Published
January 7, 2022

The NFT Technologies Manifesto: Part 1

Technologies Manifesto. Make sure to read through Parts II and III to understand the full scope of the problems we aim to solve.

As with any nascent technology, there exist several barriers to the mass adoption of NFTs. While the asset class has graced the headlines of major business and technology media networks, the reality is that NFTs still appear to the general populace as a crude and niche derivative of cryptocurrencies. That said, innovation in the NFT world is progressing at blistering speeds, with new technologies constantly being developed to refine the rough edges of NFTs and make them more widely accessible.

In Part I of our Manifesto, we define some of the technological hindrances to mass adoption of NFTs and outline how we plan to advance solutions through our first core vertical. In particular, we will cover the following subjects:

  1. Fragile Storage of Underlying Assets
  2. Intense Energy Usage and Environmental Destruction
  3. User Experience Friction
  4. Low Scalability and High Cost-Inefficiency
  5. Core Vertical 1: Technology

Fragile Storage of Underlying Assets

For many new entrants into the NFT sphere, it comes as both a surprise and a point of major contention that the asset which underlies the token is typically stored off-chain. Such a response is understandable, as the concept of an ownership token effectively becomes meaningless if the underlying asset is irretrievable. In most cases, NFTs live on the blockchain whereas their corresponding digital files reside in centralized server, with the token behaving as a pointer to the file’s location. This is due to practical considerations surrounding most blockchains’ inability to store countless digital files.

This architecture brings with it a host of data-persistence problems. For instance, in the case of centralized storage, the database can be corrupted or hacked such that the location which an NFT references is no longer valid. Alternatively, if the NFT issuer is dissolved and brings the database hosting the assets offline, the token once again appears to refer to a void in cyberspace. To some maximalists, NFTs are intrinsically designed to outlast their underlying asset and still retain their value. By this logic, the matter of off-chain centralized storage is a non-issue. However, an NFT that points to an invalid file is akin to the property deeds for a house that has burnt down; convincing mainstream investors and crypto-moderates that such forms of ownership are worth anything without the underlying asset would be an exercise in futility. In sum, alternative approaches to data storage – be they fully on-chain or off-chain & decentralized – must be designed to de-risk NFTs as a medium of ownership.

Intense Energy Usage and Environmental Destruction

A common criticism that has been leveled against permissionless blockchains powering NFT markets is that their energy-consumption is harmful to the environment. To give some perspective on this issue, Digiconomist pegs the Ethereum network’s annualized power consumption at 66.44 TWh – comparable to the electrical energy usage of Algeria – and its carbon footprint at 31.56 Mt CO2, similar to that of Tunisia. Naturally, however, these comparisons are flawed due to population differences and the difficulty in accurately sizing the Ethereum network. Digiconomist provides additional metrics which are arguably more comparable and better reveal the startling ecological impacts of blockchains. In particular, the power consumption of a single Ethereum transaction is estimated to be equivalent to that of an average US household over a workweek, and the carbon footprint of the same transaction would equate to 159,156 VISA transactions or 11,968 hours of watching YouTube.

The reason for this excessive use of energy is inherent in the architecture of many permissionless blockchains. In order to secure the network without a central intermediary, a consensus protocol known as Proof-of-Work (PoW) is used. This algorithm regulates which mining nodes can append to the chain and be in receipt of block rewards. In essence, PoW places miners in a head-to-head competition to complete cryptographic puzzles, the solutions to which can only be derived through a brute force approach. The combination of this trial-and-error system and the economic incentives to solve the puzzle first necessarily means that energy is recklessly expended across the network.

Of course, NFT transactions represent but a small subset of the total utilization of networks such as Ethereum. Regardless, because purchases and sales of Ethereum-based NFTs are done with the exchange of ether, the tokens are still partly culpable for the wider network’s environmental transgressions. Additionally, the emergence of a new use-case for the blockchain and an influx of NFT-curious investors into the network implies greater economic rents to be captured. This would incent existing miners to expand their rigs, yielding higher levels of energy-consumption and greenhouse gas emissions. Overall, the outsize energy-usage of PoW-based blockchains represents an existential threat to NFTs in a world that is growing more environmentally-conscious by the day.

User Experience Friction

The current process to entering the NFT market would no doubt be seen as esoteric for prospective investors who are not crypto-forward. Generally speaking, purchasing an NFT for individuals who are completely uninitiated in the crypto-sphere constitutes a tiresome series of steps. Users must first download a wallet, then generate an address and safeguard their seed phrase, then purchase cryptocurrency for fiat through an exchange, then transfer their crypto-funds to their self-custody wallet, then connect said wallet to a marketplace, and then ultimately purchase or place a bid for their desired NFT. This is not to mention the lengthy KYC processes that larger exchanges impose on new users in the interest of regulatory compliance. Clearly, the process to purchase an NFT requires users to interact with a fragmented set of platforms and paradigms with which they may have no prior history. This convoluted process must be streamlined to the point of being comparable to traditional Web 2.0 onboarding processes in order to prime NFTs for mass adoption. 

Low Scalability and High Cost-Inefficiency

Arguably the most oft-cited and objectively provable challenge to the wider adoption of NFTs as an investment vehicle – and more generally to the adoption of permissionless blockchains as infrastructure – pertains to scalability and cost-inefficiency. These two hindrances to the growth of the technology are inextricably linked, and both have historically served as lightning rods for crypto-skeptics arguing against decentralized systems. 

Framing the issue in the context of Vitalik Buterin’s infamous trilemma, most permissionless blockchain protocols have been architected to prefer decentralization and security at the expense of scalability. At a high-level, this implies that block times – and by extension transaction processing speeds – are much slower than what might otherwise be achievable. As a result of this incidental slowness, users of a blockchain network are compelled to pay higher fees during periods of congestion to ensure their transactions are confirmed in a timely manner and not left to dwindle in mempool-purgatory.

Returning to the example of Ethereum, it is unequivocally clear that both block times and average transaction fees have tended to increase in response to network congestion. While the higher temporal and monetary costs would be trivial with respect to multi-million-dollar NFT transactions, such costs and their volatile nature would be unacceptable for users involved in higher-volume, lower-value trades. In sum, the scalability and cost-inefficiencies inherent in popular layer-1 protocols will only serve to stifle long-term growth in the adoption of NFTs. 

Core Vertical 1: Technology

In addition to our thesis-driven focus on buying both popular and emerging NFT projects, supporting the development of technologies that promise to advance the wider ecosystem and alleviate the aforementioned barriers to growth forms another integral part of our mandate. Technologies in our current pipeline of projects we are looking to inject capital into and help to build include a physical crypto-art display, a platform which simplifies the acquisition and portfolio management of NFTs, as well as a launching pad for the issuance of industry-specific NFTs. 

With respect to the concerns surrounding off-chain storage, decentralized storage solutions such as IPFS can make it so that the digital files underlying NFTs are not easily invalidated and the tokens themselves are not susceptible to effectively becoming worthless. Protocols such as IPFS rely on large networks of nodes to operate, quite similar to blockchain protocols. This eliminates the primary risk of centralized storage, being a single point of failure which poses a threat to data-persistence. As NFT-investors ourselves, we recognize that the off-chain storage of digital assets presents risks which are unheard of in traditional capital markets. In order to safeguard our stake in the NFT sphere as well as resolve the apprehensions of other investors, we will target IPFS-like protocols furthering the mission to make NFTs and their underlying assets indivisible and non-corruptible, extending assistance both through our financial and technical support.

To help in shaping an eco-friendlier future for the world of NFTs, many layer-1 protocols are either being designed from the outset to leverage non-PoW consensus mechanisms or are transitioning from their original design to do so. Most notably, the Ethereum network is in the midst of a conversion to Proof-of-Stake (PoS) consensus, an algorithm which is not founded on brute-force cryptographic puzzles and prioritizes a node’s economic stake in the network over its raw computing power. The effect of this transition will be to reduce Ethereum’s carbon footprint by 99.98%, making the network substantially more energy-efficient than the industries it seeks to displace. Other protocols such as Solana were originally designed to use PoS-based consensus and avoid the energy costs of PoW. We have great conviction that widespread social trends will block the adoption of any and all technologies, be they NFTs or otherwise, built on the most energy-consumptive protocols. In fact, we predict that networks which lag behind in their transitions to more efficient forms of consensus will ultimately fall out of favour and cede market share to their environmentally-friendly counterparts. Accordingly, we will consider energy-efficiency as part of our criteria for determining which technologies we ultimately choose to fund and assist in building. Overall, we will prefer those technologies which treat the environment as a first-class stakeholder as opposed to a mere afterthought. 

In order to reduce the friction that is present in NFT user experiences, the number of steps must either be reduced or consolidated onto a singular platform. One potential solution to this problem might entail NFT marketplaces having built-in support for traditional payment methods such as credit cards. Examples of marketplaces already offering this functionality include Nifty Gateway and Makersplace. By doing this, the additional steps of buying and transferring ETH can be eliminated and the NFT-investing process can be streamlined. Ultimately, improving the onboarding and user experiences in the NFT market is vital to attracting a wider population of investors and creators, something that will benefit all market participants. On this basis, we will prefer platforms which take the extra step to make their user experiences as friendly to the layman as possible.

Finally, on the issues of scalability and cost-inefficiency, much progress can be made through the use of off-chain protocols and layer-1 chains purpose-built for NFT commerce. For example, the use of layer-2 protocols such as Optimism and sidechains such as Polygon enable Ethereum users to interact off-chain and ultimately settle on the mainnet. As mentioned, the Ethereum protocol is itself on the precipice of a transition in network architecture, part of which involves the use shard chains to facilitate scaling. There also exist layer-1 protocols such as Flow which were designed with the original intent of being NFT platforms. Given all of these emerging solutions, we will devote a great proportion of our resources to financially and technically supporting the development of layer-2 protocols, sidechains, and NFT-optimized blockchains. Our team will tactfully evaluate new scaling solutions in search of innovative designs and grizzled teams of distributed systems engineers, opportunistically backing those protocols we see as having the greatest revolutionary potential.

Closing Remarks

In sum, we believe that by leveraging our expertise gained over several collective years in the crypto and NFT markets, as well as our ecosystem-wide network, we are in a prime position to successfully scope out opportunities and deploy capital to advance NFTs as a unique investment vehicle and a novel paradigm for asset ownership. Further, we can apply our technical expertise to internally vet new technologies and provide constructive feedback to the development team, thereby helping to maximize their potential for success.

References

Calma, J. (2021, March 15). The Climate Controversy Swirling Around NFTs. Retrieved from The Verge: https://www.theverge.com/2021/3/15/22328203/nft-cryptoart-ethereum-blockchain-climate-change

Dale, B. (2021, February 23). It's an NFT Boom. Do You Know Where Your Digital Art Lives? Retrieved from CoinDesk: https://www.coindesk.com/tech/2021/02/23/its-an-nft-boom-do-you-know-where-your-digital-art-lives/

Ethereum Foundation. (2021, March 5). Non-Fungible Tokens (NFTs). Retrieved from Ethereum: https://ethereum.org/en/nft/#further-reading


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