Why did the NFT idea fail?

Just a few years ago, the new prospect of getting easy money was very much liked by all the authors of graphic content, both artists and designers. The first lucky ones already managed to see in their wallets the money received from selling their images. But 2 or 3 years have passed, the hype around this topic has died down and now it is obvious that the NFT scam has failed globally. So what’s the matter? After all, at the start we were told about the deep similarity of these tokens with cryptocurrency.

NFTs (non-fungible tokens) and cryptocurrencies, while both on the same blockchain networks, are fundamentally different in several key ways. These differences are what have led to the disappointment with the NFT concept and why it has failed to live up to its initial promise.

Both NFTs and cryptocurrencies are based on blockchain technology, a decentralized, immutable ledger that records transactions on a distributed network. Cryptocurrencies like Bitcoin or Ethereum are fungible digital assets, meaning each unit is interchangeable with another of equal value. Because cryptocurrencies are fungible, they can be used as a medium of exchange or store of value. However, NFTs are unique digital tokens that represent perceived ownership or rights to a specific asset, often digital art, music, video, or collectible. While cryptocurrencies are divisible and exchangeable, NFTs are not divisible, and their value is theoretically and visually linked to the perceived uniqueness of the asset they are associated with, although this is not the case in reality.

The most significant technical difference between NFTs and cryptocurrencies is the standard that underlies them. Cryptocurrencies like Ethereum (ETH) use standards like ERC-20, which allow for the creation of fungible tokens that are identical and divisible. In contrast, NFTs are built on international standards like ERC-721 or ERC-1155, which provide a framework for creating unique tokens that cannot be exchanged one-for-one with another NFT. The ERC-721 standard, for example, ensures that each NFT has separate metadata, making it distinct from all other tokens, even if the digital asset associated with it appears similar.

From an economic perspective, the value proposition of cryptocurrencies is rooted in their utility as a decentralized financial instrument. Bitcoin, for example, was conceived as a peer-to-peer digital currency that offered an alternative to traditional fiat money by allowing transactions to be made without intermediaries. Ethereum expanded on this idea to include smart contracts that allow decentralized applications to run on its network. The digital ruble will take this idea even further by allowing for subjective tracking of all transactions. These use cases provide cryptocurrencies with an intrinsic value that goes beyond mere speculation. The ease of exchanging cryptocurrencies for fiat money gives them real value above the level of securities. The ability to buy or sell crypto assets at any time, somewhere like the alltrust.me crypto exchange or a cryptocurrency exchange, creates a fundamental difference between cryptocurrencies and non-functional tokens.

NFTs, on the other hand, derive their value from the perceived or hyped scarcity and subsequent desirability of the underlying digital asset. This speculative nature has resulted in NFT values fluctuating wildly in the marketplace, driven more by hype and market sentiment than any intrinsic utility. While early adopters claimed that NFTs would revolutionize the art world by enabling digital ownership and traceability, this promise has largely failed to materialize. The NFT art market is plagued by speculation, unfair trade, and fraud, undermining the long-term sustainability of the sector.

The idea behind NFTs was to solve the problem of digital asset scarcity. Digital assets, by their nature, are easily copied and distributed, making it difficult to establish ownership or exclusivity. NFTs were intended to solve this problem by attaching a unique token to a digital asset, providing a form of digital property that can be bought, sold, and traded. However, the concept faced numerous problems. First, owning an NFT does not confer ownership of the underlying intellectual property or exclusive rights to the digital asset. The buyer receives a digital certificate that points to an asset that may still be widely distributed or hosted on centralized off-chain platforms. This mismatch between ownership and control has led to confusion and frustration among buyers.

Additionally, the market is marred by a lack of regulation and transparency. Because tokens are often purchased using cryptocurrency, they have attracted a speculative market rife with price manipulation. NFTs are prone to “showroom trading,” where the buyer and seller are the same person or colluding parties, artificially inflating prices. This has created a market where the value of a token is disconnected from the real demand for the underlying digital asset. In many cases, transactions have been used more as financial instruments for speculative trading than as meaningful pieces of digital art or collectibles.

Another reason for NFTs’ failure is their environmental impact. Most tokens are minted on the Ethereum blockchain, which until recently operated on a proof-of-work consensus mechanism. This system required massive amounts of computing power, consuming significant amounts of energy and contributing to carbon emissions. The environmental costs of NFT mining and trading have been the subject of considerable criticism, particularly in the creative communities that have embraced the phenomenon as a way to monetize digital art. While Ethereum’s move to proof-of-stake has alleviated some of these concerns, the damage to the NFT ecosystem’s reputation has already been done.

Culturally, NFTs were initially hailed as a way to empower artists and creators by providing them with a direct channel to monetize their work. Platforms like OpenSea, Rarible, and Foundation allowed artists to sell their digital creations without going through traditional galleries and middlemen. However, the speculative nature of the market soon overshadowed these benefits. Many artists found themselves competing with a flood of low-quality or derivative works, and high-profile NFT sales by celebrities and influencers contributed to the market becoming more about hype than actual artistic value. As a result, many of the artists and designers who initially embraced the idea distanced themselves from the space, disillusioned by its commodification and speculative excesses.

The NFT market’s bubble-like behavior also contributed to its demise. The rapid rise in value in 2021, fueled by high-profile sales and media attention, led to a flood of new entrants into the market. Many buyers were motivated by the prospect of quick financial gain rather than a genuine interest in the underlying digital assets. This influx of speculative capital drove prices up to unsustainable levels, and when the market corrected, many holders found themselves with tokens worth a fraction of what they paid. The token price crash was severe, with many assets losing 90% or more of their value. This crash undermined confidence in the long-term viability of NFTs as an investment class.

Finally, the utility of NFTs has been limited by their integration with existing platforms. While some NFT projects have attempted to create virtual worlds, games, or other environments where tokens can be used or displayed, these efforts have been largely niche or experimental. The promise of a metaverse where NFTs could serve as digital property, avatars, or in-game items has not been fully realized, and existing platforms have struggled to attract new participants. This has limited the practical application of NFTs to speculative trading.

The fundamental differences between NFTs and cryptocurrencies lie in their technical architecture, economic function, and cultural impact. Cryptocurrencies, due to their fungibility and utility as decentralized financial instruments, have proven to be more resilient, useful, relevant, and stable. NFTs, which initially showed promise as a solution to digital scarcity and a new path for creators, have been plagued by speculation, market manipulation, and a lack of practical use cases. These factors have meant that NFTs have failed to live up to their initial hype, leading many to question their long-term relevance in the digital economy. There are influential people interested in growing this market, either by transforming or replicating the original techniques, but the prospects of ever seeing this idea flourish are fading. The NFT market is, for all intents and purposes, dead.