The Promises and Perils of NFTs: An Excerpt From ‘The Everything Token’

The
opportunities
non-fungible
tokens
(NFTs)
create
can’t
be
realized
automatically.
At
least
as
of
2023,
there
was
tons
of
work
needed
before
NFT
technology
could
achieve
its
full
social
potential.

That
said,
high-value
applications
drive
innovation,
and
so
even
then,
we
could
already
see
those
challenges
starting
to
be
addressed.

Excerpted
from
“The
Everything
Token:
How
NFTs
and
Web3
Will
Transform
the
Way
We
Buy,
Sell,
and
Create”
by
Steve
Kaczynski
and
Scott
Duke
Kominers,
in
agreement
with
Portfolio,
an
imprint
of
Penguin
Publishing
Group,
a
division
of
Penguin
Random
House
LLC.
This
chapter
has
been
lightly
edited
from
the
original.

Just
as
the
internet
uses
a
decentralized
network
of
servers
to
store
and
propagate
information,
the
blockchain
platforms
underlying
the
NFT
revolution
rely
on
decentralized
networks
of
computers
to
process
transactions.
This
protects
the
blockchain
from
censorship,
expropriation
and
other
forms
of
centralized
control,
but
it
entails
high
transaction
costs
at
both
the
network
and
user
levels.

In
early
2022,
the
dominant
blockchain
for
NFT
creation
and
exchange
—
the
Ethereum
network—represented
as
much
as
0.34%
of
the
world’s
daily
energy
usage
because
it
used
a
computationally
costly
system
to
securely
record
transactions.
While
the
Ethereum
network’s
2022
switch
to
a
new
transaction
processing
architecture
called
proof-of-stake
(POS)
reduced
its
environmental
footprint
by
more
than
99%,
throughput
remained
an
issue
—
transaction
costs
for
something
as
simple
as
sending
an
NFT
to
a
friend
could
be
as
high
as
a
dollar
or
more.

On
the
one
hand,
a
dollar
to
ship
an
asset
might
sound
cheap
relative
to
postage
costs
(at
least
in
the
U.S.,
where
it
costs
about
$0.50
to
mail
a
folded
sheet
of
paper).
But
for
digital
assets
that
are
just
bits
in
a
computer
network,
such
costs
are
exorbitant,
and
prohibitive
for
many
ordinary
types
of
transactions.
(Imagine
if
you
and
a
friend
wanted
to
trade
Magic:
The
Gathering
cards
and
had
to
pay
a
dollar
per
trade.)

Worse
still,
these
costs
typically
scale
with
the
level
of
network
activity,
which
means
they
can
be
much
higher
at
peak
times.
(Effectively,
a
high
density
of
trading
at
a
virtual
gaming
convention
could
gum
up
the
network’s
processing
pipeline
and
raise
transaction
costs
so
much
that
nobody
would
actually
want
to
trade.)

And
all
of
that’s
with
only
the
relatively
low
number
of
people
who
were
engaging
in
blockchain
transactions
at
that
time.
The
infrastructure
wasn’t
ready
to
handle
Visa-
or
Mastercard-level
transaction
density
of
up
to
thousands
of
transactions
per
second.

Luckily,
even
as
we
were
writing,
these
challenges
were
starting
to
be
addressed
—
both
through
improved
blockchain
infrastructure
design
to
increase
throughput,
and
through
a
variety
of
solutions
that
process
many
transactions
quickly
and
then
encode
them
into
the
blockchain
all
at
once
through
a
single
settlement
transaction.
In
both
cases,
increasing
the
effective
computational
power
of
the
blockchain
has
reduced
the
marginal
cost
required
to
execute
a
given
transaction
—
much
as
widespread
availability
of
cloud
computing
infrastructure
eventually
led
to
low-cost
processing
and
storage.

In
parallel,
as
we’ve
mentioned
a
couple
times
already,
there
are
significant
challenges
around
accessibility
and
usability
of
NFT
technology.
When
we
were
writing
this,
many
consumer
digital
wallets
interacted
directly
with
the
blockchain
itself,
and
were
“self-custodial”
in
the
sense
that
the
user
had
absolute
control
of
their
digital
assets
and
was
personally
responsible
for
their
security.

The
experience
was
thus
a
bit
like
the
very
early
internet:
Navigating
crypto
transactions
required
a
sophisticated
understanding
of
the
technology
and
could
be
fraught
with
error.
Even
just
purchasing
an
NFT
sometimes
required
a
consumer
to
interact
with
source
code
directly.
Both
digital
wallets
and
transactions
needed
more
intuitive
interfaces
separating
user
activity
(e.g.,
minting
an
NFT,
activating
its
utility,
or
sending
it
to
a
friend)
from
the
technological
“rails”
making
it
happen.

Moreover,
crypto
transactions’
instantaneity
and
finality
have
meant
that
they
lack
many
of
the
protections
people
are
used
to
from
most
other
online
consumer
services.
Sending
an
NFT
to
someone
else
is
like
sending
an
email—
as
soon
as
the
computer
system
has
processed
the
transfer,
it’s
irreversible.
This
means
if
you
type
an
address
incorrectly,
a
digital
asset
could
go
to
the
wrong
person,
or
even
just
be
lost
in
the
pipes
of
the
network.
Conversely,
hacking
or
account
compromise
can
lead
to
irreversible
loss.
(In
late
2021,
Bored
Ape
NFT
theft
was
briefly
so
commonplace
that
“All
my
apes
are
gone”
unfortunately
achieved
meme
status.)

See
also:


Collectors
Are
Bored
of
Apes,
Don’t
Want
to
Pay
Royalties

And
finally,
there
were
challenges
around
fine-grained
data
control
and
privacy.
As
of
mid-2023,
while
digital
wallets
gave
users
control
of
which
platforms
could
interact
with
their
digital
assets
in
the
first
place,
this
access
was
generally
all-or-nothing:
Most
available
solutions
did
not
provide
a
robust
mechanism
for
users
to
filter
a
platform’s
access
to
specific
digital
assets
within
a
wallet.
And
at
the
same
time,
the
data
underlying
users’
digital
assets
was
often
fully
public
on
the
blockchain.
This
limited
the
use
of
NFTs,
and
crypto
more
broadly,
in
privacy-critical
applications
like
healthcare.

But
again,
solutions
were
in
development
—
this
time
by
wallet
service
providers,
who
had
a
lot
to
gain
from
improved
accessibility
and
security,
because
that
could
drive
broader
consumer
adoption.
Scott’s
first
NFT
purchase
in
mid-2021
had
to
be
done
with
cryptocurrency
and
involved
multiple
failed
attempts
over
the
course
of
the
week,
even
with
a
close
friend
helping
him
navigate
the
process.

By
contrast,
when

Reddit
launched
its
collectible
avatars
in
fall
2022,
the
platform
sold
more
than
five
million
NFTs,
many
users
paid
using
credit
cards,
and
the
process
was
so
simple
that
many
non-Web3-native
buyers
had
no
idea
they
were
interacting
with
a
blockchain
at
all.
Meanwhile,
numerous
Web3
identity-
and
data-management
solutions
with
greater
degrees
of
privacy
and
user
control
were
in
development.

But
of
course
access
to
NFTs
and
other
digital
assets
isn’t
purely
a
technology
problem.
Digital
divides
are
pervasive
across
socioeconomic,
racial,
and
geographic
lines;
and
with
crypto
technology,
especially,
the
cost
and
complexity
of
entry
have
been
barriers
to
access
for
many.

As
we’ve
mentioned,
early
NFTs
during
the
boom
of
2021
often
required
access
to
cryptocurrency
to
purchase
—
and
carried
significant
price
tags.
The
resulting
consumer
base
skewed
affluent,
as
well
as
disproportionately
white
and
male.
Then
the
next
wave
of
NFT
products
by
and
large
catered
directly
to
those
consumer
demographics,
further
exacerbating
the
challenge
of
diversifying
engagement
in
the
space.

Moreover,
the
tech
industry
has
struggled
to
mirror
the
general
population
in
the
representativeness
of
its
workforce,
in
terms
of
corporate
leadership,
employment,
and
who
receives
investment—
and
Web3
is
no
different.

Just
like
the
internet,
NFTs
have
the
potential
to
create
value
for
all
types
of
people.
And
especially
given
the
decentralized
and
open
nature
of
public
blockchains,
there
is
in
principle
an
opportunity
for
NFT
space
to
become

more
diverse
than
many
technologies
that
came
before
it
—
both
geographically
(instead
of
anchoring
just
in
the
few
countries
that
host
the
dominant
Web
2
platforms),
and
also
in
terms
of
who
participates.

But
without
broader
representation
among
the
creators
and
consumers
of
NFT
products
and
infrastructure,
the
technology
could
become
regressive
instead.

These
inclusivity
challenges
are
complex
to
solve,
and
the
business
world
was
continuing
to
address
(and
struggle)
with
them
as
we
were
writing
this.
We
don’t
claim
to
have
a
panacea
for
creating
a
more
diverse
and
representative
environment
in
Web3.
But
the
first
step
towards
fixing
these
issues
is
recognizing
that
they
exist.

And,
especially
in
the
context
of
Web3,
we
are
optimistic
—
or
at
least
hopeful:
Because
of
Web3’s
focus
on
decentralized
access
and
user
control,
it
has
the
potential
to
upend
traditional
hierarchies
and
power
structures.
At
scale,
for
example,
it’s
possible
that
Web3
could
improve
market
access
across
gender,
race
and
socioeconomic
lines
because
it
enables
creators
to
reach
consumers
directly.

Likewise,
the
bottom-
up
community
building
NFTs
enable
can
help
people
from
a
wide
range
of
backgrounds
create
spaces
to
meet
and
collaborate.
We
know
many
NFT
creators
and
collectors
from
underrepresented
groups
who
share
these
sentiments,
and
have
personally
found
success
and
belonging
in
Web3.

Companies
like
House
of
First
are
championing
diverse
NFT
creators,
and
NFT
brands
like
World
of
Women,
People
of
Crypto,
and
Miss
O
Cool
Girls
are
providing
Web3
education
and
access
to
underrepresented
groups.
And
numerous
NFT
collections
have
been
created
by
and
to
support
women,
nonbinary,
and
LGBTQIA+
creators;
racial
minorities;
indigenous
groups;
disabled
communities;
neurodiverse
individuals;
and
people
facing
humanitarian
crises.

So
while
in
2023
there
was
still
a
long
way
to
go
to
improve
equity
of
access
and
opportunity
in
the
NFT
space,
these
projects
hint
at
what
NFTs
may
eventually
be
able
to
achieve.
As
World
of
Women
Chief
Operating
Officer
Shannon
Snow
optimistically
remarked,
“Pushing
forward
the
next
generation
of
the
web
won’t
happen
overnight,
and
there
are
many
challenges
to
overcome.
However,
innovations
like
NFTs
.
.
.
offer
opportunity
to
reshape
the
world
in
the
image
of
fairness
and
equality,”
especially
by
leveling
the
playing
field
in
terms
of
access
to
marketplaces
for
creative
work.

At
the
same
time,
as
with
any
novel
asset
class,
NFTs
raise
questions
about
regulation.
At
a
basic
level,
it
can
be
hard
to
even
determine
what
type
of
asset
an
NFT
is
—
and
indeed,
the
answer
might
vary
with
the
format
of
the
NFT
and
the
specific
functionalities
it
has.

Many
NFTs,
such
as
those
that
simply
confer
ownership
of
digital
artwork
or
collectibles,
have
a
narrow
range
of
characteristics
that
make
them
analogous
to
commodities
or
physical
property.
But
some
NFTs
have
a
range
of
characteristics,
including
features
that
make
them
analogous
both
to
commodities
and
to
securities;
active
secondary
markets
for
this
latter
category
of
NFTs
raise
significant
regulatory
and
policy
questions
given
the
different
ways
commodities
and
securities
markets
are
regulated.

The
challenge
of
disentangling
the
various
types
of
NFTs
—
and
how
they
should
be
regulated
and
taxed
—
was
ongoing
at
the
time
of
this
writing.
Of
course,
the
fact
that
NFT
assets
might
evolve
and
take
on
new
functionalities
makes
the
puzzle
especially
difficult.
If
an
NFT
starts
as
a
simple
ownership
record,
but
later
starts
paying
dividends
based
on
the
creator’s
various
products,
does
it
morph
from
commodity
into
a
security
—
and
if
so,
what
sorts
of
registration,
disclosure
and
customer
identity
tracking
processes
would
be
needed?
The
form
of
the
reward
matters,
too
—
giving
out
digital
music
NFTs
as
rewards
to
repeat
buyers
of
concert
tickets
is
very
different
from
paying
those
ticket
holders
a
share
of
concert
revenues.

See
also:


What
‘Line
Goes
Up’
Gets
Wrong
(and
Right)
About
NFTs

Beyond
that,
there
were
also
regulatory
challenges
at
the
level
of
the
broader
crypto
ecosystem,
such
as
determining
what
types
of
consumer
protection
to
mandate
and
how
(to
help
solve
the
problems
described
in
the
previous
section).
Similarly,
there
was
a
need
to
sort
out
how
NFTs
should
interact
with
existing
rules
around
ownership
and
property
—
especially
IP
[intellectual
property}.

Most
crucially,
in
some
ways,
it
also
remained
to
be
seen
how
much
decentralization
Web3
will
truly
support.
There
was
a
possibility
that
the
need
to
aggregate
computational
power
and
data
storage
could
lead
to
centralization
in
the
infrastructure
underlying
NFTs
and
other
digital
assets.
And
there
were
also
concerns
that
even
if
the
infrastructure
managed
to
be
highly
decentralized,
platform
centralization
and
market
power
could
arise
at
the
application
layer
—
just
like
it
had
in
Web2.

Some
have
speculated
that
the
need
to
develop
intuitive,
accessible
wallets
and
other
platforms
to
support
Web3
will
drive
a
new
form
of
centralization,
concentrated
on
the
platforms
with
the
best
consumer
experiences.
Plausibly,
that
movement
might
even
be
led
by
existing
Web2
giants.
(Certainly
Facebook,
with
its
transformation
into
Meta,
is
attempting
to
lead
the
charge.)

There
were
some
instances
of
this
sort
of
centralization
in
the
early
NFT
market
—
for
example,
at
one
point,
many
platforms
displayed
images
and
other
media
associated
to
NFTs
via
reference
to
OpenSea,
one
of
the
top
NFT
trading
platforms.
When
OpenSea
removed
an
NFT
collection,
for
example
for
copyright
violation,
the
image
references
elsewhere
broke,
as
entrepreneur
and
computer
security
expert
Moxie
Marlinspike
observed
in
late
2021.

But
even
so,
there
were
signs
that
giving
individuals
control
of
their
digital
assets
was
nevertheless
having
an
impact
on
the
structure
of
the
market.
By
the
end
of
2022,
OpenSea
had
several
major
competitors,
all
of
which
had
launched
by
using
public
blockchain
records
of
users’
NFT
transaction
history
to
offer
rewards
to
active
traders
who
chose
to
switch
platforms.
The
ease
of
simply
connecting
one’s
digital
wallet
to
a
different
trading
site
made
switching
easy
—
and
as
a
result,
it
was
harder
for
any
individual
platform
to
dominate
the
market.

Meanwhile,
when
Web2
giant
X
(formerly
Twitter)
made
its
first
foray
into
the
world
of
Web3,
it
had
to
accept
that
users
would
want
a
different
level
of
data
control
than
they
had
previously.
In
particular,
X
had
to
open
its
platforms
up
to
the
possibility
of
users
connecting
and
loading
data
out
of
their
own
private
digital
wallets

without
handing
over
control.