Non-fungible tokens (or NFTs, as they are more commonly known) can be used to buy and sell various forms of digital creative work including visual art, music, trading cards and sports collectibles. Virtual marketplaces such as OpenSea, Rarible and SuperRare enable creators, artists and musicians to digitally license and manage the distribution of their content, and to earn a share of the profits every time it is sold. Platforms such as RAIR are now also looking to use NFTs for digital rights management.
Twitter and Square CEO Jack Dorsey sold his first-ever tweet as an NFT for nearly $3 million, and iconic auction house Christie’s has sold digital artist Beeple’s NFT art piece for $69 million. So far in 2021, investors have already poured $90 million into NFTs and digital collectibles – almost triple the $35 million invested in the entire year of 2020. Within the last 3 months alone, the overall market cap of the major NFT marketplaces has risen by 1785%, from $23 million at the beginning of 2021 to $432 million near the end of March.
Despite growing interest among investors and industry insiders, a major obstacle preventing mainstream adoption is the complex payment infrastructure surrounding NFTs. Buying NFTs often requires collectors to purchase them using cryptocurrencies. The absence of a streamlined system that allows buyers to switch between their preferred payment methods has been a major deterrent for stakeholders, particularly those who don’t really use digital currencies.
Fintech firm Circle recently launched an NFT payments platform that will accept traditional as well as crypto payments, allowing NFT marketplaces to widely accept credit card payments in addition to cryptocurrency. This could be a game-changer for traditional collectors who are not currently part of the crypto industry, and it could serve as a major step in the widespread adoption of NFTs.
“Right now, NFTs are typically bought with cryptocurrency. Users need to use valuable BTC or ETH or other currency to purchase new hot NFTs on OpenSea, Rarible or a host of other available platforms. This means a large swath of the population – those not already in the crypto space – are missing out on purchase opportunities,” explained Hannah Post, product marketing manager at Circle.
“For the marketplaces selling the NFTs, they’re missing out on a huge opportunity to bring more users onto their platforms. Circle’s payments and treasury infrastructure allows NFT marketplaces to accept credit card payments and bank transfers in addition to cryptocurrency, which means a better user experience and a bigger addressable market for the platform.”
Circle plans to remove barriers for NFT creators and customers by providing support for USD Coin (USDC), Bitcoin and Ethereum payments, NFT custodial services and yield-generating accounts for NFT marketplace operators. “In the future, Circle will also provide custody solutions for NFTs themselves, providing a full end-to-end solution for NFT marketplaces,” said Post.
The interest in creating more options for payment may be a sign of the quick maturation of the NFT market. “When NFTs first came out back in 2017, the NFT craze was considered nerdy and was only limited to people involved with crypto. You had to have Ether (the native cryptocurrency on Ethereum), and the payment system was very complicated,” said Noelle Acheson, Director of Research at CoinDesk. “But now, with more payment options becoming available such as credit card, the payment process feels smoother and that makes participating in the NFT market so much easier for the mainstream audience. This will also encourage better funding and more investment in building better infrastructure – it’s a self-fulfilling circle.”
What could prevent NFTs from going mainstream?
According to Acheson, the biggest factor that could potentially slow down or prevent widespread adoption of NFTs is the lack of clarity on how they fit into current regulatory frameworks governing the financial technology and crypto industries. “We are seeing a lot of intellectual property infringements in the NFT world. There’s nothing to stop me from taking a painting that you made, creating an NFT out of it, and then selling it for a high price. And if I’m in a different country, you have no way of finding out who I am because my identity doesn’t need to be disclosed. This has started happening already,” she said.
NFTs have also come under fire for their impact on the environment, since their storage consumes large amounts of electricity. Some estimates suggest that a simple GIF file stored as an NFT could have a carbon footprint equivalent to an EU resident’s electricity usage for two months. But Acheson explained that these ecological costs are temporary, as Ethereum will soon adopt a new system that would drastically reduce its energy use. “Ethereum, the blockchain that currently stores a high percentage of NFTs, is running on a similar system to bitcoin that involves a lot of electricity consumption,” said Acheson. “But Ethereum is moving to a totally different system – possibly as soon as the end of this year – which will consume much, much less electricity. And the other blockchains that service the NFT industry are already using much less electricity.”
What does the future hold?
Despite current challenges, Acheson believes that NFTs are well on their way to mainstream adoption, supported by easier payment options that make them accessible to a much wider audience. “The younger generation of investors and consumers like to invest in experiences rather than things. They like knowing that they are contributing to a new way of financing art, music and creativity, which allows them to engage more directly with the artists and creators that they follow. NFTs give them the thrill of ownership and a sense of belonging that just watching a video for free on YouTube doesn’t quite give you,” she said.
NFTs don’t appear to be a bubble or a temporary trend either, according to Gauthier Zuppinger, the co-founder of NonFungible.com, a site that provides market research, reports and analysis on NFT creators and consumers. “Unmatured or unscrupulous projects, scams or unnecessary use cases are all things that could bring NFTs into disrepute in the short or medium term. But in the long term, these will be seen as errors that will be quickly forgotten,” he said.
John Crain, the founder of SuperRare, is similarly optimistic about the future of NFTs. “Similar to how the internet grew from hobbyist technology to the foundation of modern economies, NFTs will continue to grow as creative entrepreneurs find compelling ways to use them,” he said.
“They will experience hype cycles just as cryptocurrencies have, and similarly they are a groundbreaking invention that’s here to stay.”Illustration by Freepik Storyset