Speculating on the future of the non-fungible token (NFT) ecosystem, we asked Jenny Zheng, head of NFT development at Bybit, to analyze the current challenges and controversies surrounding NFTs.
NFTs and Web3
Q: Could you explain the concept of Web3 and its relationship with NFTs?
The term ‘Web 3’ encompasses a wide range of technologies, protocols, and concepts that collectively aim to redefine and improve various aspects of the Internet, such as decentralizing it by giving users more control over their online identities and digital assets. This includes ownership and trading of NFTs, unique digital items representing real-world objects like art, music, and collectibles.
Q: How does Web3 technology enable the creation, trading, and secure ownership of NFTs?
The creation, trading, and secure ownership of NFTs – all are enabled by the nature of blockchain technology. NFTs are code-based digital assets built on blockchain networks like Ethereum, and they use smart contracts to automate ownership transfers.
It leverages key components such as blockchain infrastructure, smart contracts, wallets, and decentralized marketplaces.
Q: Is the future of NFTs closely intertwined with further Web2-to-Web3 transition? Why?
A: Yes. The following three aspects will inevitably affect the evolution of NFTs and how they are related to our daily lives:
- Challenges during the Web2-to-Web3 transition (technological, security, or perception issues);
- Mass adoption of blockchain technology;
- Use case scenarios.
We believe that NFTs will replace contracts and deeds in the future. For example, transferring an NFT between parties will confer real estate ownership. Using smart contracts, it would be possible to “lock” your house NFT to collateralize a loan, releasing it once the loan has been repaid. NFTs also reduce transaction costs, removing the need for middlemen or approval from third parties.
They have the elements for viable commercial use cases: transparency, verifiability, and an effective trust mechanism between contracting parties.
But this blueprint still faces hurdles buried in the above three aspects, such as technology glitches, the development of the regulatory and digital infrastructure, and public perception of Web3, NFTs, and crypto as a whole. That will take some time.
NFTs are incredibly new, so highlighting investor opportunities and establishing trust and reassurance is a primary concern. That means there is a big need for education and awareness, which aligns with the transition from Web2 to Web3.
Major NFT concerns and challenges
Q: NFTs are claimed to become a new standard for collectibles and are described as a secure and easy way to prove ownership and authenticity. However, is buying and selling NFTs really worthwhile?
A: Fundamentally, an NFT is a certificate rather than an asset itself. It’s worthwhile if the underlying digital asset embodies value, whether it is artistic, collectible, monetary, or historical value.
Q: Security is a critical concern in the blockchain space. How are NFTs secured, and what security measures are implemented to protect NFT owners?
A: From the exchange’s perspective, we use two-factor authentication, whitelisting, auditing, and multi-signature transactions mechanism.
From users’ perspective, we always encourage consumers to update their antivirus and never click on dodgy links or store NFTs offline in cold storage to protect them from scammers and hackers.
Indeed, most of the risks in the NFT sector derive from the project itself, whether the code has been hacked or the project rug pulled its users.
For beginners, purchasing an NFT from an exchange might be a better choice because of the strict evaluation and auditing process.
Intellectual property rights
Q: Purchasing an NFT is often not as straightforward as purchasing a physical asset. Basically, an NFT is a metadata about an asset on a blockchain. So what about intellectual property rights?
A: The ownership of intellectual property rights for NFTs is not always clearly defined, as applying traditional copyright law frameworks to them can be challenging.
Currently, there is a growing use of alternative licenses by NFT artists to designate usage rights for their artwork. For example, the Creative Commons nonprofit organization offers six different licensing options that NFT creators can apply to grant specific permissions to collectors.
As the legal treatment of NFTs continues to evolve, standardized intellectual property frameworks still require further development and clarification.
Q: And what happens if they are infringed?
When it comes to infringement, given the industry is still in its infancy, there’s no readily available legal framework to follow. Industry players work closely with legal advisors on a case-by-case scenario.
Q: Gas fees on blockchain platforms can be a challenge for NFT users. How can developers and platforms address this issue to make NFTs more accessible to a broader audience?
A: Here are some examples that developers and platforms can take:
- Implement layer-2 scaling solutions to reduce congestion and lower gas fees.
- Optimize gas usage through batch processing and efficient contract design.
- Provide users with better visibility into gas fees before transactions.
- Subsidize or partially cover gas fees to make NFT transactions more affordable.
- Offer flexible fee structures that allow users to choose transaction speed options.
- Support multiple blockchain networks to provide alternatives with lower gas fees.
- Purchasing and trading NFTs on a centralized exchange can be free of gas fees. For example, the Bybit NFT marketplace could be a good choice for high-frequency NFT traders.
Q: Do NFTs contribute to increased inclusivity and representation for all musicians, artists, and creators, or do they deepen inequalities further by promoting already famous people and wealthy collectors?
A: Despite the hype around certain types of NFTs or projects that are driven by celebrities and wealthy collectors, we still believe that NFTs, in general, democratize inclusivity and provide opportunities to a broader group of creators.
Imagine when a century ago, artists could only depend on galleries to sell their art. Still, in the Internet era, creators and artists can efficiently utilize social media to reach directly to their audiences. We believe the technological advancements brought by blockchain and NFTs will further optimize this.
More specifically, NFTs bring several significant benefits to creators, artists, and musicians:
Q: Given the rising popularity of NFTs, there have been concerns about their environmental impact, particularly regarding energy consumption. How do you assess environmental implications?
A: Most of the coverage of the negative impact of NFTs on the environment is outdated because it refers to proof-of-work (PoW) blockchain consensus. Today, most NFT transactions happen on proof-of-stake (PoS) blockchains. In the PoW system, multiple miners compete to complete a single task, often requiring significant energy consumption.
On the other hand, the PoS system randomly assigns a single miner the responsibility of creating and verifying NFTs, avoiding the complex and energy-intensive processes associated with PoW. This reduces the need for computing power and, consequently, lowers energy consumption.
A significant development occurred in September 2022 when Ethereum, a major player in the NFT market, changed to PoS. This switch led to an impressive reduction of over 99% in carbon emissions.
The move underscores Ethereum’s commitment to sustainable practices and reflects a broader industry trend towards more environmentally conscious protocols.
NFT Use Cases Beyond the Crypto World
Q: NFTs have mostly gained traction in the realm of crypto gaming and collectibles. Could you identify some real-life NFT use cases in other sectors?
A: These could include artwork, music, tickets, insurance policies, certifications, in-game items, memberships, and more, with uses constantly evolving.
NFTs provide an innovative and engaging way for people to buy and sell creative works, enjoy fan club membership, get exclusive tickets, and, perhaps in the near future, register property transactions, promising to be part of the critical infrastructure of the future web3.
In addition, many fashion, luxury, and consumer brands have entered the NFT space. Major companies like Tiffany & Co., Netflix, Coca-Cola, McDonald’s, and Louis Vuitton have launched NFT campaigns to engage fans and explore the Metaverse. These tests familiarize consumers with Web3 technologies like NFTs in entertaining ways. Global enterprises foster affiliation and familiarity with emerging virtual economies and platforms by offering exclusive digital collectibles.
Taking Bybit itself as an example, we already have multiple use cases in play:
- In 2022, Bybit became the principal crypto partner for the F1 team Oracle Red Bull Racing. We launched several NFTs, including the Playseat Auction at the Monaco Grand Prix, where the winner won the physical playseat and an NFT playseat.
- Bybit also announced a partnership with Swiss luxury watch manufacturer Franck Muller. Franck Muller will launch an exclusive game that offers an immersive experience for watch enthusiasts and gaming aficionados. Bybit will help develop a collection of NFTs featuring iconic figures and weapons from the game and offer weekly prizes for top scorers.
- And for our annual World Series of Trading event in 2022, we augmented our record-breaking $8m prize pool with over 1,000 bonus NFT prizes, which included exclusive CloneX and Mutant Ape Yacht Club NFTs.
The Future of NFTs
Q: NFTs are sometimes called a speculative bubble. So, what happens next when the hype around NFTs fades away?
A: NFTs as an investment can be perilous. The early-2022 NFT bonanza caused a slew of copycats, poor-quality projects, and scams leading to heavy losses for neophyte investors. Furthermore, while improving, the lack of analytical tools leaves many investors in the dark trying, as a developer friend told me, to throw a dart in a pond, hoping to spear a fish. So where does that leave NFTs as an investment?
Well, pretty far down the risk curve.
But it’s on the outer edges of possibility that great things occur. So I personally allocate a very small amount of my portfolio to NFTs to gain exposure to the massive potential of this new technology.
A Personal Take
Q: As a blockchain and NFT expert, would you buy an oil painting of a famous artist, or do you believe in the value of its tokenized representation and purchase it instead?
A: I personally view NFTs as luxury goods as opposed to an oil on canvas art piece (though the two overlap a lot). In general, owning a high-value NFT is the digital equivalent of a Gucci bag or expensive car. They’re social signifiers, and people have always paid top dollar to appear wealthy and influential for pretty much as long as human society has existed.
But it’s not all about expensive jpegs; smaller groups have their own flavors and identities built around niche NFTs where it’s not so much about the price tag but about being in the know. This way, they can identify other people who share their interests.
For example, the Goblin Town NFT – which was popular in 2022 – sprung from the dark humor that abounded in crypto groups during the 2022 crash. The NFTs were purposely ugly-looking and became popular, not as a Gucci-style flex, but as a token of membership.
Therefore, NFTs, as they exist today, are more in-line with clothes, vehicles, and watches. Although art aficionados might disagree, I see them as future-ready digital signifiers.
About Jenny Zheng
Jenny Zheng is a seasoned blockchain professional with over 6 years of experience. In 2017, she founded Blockcast.cc, a Singapore-based blockchain media and an official Google News source. With a subscriber base exceeding 80K and a mailing list of 250K, Blockcast.cc has established itself as a prominent platform in the blockchain and technology space.
In 2022, Zheng joined Bybit as the BD lead of the NFT marketplace.
You can reach out to Jenny Zheng via her Twitter.