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The Blockchain NFT Wars Are Here

NFTs could become a trillion-dollar industry, but not before its scalability issues are adequately addressed, says the co-founder of Immutable.

CoinDesk Insights
Dec 22, 2020 at 3:09 p.m. UTC
Updated Sep 14, 2021 at 10:46 a.m. UTC

It’s been a big year for blockchain, highlighted by Eth 2.0, the rise, fall and resurrection of decentralized finance (DeFi) and the real steps towards adoption by institutions like PayPal. But the steady rise of the humble non-fungible token (NFT) has been the real hidden hero.

NFTs are little bits of code that extend the fundamental innovation of hard-capped supply, self-custody and censorship-resistance to all digital assets, not just to money. This is vital. NFTs enable any unique asset or item to be tracked and traded with all the same freedoms as its fungible token counterpart. While this asset class is still nascent, the potential is utterly astounding. 

This post is part of CoinDesk's 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Robbie Ferguson is the co-founder of Immutable, makers of "Gods Unchained," a digital trading card game.

Take the $100 billion video game items industry. In the last three years alone, we’ve seen nine figures in venture capital invested in blockchain companies competing for its disruption. Other NFT verticals are quickly emerging. In 2020, there was an explosion of digital art and tokenized custody startups: everything from sneakers to Cézanne to Saint Laurent are now being wrapped up, sold and traded as unique and individual NFTs. 

The power of NFT ownership isn’t limited to gaming or art. Any illiquid or unique asset globally could benefit from this technological standard. Financial assets? Check. Commodities like diamonds? Check. The 3% timeshare of a boat you bought, have regretted ever since and can’t find a buyer for? You bet. The total addressable market is, quite literally, in the trillions.

NFTs are a rapidly emerging asset class with an Achilles heel: scalability. Like most other cryptographic tools, NFTs greatest weakness comes from the code's deployment in the real world. Limited transaction throughput, high transaction fees and slow transaction time are all muting this immutable technology's revolution.

Different blockchains are doggedly fighting to solve this issue and establish themselves as the home of unique digital assets. But the wrong choice will hand the reins of this future to a centralized and insecure solution, destroying the possibility of a truly community owned future. 

The battle over ownership

Everyone wants to own the network and users on which NFTs live and trade. It’s a big pie, and there are lots of people who want a slice. But the pie doesn't scale.

Trading an NFT is insanely more expensive than an ordinary fungible token. If you trade a million ERC-20s, it costs the same as trading one, while a million NFT trades will cost you a million times more. These scarce digital assets are also inherently illiquid, because every NFT is an individual order-book. If there are 15 million gods unchained cards out there, there’s 15 million individual markets, each with their own bids and asks. 

Everything from sneakers to Cézanne to Saint Laurent are now being wrapped up, sold and traded as unique and individual NFTs.

Better tech will provide better scalability and liquidity without requiring trade-offs in decentralization or security. A swathe of layer 1 and layer 2 solutions are all scrambling to upgrade their tech to lay claim as the default home of NFTs.

So, who’s in the running?

VC-backed layer 1s

Over the past year we’ve seen many “ETH-killers” come to the party, and many of them have impressive-sounding tech and hundreds of millions in savvy VC funding. New blockchains like Flow and TRON have publicly claimed they want to be the home of all NFTs or gaming and have built up handsome IP partnerships to do so. 

Their weaponry? In the end, the blockchain trilemma still applies: the only fundamental scaling boosts come from a reduction in security, decentralization or both. While this is always an individual decision, it’s imperative users know what they’re trading off.

The emperor’s new sidechains

Sidechains are trying to operate on existing L1s (predominantly Ethereum) in order to provide a low-security scalability option to NFTs. Namely Matic, Ronin, xDai. However, these scaling solutions are fundamentally achieving this throughput by removing the security and decentralization properties that are necessary to support highly valuable assets. What’s the point? 

Rollup: Immutable X and Optimism

It wouldn’t be an op-ed without an opinion, and thankfully, mine is shared by someone much smarter than me.

“In the short term, I just don’t see rollups as being one choice among many things; I see them as being the only choice.”Vitalik Buterin

Thanks, Vitalik.

Pens over swords

Today’s wars aren’t fought with force, they’re fought with information. Token holders and expensive PR campaigns evangelize their chosen champion’s tech with a religious and one-eyed zeal. Anonymous personalities on Twitter become overnight thought leaders (and sometimes stick around long enough to see their predictions validated).

But this marketing comes at a cost: Users have to know what deals they’re giving away when they use a piece of technology. We are at dire risk of letting the future of digital asset ownership, NFTs, be run by a centralized operator, a VC-owned blockchain or fundamentally insecure tech.

If we’re serious about getting major league developers and financial institutions to consider NFTs, it’s not enough to just make a high frequency marketplace. The future home for NFTs needs to be secure and censorship-resistant at its core, like Ethereum is today, and be able to securely support a billion dollar item economy.

Over the past six months, so-called “Eth killers” have announced their intention to draw liquidity to other chains for NFTs. Right now, crypto-developers, gamers and artists are actively being marketed to leave Ethereum. But the moment is even more critical than that. Whoever wins the NFT blockchain wars will become the default network of all future gaming, entertainment and collectible applications.

The blockchain NFT wars are here. 

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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