At the moment of writing, ethereum is preparing for the big merge which will bring the blockchain into a proof of stake consensus, hopefully reducing its environmental impact and the exorbitant costs of transactions significantly [13], assuming it all goes through without a hitch [14].
In the meantime, NFT transactions on Opensea have dropped by 99% compared to their high point [15], raising several questions about their future, viability, and most importantly, their relevance. The sceptics are all crawling out of the woodwork proudly bearing "I told you so" signs. They are not entirely wrong – NFTs, blockchain, cryptocurrencies and all related technology still lack the one fundamental ingredient: purpose. Until a real-world use case is found for these technologies, they will remain in the realm of niche.
However, they are not entirely right, either, and not all is doom and gloom. The recent collapses, the increase in security breaches and a greater awareness – both at an individual level as well as governmental – are signs of a maturing industry. Looking back at history, new and revolutionary systems, such as the stock exchange and the internet itself, all went through a period of hype, abuse and collapse before enjoying greater stability, acceptance and growth. I believe blockchain is no different. Over the next years we will see greater acceptance towards the inevitability of regulation and some form of control. As much as we would like to believe we are able to fend for ourselves and do not need some form of centralised authority to provide direction and control, it is unfortunately clear to me that this is far from being the case. Bad actors within a system will always exist, and they cannot be controlled by technology alone. It might be that we keep forgetting that a large portion of the mechanics of any system is driven by human nature, and this can only be stabilised through social structures.
On the other hand, the tendency of governments is to take full control through (sometimes extreme) regulation. We can see this through the efforts being carried out in the US via the SEC listing some cryptocurrencies as securities [16][17]. This is another swing of the pendulum observed in any evolving industry. It is yet to be seen how things might eventually stabilise, given that the blockchain system (very much like the internet itself) was designed to have a certain immunity to regulation.
All this means that the future is still quite unpredictable. But unpredictable also means interesting – and interesting leads to opportunity. The bottom line is that we are still in the early days of an industry rife with potential. This is the point where innovation happens, where those with a vision can bring new things to the table, and where those who are willing to take a chance can lay out their course towards success.
The next months and years will be unequivocally important, and society will be different from here on out. I, for one, am excited to see how things will evolve.
[1] https://bitcoin.org/bitcoin.pdf [2] As a personal note, I am trying to avoid the use of the word anarchy, since it is often misinterpreted as lawlessness, violence and chaos. My interpretation is more on the lines of giving more control to the individual, with as light a form of government as may be possible. This does not automatically result in chaos; however the discussion and nuance surrounding such interpretations is not one that will 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 is the founder of Oxygia , a boutique management consultancy specialising in strategic, operational and human insight advisory. With several years of experience in project management, business analysis, operations and payments among others, Oxygia assists organisations of any size and industry to investigate, manage and adapt to the future.
Photo by JD Photography on Unsplash