Oct 22, 2020
Why Ethereum will continue to remain the home for NFTs (that matter)
This article attempts to broadly outline some of the arguments for why Ethereum will continue to dominate as the most important blockchain for people to own, acquire, sell, trade, display and build with NFTs (that matter). Each topic can easily be its own deeper article, but the goal here is to introduce some of the ideas and push the conversation along.
A deep ongoing discussion already exists around whether Ethereum will continue to be the dominant smart contract blockchain in general. There are many articles around this topic, so I won’t go into details here. I will focus specifically on the far less discussed vertical specific to non-fungible tokens, or NFTs, within the greater blockchain ecosystem.
As we all know, Ethereum has issues (block size limits, high gas, expensive transaction fees, slow confirmations, semi-centralized points of failure around tools, etc… the list goes on) yet it has been and continues to be the most important blockchain in the world besides maybe Bitcoin (some would say it’s even more important — but not a topic for this article!).
The NFT World… so far
The NFT world currently revolves around Ethereum. It’s where NFTs started, it’s where most people have acquired their first NFT, it’s where most of the sales are happening, and it’s where the biggest NFT creators and collectors are. At this stage, it’s currently the only chain on which most people would hold highly valuable NFT collections.
Recently, we have seen interest around NFTs spread and pick up steam, which is not surprising to those of us who have been deeply focused on NFTs for a few years now.
Below, I break down the arguments into sections, but you will see that some sections blend into other sections, which I find to be a strong characteristic in this space.
Ethereum has a huge head start
Nothing new, but this advantage is a big benefit. The head start and community around Ethereum (compared to other smart contract blockchains) is often discussed when comparing blockchains in general, but this is also relevant when it comes to NFTs. The developers, the tooling, the history, the platforms, the wallets, the familiarity — all these things matter when people are interacting with NFTs.
The Ethereum brand is super valuable. As the NFT space grows and newcomers enter, whether that is creators, builders, artists, collectors, or businesses, they will first come to Ethereum because they have heard about what is happening.
As an example, popular DJ 3LAU releasing his first music-based NFT into the world was not going to happen any other place than Ethereum, and that will be the case for any important artist over the next few years, especially the big names that are about to flood our world! Each new creator and fan that enters will continue to build the momentum, strengthening the ecosystem one by one.
Strong values matter
Short but sweet — Ethereum has extremely strong values — neutrality, user sovereignty, and freedom. Not every chain has the same values, and chains often sacrifice values to chase features. This matters, and people will take this into account.
Security and safety of assets
As of today, Ethereum has proven to be a safe and secure blockchain, approaching the characteristics of Bitcoin. As the value of NFTs grows rapidly, holders of this value will be very careful about where they store this value. Much like highly valuable physical art, the security demands and systems protecting these NFTs will only grow higher.
You wouldn’t store your Mona Lisa on the wall in your unwatched vacation home.
NFT composability matters
Most readers will be familiar with composability in the Decentralized Finance (“DeFi”) space. The ability to permissionlessly build on top of everything else that exists in DeFi is truly valuable and becoming one of the most powerful characteristics of DeFi, and also know as “money legos”.
This composability is happening with NFTs already, and I am calling it NFT Legos. Some examples of this include games that are leveraging outside NFTs that users own, defining certain permissions based on NFT ownership, allowing digital art collectors to prove ownership of NFT art when displaying in virtual worlds, and tokenizing baskets of NFTs into fungible tokens.
I argue that this composability characteristic is very important in the NFT world. The NFT legos that make up this composable ecosystem include the platforms, creators, collectors, virtual worlds, communities, and so on.. not just the protocols.
Virtual worlds with true ownership of assets are the pieces of the MetaVerse that are attracting the crowds.
The MetaVerse is built on NFTs and as the MetaVerse grows, it will become harder and harder for it to detach from the NFTs at its core.
You can see an example of this in action with NFT art in virtual worlds. Though these worlds are still in their infancy, one of the main use cases for these environments is to display the digital art NFTs of collectors.
The next stage which has already started is for people to build businesses in these virtual worlds. As these businesses form and grow, the value associated with this increases. Before we will realize it, there will be $10bn of value locked in the Ethereum-based NFT/MetaVerse worlds that will be interacting with each other, making it very sticky, much like DeFi.
NFTs and DeFi are blending together
I believe that products in DeFi will become more and more intertwined with NFTs, and NFTs will become more and more intertwined with DeFi.
We are already seeing this happen with projects like Aavegotchi, DeFi-staked Crypto Collectibles and NFTfi, a simple marketplace for NFT collateralized loans. MetaFactory brings together NFTs, Fashion, DeFi and DAOs! This is only the start of what is to come.
Eventually, it will be common to have assets such as digital art NFTs that own DeFi assets such as interest-bearing tokens, permissions, or other NFTs. (This is a deeper topic for an entire separate post.)
If the future of NFTs is heavily attached to DeFi and the core of DeFi stays in the Ethereum ecosystem, then that is another strong reason to believe NFTs will stay as well.
Other NFT platforms will connect to Ethereum
There are other NFT blockchains that are starting to and will continue to sprout up. I believe that these platforms will have to connect to Ethereum, and add value to participate.
Once again, we already see this happening in DeFi where the core of DeFi remains on Ethereum and any serious player that wants to participate will have to “connect to” the DeFi systems on Ethereum.
The NFT ecosystem could very well work the same way.
There will be other blockchains that are built specifically for NFTs, and when they are ready for the big leagues, they will offer certain advantages over the current Ethereum NFT experience. They may even be better at bringing the non-crypto world into the NFT space. However, they will have to be friendly with Ethereum and add value in order to attract an audience.
The decision for a collector to hold her $20k+ valued NFT portfolio on another chain versus Ethereum will not come easy. Even when that chain is more mature and there exists a very safe and strong “bridge” between those chains, it will be difficult to change minds and comfort.
There will be use cases where some NFT assets are moved across, used in some manner and eventually brought home to Ethereum, but the core will remain.
It’s kind of like when you let your cousin borrow one of your treasured toys, and tell him once he brings it back undamaged by a certain date, you’ll let him borrow another toy only then.
The Ethereum NFT space will start to suck in other NFTs platforms and activity, much like DeFi is doing by sucking in Bitcoin value as collateral on Ethereum.
NFTs will be fine on Ethereum
At this point, the critics will be asking “How will Ethereum be able to handle this?”
My answer is not Ethereum 2.0. In fact, I will ignore Serenity because it doesn’t exist yet and I know some NFT people that say it may never exist. However, what does exist is the crazy amount of research, development and progress that is being made in the Layer 2 solutions world on Ethereum.
Ethereum Layer 2 technology continues to advance. There will be different Layer 2 solutions for different use cases. Each Layer 2 solution will come with benefits and drawbacks. For example, some will have long, problematic withdrawal periods, and others will have shorter wait times. The key with all these true Layer 2 solutions is that they will have the same security properties as Ethereum mainnet.
Rollups are coming. There will be domain-specific rollups for different use cases. As an example, Optimistic Rollups which are getting a ton of excitement these days may not be the best solution for NFT-related environments.
Because of the long-latency of fraud-proofs used in Optimistic Rollups, there is a long waiting period for withdrawal to mainnet. With fungible tokens (ERC20), this drawback can be dealt with by using liquidity providers who will charge a small fee for giving you your assets quickly, mostly eliminating the wait period. However, with non-fungible tokens (ERC721), it is impossible for liquidity providers to eliminate this wait period being non-fungible by definition.
With NFTs, ZK rollups using zero-knowledge proofs may have a big advantage by having much lower latency for on-chain transactions. Once you know the ZK proof is valid, you can withdraw your assets to the main chain.
We will soon see Layer 2 solutions built specifically for NFT use cases.
Conclusion
The NFT space is currently built on Ethereum, and it is expanding rapidly. Ethereum has its drawbacks, yet there are too many good reasons why the NFT space will continue to find its core home and be built on Ethereum.
Other chains are coming, but rather than capturing the NFT market, these other chains will have to connect to Ethereum and add value to the system in order to gain adoption. All of this together will solidify Ethereum as the home of NFTs (that matter)*.
(*Though this article may not sound like it, I am actually excited to see other platforms succeed and help bring NFTs to the world!)
