Despite its unique nature, why is NFT so expensive? The following reasons may help answer your question: Necessity, Lack of fungibility, and One-of-a-kind nature. As a form of digital currency, NFT is a necessity. High transaction fees are the downside of its fungibility. But are these drawbacks worth the price? This article explores these questions and offers solutions.
Necessity
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To understand the benefits of NFT, we need to understand what this technology is. NFT stands for non-fungible token. Non-fungible means it is not interchangeable, unique, or available in unlimited supply. In the case of cryptocurrency, the definition refers to the digital existence and protection of an asset through blockchain technology. An NFT is a unique digital asset, which cannot be duplicated. Unlike fiat currencies, NFTs are unique in that they are not available for resale.
One decentralized finance protocol is developing a platform that uses NFTs as collateral. COO of the company, Jordan Lazaro Gustave, says that he sees NFT as a store of value. In the future, it will use NFT art as collateral. This would function similarly to bank lending. In a way, he says, NFTs can serve as a medium of exchange.
In addition to NFTs being a means of proof of ownership, NFTs also play a vital role in WEB3.0. Without the NFT marketplace, the ecosystem cannot function effectively. It is the keystone of a functioning NFT ecosystem. Therefore, NFTs are essential to WEB3.0. This technology is a major step in this new era of commerce. So, what is NFT and why is it necessary?
Lack of fungibility
The hedonic value of a digital asset is not as simple to define as the scarcity of tangible assets. Digital assets, on the other hand, have infinite copies. For example, a $69 million NFT from digital artist Beeple is only one among billions, but anyone can download it and use it. The problem with this is that you have no idea who owns the NFT.
To sell an NFT, you must first buy it. This is why a conventional vendor takes a commission. You will have to pay them for the services needed to upload and move NFT. A cryptocurrency exchange like Rarible charges 2.5% commission on each side. Then, it takes 5% of the final sale price. The problem is compounded when the NFT is not fungible.
It has been shown that many markets are dependent on these kinds of complex phenomena. But these phenomena are more distant from real-world referents than NFTs. A famous example of this is the collapse of the CDOs market in 2008, which is a complex financial instrument. While this complicated structure appeals to many investors, it ultimately hurts everyone. The solution is to introduce more scarcity.
One way to justify NFT prices is to understand why they are so expensive. Basically, if NFTs are valuable, people will pay more for them. Scarcity is not always a source of profit, but it does create a demand for these assets. In many markets, a limited supply of NFTs can make them more expensive than a physical asset. The demand for such products is largely determined by the amount of scarce resources.
One-of-a-kind nature
As NFTs are created on blockchain technology, they are one-of-a-kind. However, most creators use Ethereum, which is similar to Bitcoin and uses a proof-of-work system to verify transactions. During the mining process, specialist computers attempt to guess a digital lock and win an Ether reward. The digital lock is reset every fifteen seconds. This process requires huge amounts of computing power, and uses more electricity than the entire country of Nigeria!
The demand for NFTs is directly related to its rarity. Not every NFT is a single representation of an object, so collectors can hunt for one that only exists once. One-of-a-kind digital images, such as Crypto Punks characters, are among the most expensive NFTs. Another example of a unique NFT is Beeple’s collage of images. This image has a following of 2.5 million people on Twitter.
One-of-a-kind assets are not fungible, meaning that they cannot be exchanged for other things or copied. They are unique, which makes them so valuable. NFT prices are on par with traditional artworks, which can range from $92.2 million to $430 million, depending on the artist and medium. And because NFTs are non-fungible, they are rarer and more expensive.
High transaction fees
As an NFT newbie, Martin did not know about these fees until he went to buy his first one. The result was a sale that ended up costing him nearly three times as much as the original price. He now uses a wallet called Rainbow Wallet. Still, he wishes there was a warning before the sale. Another NFT artist wrote off the gas fees when he minted his first NFT.
While gas fees may be a nuisance, they have their place with blockchain and NFTs. These fees compensate users for the energy expended to process transactions on a blockchain. The more gas fees a transaction generates, the more miners will prioritize it. As such, gas fees fluctuate based on the amount of data used and the time of day it is performed. Although these fees are high, they do have a reason: they are a way to compensate users for the computational energy used to process transactions.
NFTs are valuable investments. They have underlying value, utility, and ownership history. There is also a liquidity premium. They are worth more than the price of the token. In fact, some NFTs are worth millions of dollars. It’s a common misconception that these tokens are only used by the rich and famous. But this is far from the truth. High transaction fees make it difficult for newcomers to get access to their coins.
Gas fees are driven by the complexity and speed of the transaction. Basic wallet-to-wallet transfers are cheap, but heavier computational tasks require more bandwidth and resources. The fees for heavier computational tasks will increase. In addition, gas fees may increase by as much as 470% in the middle of 2021. The spike is likely due to the Dogecoin and NFT mania. If you don’t like the high fees, consider switching to another NFT marketplace.
Lack of transparency
As a new user, I was shocked to discover the high gas fees associated with the purchase of my first NFT. I was shocked to learn that the sale ended up costing me nearly three times what I had originally paid. It’s a shame, but the sale also revealed deep philosophical divisions within the crypto-art community. I wish there had been some kind of warning before I made the purchase.