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Five Reasons Why NFTs May Fail to Achieve Mainstream Adoption
The vast majority of NFTs will likely have little or no monetary value, similar to most paintings, movies, and music—the best of the best gains attention and cultural prominence while everything else becomes irrelevant. However, even though most NFTs may not be valuable monetarily, they could still have value to anyone with a smartphone.
In the future, I envision a world where everyone has a digital wallet and owns NFTs, even if they are not fully aware of the technology behind it. This shift may take a long time to fully materialize, as it will require the development of the necessary infrastructure and the normalization of NFTs within society.
But what if I'm wrong? It’s possible that I’ve been drinking too much of the NFT Kool-Aid.
In this post, I'll discuss five potential reasons why NFTs may not reach their full potential, from least to most likely. I won't include obvious factors like a global recession or World War III in this post, as I don't have anything unique to add.
5. Screen Time Decreases
The amount of time that the average person spends staring at a screen has been increasing rapidly over the last decade. Because of this, I believe that digital status goods will be just as sought after as physical status goods. As people spend more time in digital environments, they’ll want to own things in those environments. I have friends who I only know via the internet and spend tons of time online, which is why NFTs instantly clicked with me.
A continued uptick in screen time and social media seems inevitable, but what if, in the big picture, this is just a fad? We likely won’t regress technologically as a society anytime soon, but what does the next progression look like? Maybe the next technological breakthrough happens in the physical world rather than the digital one. Or it's possible that augmented reality with AR glasses becomes more important than virtual reality and digital worlds become less relevant.
Humans stepping away from social media and screens in favor of something else that leads to the demise of NFTs is unlikely. Mark Zuckerberg is betting his entire career and tens of billions of dollars that we’ve only scratched the surface of digital worlds.
Maybe we won't be looking at screens and interacting with people from around the world forever, but there's likely a long bridge that involves digital worlds before we get to whatever's next.
4. The User Experience Never Improves
The crypto user experience is still messy. Setting up wallets, transferring assets, signing contracts, exchanging tokens, and learning proper security all need to be improved substantially.
Some argue that when new technologies like smartphones or Facebook were introduced, they may have seemed complex at first, but because they were so groundbreaking, people quickly learned how to use them and adopted them into their daily lives. However, it’s unlikely that NFTs will follow the same trajectory.
With Facebook, if you couldn't figure out how to use it, you were only missing out on sharing pictures of your cat. The stakes were low. With NFTs, the stakes are much higher because they represent financial assets. While blockchain technology is revolutionary, the current user experience won’t be adopted by the mainstream unless something changes, such as large corporations or governments deciding to censor transactions and transfers of assets.
The user experience in the world of NFTs is almost guaranteed to improve because there appears to be a strong demand for it and companies are ready to capitalize on the opportunity.
For example, big social media platforms like Facebook, Instagram, and Reddit are developing wallet solutions for everyday users. Dapper Labs has an easy-to-use marketplace and wallet for its collectibles platform, and also offers an option for users to manage their own keys. Casa offers simple 2-of-3 multi-signature wallets for Bitcoin and Ethereum that could potentially be used for NFTs in the future too.
3. Over Financialization of Everything
If you hang out with a "crypto bro'' even just for a few minutes, they'll likely tell you that once we have items like home ownership, car titles, and luxury watches represented as NFTs on the blockchain, people will be able to use them as collateral to borrow money or trade them more easily due to improved liquidity and fewer intermediaries. It’s a common dream among crypto enthusiasts for all assets to be represented on the blockchain and to be easily tradable against other assets.
24/7 liquid markets are a friend to NFTs, but it also creates chaos and extreme volatility that many people cannot stomach. When every asset has a price attached to it, a downturn in value can cause panic among buyers and collectors, and things can quickly spiral out of control. The opposite is also true when prices are rising. It's reasonable to say that not all assets should have prices attached to them, but even in the relatively small world of NFT collectibles, we can see the negative effects of excessive financialization on collectors' happiness.
For example, NBA Top Shot removes many of the challenges associated with traditional sports card collecting, such as grading, counterfeits, shipping, and taking pictures. Buying Top Shot moments takes just a few minutes, and you are guaranteed authenticity each time, but instant liquidity means that every moment can be sold immediately. Over the past 18 months, the marketplace has been a race to the bottom, and many moments have lost more than 95% of their value.
As the ownership of crypto and stocks continues to rise amongst everyday people, we’ll likely naturally adjust and become immune to price volatility. But even if the mainstream audience doesn’t accept a highly financialized and volatile world, there are many non-financial use cases for NFTs, like events, rewards points, clubs, and digital identity, that can still be useful to users without significant financial implications. We don't need to put every asset in the world on the blockchain for NFTs to be considered a success.
2. Government Regulation
Government regulation is the second largest obstacle for NFTs going forward. Many regulations would help advance our space by providing more customer protection, but there are two specific areas of regulation that have the potential to end the usefulness of NFTs.
The first area of concern is a ban or limit on the use of self-custody. Crypto networks can't be shut down directly, but if governments were to limit a fundamental element of crypto, like self-custody, it would effectively end any usefulness that crypto has. If you can't own your private keys, we don't need blockchains.
The second area of concern is crypto assets being deemed illegal securities by the SEC. Aside from bitcoin, which has been ruled a commodity, every other cryptocurrency and NFT has questions. SEC Commissioner Gary Gensler has said directly that many cryptocurrencies appear to be illegal securities, while the Bored Ape Yacht Club is currently being investigated.
Many NFTs are just digital art with no additional utility provided by the creators. However, some profile picture projects operate like businesses because they accept investments during the mint process, and their investors often expect to receive a return on their investment in addition to utility. Will these NFT projects have to shut down if they’re deemed securities? I don't know.
The potential for U.S. regulatory intervention should be monitored even by those who live outside of it because much of the crypto industry's development, investment, miners, and nodes are located here.
What worries me is that governments are often populated by people who see crypto as a threat or don’t understand it. Fortunately, with a combined market capitalization of over $1 trillion, the crypto industry has made a significant impact and is likely to receive the proper recognition. Plus, many US-based crypto businesses have both the financial resources and expertise to effectively lobby Congress.
I’m hopeful that even if utility NFTs and other cryptocurrencies are deemed to be securities, new regulations specific to the crypto industry will be implemented to make it easy for these assets to properly register and be traded by individual investors without the need to become public companies and comply with the usual requirements for securities.
1. Centralization Wins
The biggest threat to NFTs is centralization. While digital assets may have a future, it’s no sure thing that they will take the form of NFTs. It pains me to ask, but what if middlemen are actually a good thing? Middlemen can provide assurances and protection for assets, a better user experience, as well as customer support in case of issues.
If a company can create an environment that users prefer for digital assets over one backed by a blockchain, the better user experience will likely win because users won’t care about decentralization until they encounter problems like being locked out of their account, unable to transfer assets, or facing high selling fees.
Meta and Apple are the biggest centralized threats, but the threat can come from anywhere. Mark Zuckerberg has shown interest in NFTs by integrating them into Instagram and Facebook. However, he may change his mind and build a closed ecosystem or put strict restrictions on the NFTs allowed on the Meta marketplace.
Apple, on the other hand, has already started its war on NFTs by banning the latest Coinbase Wallet app update and requesting a 30% cut of gas fees for each transaction. Does Apple want a cut of every NFT that's ever sold on an iPhone? Will they eventually launch an Apple-branded digital asset marketplace in the future? I have no idea what the future looks like regarding NFTs and Apple, but Apple's usually not in favor of open ecosystems, which is likely bad news for blockchains.
While some form of centralization will be necessary for improved NFT usability, it's important that all digital assets are still stored on a blockchain and that users have the option to exit the centralized platforms if they desire.
NFTs and blockchains face many threats before reaching mainstream adoption, but the most serious threats are government regulation and centralization. Government regulation is kind of out of our hands. Crypto believers just have to hope that we've made enough of an impact and that enough smart businesses and people are on our side to help regulators better understand.
To mitigate the threat of centralization, it’s crucial to provide crypto-native businesses with the necessary funding and incentives to build on decentralized protocols. This is especially important because end users may not prioritize decentralization.
It’s important for blockchain believers to continue to educate others and advocate for decentralization because if the benefits of NFTs aren’t clearly articulated, all the digital assets of the future may wind up in Zuck’s centralized database, rather than a blockchain. But I’m hopeful that we’re just getting started!