Exploring the Effects of Blockchain Instability on the NFT Economy
In the realm of physical, tangible art, collectors will go to great lengths to have their pieces certified as original. Paintings by classical or popular artists are highly sought after and valued accordingly. If a collector is unable to verify the authenticity of an artwork, they’ll be unable to sell, insure, or donate the piece. If they do find a willing buyer, it will sell for far less than its market value would be as an authenticated work. NFTs solve this by creating mechanisms for verification of provenance and ownership at the time of minting. However, this is contingent on the underlying blockchain remaining operational for these mechanisms to be of any value. This raises the question, is good art minted on a bad blockchain still worth collecting?
Anyone can save a JPEG of an NFT artwork to their device and view the JPEG. However, that JPEG does not, by itself, provide the owner with access to any of the utility that belongs with the NFT represented by the JPEG. Owning such an NFT enables whoever controls the wallet that holds it to gain access to communities, features, products, and events that would otherwise be inaccessible to the general public. Blockchain technology allows for digital ownership recognition in ways that other forms of technology never will.
Copy the image. Who gives a shit? I own the data that exists on the blockchain underlying the NFT. It’s the data that gives me access.
Considering the ownership aspect of NFTs, there’s a reason highbrow art auction houses like Sotheby’s and Christie’s have adopted this technology and operate their own separate metaverses: blockchain technology now offers a viable way to track legitimate ownership in the digital realm.
In traditional art spaces, when you purchase a piece of work from an artist, you’re taking home a tangible good. This may take the form of a sculpture, painting on canvas, or any other physical medium in which that artist creates. Prints of said works can be purchased, but these are obviously not the original work, and pale in comparison of value.
If NFTs are analogous to original works of physical art, then prints are the “right-click save”. Smart contracts by which any NFT is produced can be verified. Ownership can be verified. Counterfeits can be verified as counterfeit.
Ultimately, the viability of this verification is dependent on the blockchain upon which an NFT is minted. If the blockchain is in any way unable to verify the data underlying the NFT in a user’s wallet, that NFT is literally not more than an overpriced JPEG.
Take, for example, the not-infrequent outages of the Solana blockchain:
I am not a specific blockchain maxi; I am open to investing in projects and purchasing art on any viable blockchain. In this case, viable is the operative word. Ben McMillan, writing for Forbes and echoing a statement made by Vitalik Buterin, explains that “when building a blockchain, developers have to decide which 2 or 3 critical issues they’ll solve for: Decentralization, Security or Scalability”. He further notes:
Ethereum prioritized decentralization and security at the expense of scalability…this resulted in massive ‘congestion’ and high gas fees particularly when NFTs boomed in popularity. Solana sacrificed decentralization in order to prioritize security and scalability.
That sacrifice has cost Solana the ability to operate smoothly. According to the Motley Fool, Solana crashed 12 times in 2022 alone. This is an average of one outage per month. While this may be considered practically dependable, is it reasonably acceptable? The market has decided it is not: outages and other issues have strengthened the selling pressure on Solana’s native token, SOL, causing it to lose more than 90% of the value of its all-time high.
While many tokens dropped in value during this recent bear market, SOL has been dropping in value since November 7, 2021 — according to CoinDesk — which was long before the start of the bear.
Solana Price Chart from November 7, 2021 to January 16, 2023 Source: CoinDesk
When it comes to tokens of this sort, exiting your position is a simple matter of swapping or selling. This only becomes problematic when liquidity is low.
NFTs, however, are a different kind of monster. If you want to offload an NFT, you need a buyer lined up ready to take on the risks and responsibilities of owning that NFT. If users are exiting the blockchain on which an NFT is hosted, this may prove to be incredibly difficult.
While art is art no matter where it’s being made available, the medium matters when it comes to verifiable provenance and ownership. When we consider NFTs as a medium, the viability of the underlying technology matters. One of the primary factors driving NFT adoption is the concept of digital ownership. Many people make jokes about “right-click save,” however this does nothing in terms of modifying the ownership of an NFT and all that entails.
This warrants examining in greater detail. Descriptive metadata, artwork, and collectibles may change, but ultimately, the NFT itself represents the hash on a blockchain and ties that hash to the wallet address of someone who created, minted, or purchased it. Holding an NFT, then, implies ownership of whatever that hash enables within the context of the blockchain ecosystem in which it is minted.
How does this apply to Solana?
You can’t verify ownership when a network is down.
Here’s an example: you purchase a particular NFT on Solana. You want to join the artist’s community and gain access to the “Member Only” categories. You plug your wallet address into the resident crypto bot, and you’re unable to be verified. The community bot can’t check your data because Solana is down. It’s fine, you think. Solana will come back up.
What if the stakes are higher, or your transaction is time sensitive? Maybe you’re bidding on a piece of art or your favorite artist just launched their public mint. Or maybe you’re trying to buy tickets to your favorite football club’s game. Or maybe you want access to a variety of private sporting events. Or maybe you want to ape into the latest footwear drop. None of this works if the blockchain on which the NFTs were minted is not operational.
After a dozen crashes in a year, how many more times will it crash before the bulk of the community finally calls it, sells, and bounces?
Arbitrary pauses of a blockchain, be it from technical bugs (Solana) or manual pauses (BNB Chain) compromises the raison d’être of the Web3 experiment.
This web3 experiment may have started with the goal to democratize finance, but it has since expanded to include a host of other features. With DAOs, we’re revolutionizing the way we work. With NFTs, we’re revolutionizing the role and experience of art and utility in the digital realm. None of this is possible if the underlying technology is unreliable.
At this rate, it’s more likely that Solana fails entirely than it turns around. It’s a low-faith consideration, but their performance this past year has done little to inspire faith at any level. If Solana fails, that NFT you bought on their blockchain will be useless.
We can make the case that in purchasing an NFT, you are supporting the artist’s work, which is admirable. However, if the recognition of ownership is not a key factor in purchasing an NFT, it would make more sense to simply fund the artist’s work directly by becoming a patron, rather than purchasing a product that may not be viable in the long run.
Now, this isn’t to say that other blockchains won’t be viable in the long term. The fact that other blockchains are operating with far greater consistency than Solana provides greater faith in the underlying communities building these blockchains.
For most blockchain development communities, decentralization is not being sacrificed for either security or scalability, leading them to continue to operate regardless if an entire platform crashes. If Amazon Web Services or Infura goes down, heavy data-centric apps may struggle, but many of these other blockchains will continue to operate, thanks to the continued operations of independent validators.
Now, is good art worth minting on a bad blockchain? Ultimately, the answer lies with you. This is only one facet of the argument, and given the value afforded to the function of NFTs as digital ownership technology, I argue it is unwise to purchase NFTs on any blockchain that struggles to remain reliable.
This article initially appeared in BanklessDAO’s Decentralized Arts newsletter on October 18, 2022.
nonsensetwice is a writer, editor, developer, and fitness professional. A member of, and contributor to, BanklessDAO since its inception, nonsense’s main drive to contribution is the development and growth of contributors in web3, particularly in the realm of governance. When he’s not engaged in DAO work or kicking clients’ asses with yoga, nonsense can be found playing Borderlands, producing work for his L V N A C Y project, or shitposting on social media. Follow the bastard at nonsensetwice and nonsensecodes on Twitter.
Trewkat is a writer and editor at BanklessDAO. She’s interested in learning as much as possible about crypto and NFTs, with a particular focus on how best to communicate this knowledge to others.
BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.
This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.
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