NFTs have been utilized to represent a variety of physical and intangible assets like CryptoKitties, houses in games like Decentraland, tickets to shows or concerts, artwork, trademarked items and more.
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There are some challenges with this new form of ownership, though: first is the issue that digital goods are not tangible and can be easily copied. Second is the problem of scaling–as adoption increases, so will transactions per second (TPS), taxing blockchain networks.
From here, many believe NFTs can help reduce the number of Bitcoin transactions per second (TPS) by taking much of the work away from the blockchain and allowing users to interact with their digital assets through a mobile app. It is an essential piece of the puzzle as it has been suggested that higher TPS, or transaction frequencies, is what will make sure this new technology survives.
It can remove the burden of running complex blockchain networks, freeing up valuable resources to be used elsewhere to help save and scale current blockchain networks. However, the main issue with making NFTs tangible is that they are not easily transferable, and there has been no viable solution in this regard thus far—until now. Let's explore these challenges in detail.
Smart Contract Risks and Maintenance of NFTs
The first issue with NFTs is the possibility of fraud. Once a piece of digital art, or sometimes a physical one, is bought or traded, there is no way to reverse the transaction. It means if someone were to steal a piece of art or any other NFT, they could use it at their discretion without help from a 3rd party. To combat this risk, various decentralized applications (DApps) can set various rules in place and even charge users for their services.
An example of this can be seen with CryptoKitties, as the game is run by a company called Axiom Zen on the Ethereum blockchain. To ensure the artwork's legitimacy, each CryptoKitties is given a unique ID corresponding to its contract. When presented with an art piece, users can check that contract to ensure that it hasn't been tampered with or altered in any way. It ensures knowledge of ownership and mitigates fraud. Of course, other applications can do this, just not as quickly or effectively as CryptoKitties.
Evaluation Challenges
NFTs also lack standardization. CryptoKitties has been criticized for the large number of variations that have flooded the market, spurring new projects to develop their own versions. As NFTs are a blockchain-based form of digital information, the data itself is immutable; immutable action is needed to advance that data and make it meaningful.
As there is no definitive standard, any given piece of art will be interpreted by companies in various ways depending on what its creator intended.
Blockchain Scalability
Scalability is essential as it affects nearly every aspect of blockchain technology and NFTs, in particular, rely on it. Simply put, it means how well the network can handle the number of transactions occurring within its environment.
For example, when a new piece of information is added to a distributed database, it must immediately be accessible by everyone else in that network. It can be done, but not as quickly as it could if there was increased TPS on the network, which is why scaling NFTs has been so important to developers and users alike.
One way scalability is addressed through the introduction of smart contracts, which run on blockchain and are executed by blockchain nodes each time a transaction occurs. These contracts execute based on rules set forth by users, removing the need to go through a 3rd party to have the artwork recorded in an immutable database.
Legal Challenges
The final challenge with NFTs is the legal issues of using blockchain technology. As these transactions are stored on a distributed database, specific rules and regulations must be followed when creating an NFT. It has been met by an organization called the Non-Fungible Token Association (NFA), formed in March of 2018 to help create set standards for tokens like if they can be traded by users, what their transfer fees should be or if organizations should set their redemption amounts to zero.
While these rules will help ease the process for developers and users alike, there is still much to be done to ensure NFTs are not a source of fraud, which is why this organization has been formed.
Many collectors purchase digital art due to its nature as an electronic file. The piece itself will have no physical form, i.e. it is not tangible; it is simply an electronic file with some characteristics that can be electronically reproduced by organizations. The artist can also manipulate it in any way she sees fit, as most digital art is stored on the blockchain and cannot be tampered with once created.
