With strong competition from networks like Solana and Cardano, will Ethereum’s dominance over NFTs hold much longer?
The term “digital ownership” has only recently come to mean anything. While nonfungible tokens (NFTs) have been around for some time now, it’s in the last year or two that they’ve caught the attention of mainstream media. The third quarter of 2021 alone saw over $10 billion in NFT trade volume across blockchains, a substantial increase from Q2’s $1.2 billion.
NFTs are unique digital assets that represent ownership. As proof of ownership, NFTs extend from things like art and digital collectibles to real estate and other physical assets. This is causing a tectonic shift in a wide range of industries, improving the efficiency of ownership transfer and breaking new ground in terms of what digital assets can offer.
According to Jonathan Choi, chief investment officer at Metaplex — the Solana protocol that set up open standards for on-chain digital asset issuance and ownership — that while NFTs are gaining traction among mainstream audiences for profile pictures, artwork and collectibles, the technology behind NFTs is much more meaningful.
“NFTs can serve a much broader range of use cases, including representing ownership of physical assets such as real estate, loans, luxury items and other digital assets such as audio, files, degrees or certificates,” he said.
Like most platforms in the decentralized finance (DeFi) space, most NFT-based projects have been built on the Ethereum blockchain — and understandably so. Ethereum is the longest-running active smart contract-enabled blockchain globally, and more than anything else, NFT sellers want an audience.
Beyond Ethereum’s dominance
However, Ethereum’s role in the NFT industry’s growth has been much greater than a mere hosting platform. In fact, it was arguably the now-iconic ERC-721 token standard that kick-started the NFT revolution in the first place. CryptoKitties launched nearly half a decade ago, and while the platform was wildly popular at launch, perhaps it hadn’t fully considered the limitations blockchains posed at the time.
Network congestion and the unpredictable, sometimes absurdly, high gas fees turned a lot of players away from the NFT space, but this is no longer the case. Outfits like Axie Infinity and Decentraland are pushing the NFT and GameFi narratives further than ever before. However, with an indefinite roadmap for the Ethereum 2.0 upgrade and its scalability updates, not all projects are convinced it’s the best place to set up shop.
CryptoKitties themselves announced a move to their in-house Flow blockchain, citing issues with Ethereum’s constrained throughput and inflated fees. While the platform isn’t the NFT goliath it once was, it’s an iconic brand for the space, and its departure from Ethereum could sway more projects onto other networks.
“Ethereum will always be a premier chain for launching NFTs and have one of the most vibrant communities in crypto, but due to some of its limitations, there will still be challenges and concerns for broader audiences and developers,” added Choi.
In particular, networks like Cardano and Solana are making inroads into the realm of NFTs, with Solana even launching a $5 million fund this year to onboard creators and their fans into its ecosystem. Solanart, the most popular NFT platform on the Solana blockchain, is making waves with users in the space, producing collections like the Degenerate Ape Academy, SolPunks, Aurory and more, with hundreds of millions of dollars trading hands.
“There is so much potential with NFTs and right now, we’re seeing the exploration of what’s possible,” Frederik Gregaard, CEO of the Cardano Foundation said, “For example, in decentralized finance, NFTs could be used to implement security mechanisms to guarantee the uniqueness of transactions, the correctness of each submitted order and to prevent front-running attacks.”
He also mentioned other technical use cases within blockchain ecosystems including its use as an access control mechanism for utilities and assets on public blockchains and the ability to guarantee the uniqueness of an eUTXO decentralized app (DApp). “Outside of the immediate ecosystem, there is mass adoption potential for NFTs when it comes to the property rights of individuals and communities,” he added.
Though Cardano isn’t striding into NFTs as boldly as Solana, it is making progress. Following the network’s successful Alonzo hard fork that enabled smart contracts, CardanoKidz was launched this year as the first NFT project on Cardano. Just last month, SpaceBudZ managed to conduct the first NFT sale for over $1 million on the network.
Before smart contracts went live on the network, users could still mint and sell NFTs without a contract address, though properties like metadata were not capable of being transferred over the blockchain. The addition of smart contracts attracted far more users to the platform, which has caused a surge in interest for NFTs on Cardano. However, after the introduction of Cardano Improvement Proposal 25, the blockchain now has a defined NFT metadata standard for its native tokens.
This will resolve various issues around identity, authentication and governance concerning NFTs on the network. Previous representations of NFTs can also be destroyed once ownership has been transferred, adding to a whole new level of exclusivity. With so much work being done on these platforms to compete against Ethereum in the NFT space, the reigning smart contract platform is most certainly in for some competition.
Young, dumb and not-so-broken
Layer-one blockchains like Solana and Cardano offer an alternative to the high transaction costs plaguing the Ethereum network while also lowering entry barriers for a broader audience. These platforms are also incredibly well-positioned among developers building on Web3 since factors like cost, speed and community growth are vital during development stages, especially for newer projects.
Additionally, with interoperability becoming the next goal for blockchains, we could start seeing projects launch on a variety of platforms, only to build bridges onto Ethereum to take advantage of its large user base. Despite the massive surge in popularity and adoption of NFTs, however, there’s still a long way to go before this technology is used globally across industries.
Tor Bair, founder of privacy-centric nonprofit organization the Secret Foundation said:
“Today’s NFTs are more like dumb receipts than smart ownership with no native access control or privacy for content or buyers. If we can solve these issues, we’ll see NFTs expand to represent trillions of dollars of art, content and physical and financial assets.”
He also stated that blockchains would need to offer new use cases and design spaces created by their unique functionality to succeed alongside Ethereum in this space, whether through native data privacy, improved scalability, or global interoperability. In the long-term, both Solana and Cardano could become much more widely used platforms in the NFT ecosystem, launching unique products on their networks to pull users in.
Just this month, world-famous DJ Steve Aoki launched an NFT collection on Solana in collaboration with legendary comic artist Todd McFarlane, marking the first time in over 30 years since he last authorized original art for sale, digital, or physical.
Furthermore, Cardano and Solana aren’t the only layer-one blockchains making moves into NFTs, with other prominent platforms like Polkadot, Flow and Wax pushing the technology to new audiences.
“NFTs are like golf club membership compared to cryptocurrencies, which are more like liquid cash,” Abhitej Singh, co-founder of Cosmos-based DeFi platform Persistence said. According to him, becoming a golf club member is subject to all kinds of factors including early membership, exclusivity, community and other elements that liquid cash alone cannot provide.
“The scarcity and the exclusivity results in high membership cost both socially and economically for new members,” he added.
With the advent of new protocols like Flow, Solana and Cardano, complications of Web 3.0 are being abstracted away, and in the next few years, NFTs could emerge as one of the biggest utilities of blockchain technology, and not just on the Ethereum network.