The Hidden Fees in NFTs that May Slow Down Adoption
Non-fungible Tokens (NFTs) are the hottest asset in town.
And why not?
Art, after all, transcends time.
It cuts across different generations and trends. More often than not, every piece of art that grabs the world’s attention aptly represents what truly makes us.
The NFT Money Printers
In day and time, the transition to a digital economy has opened up more opportunities than anticipated.
Take Jack Dorsey as an example. The crypto community holds him in high esteem for being their ambassador. He owns several companies, including Square Inc., that allow folks to purchase BTC. While he’s more pro-Bitcoin, Jack recognizes other protocols. In this case, Ethereum and how NFTs can be utilized to serve different needs.
For this, the CEO and billionaire auctioned his first-ever tweet in 2006 as an NFT for $2.9 million. Easy money, right? All the proceeds went to charity.
That aside, Mike Winkelmann, who goes by the name Beeple, made headlines when he sold his collage of digital sketches via Christies for $69.3 million.
On that day, available on Christie’s auction board were unique computer sketches secured by the Ethereum blockchain as NFTs.
Amid the unbridled exuberance of the last few months only seen in crypto, a Singaporean investor acquired these assets and made them part of his collection.
Other artists, including The Weeknd, members of Kings of Leon, and even journalists—like Kevin Roose of the New York Times, have made serious money.
The Bridging Tool
Clearly, NFTs could signal a shift away from traditional processes.
More importantly, for disadvantaged groups who felt clipped by intermediaries, NFTs are a wealth-building bridge. Through this novel technology, gifted artists—anywhere in the world, can capture billions without necessarily relying on a middle man—like Christies in this case.
There are doubters, of course, who argue that NFTs are just a passing fad, a flash in the pan. Still, we look at the present and determine whether the space has a chance.
NFTs rely on the blockchain for security and transparency. Collectibles, trading cards, or unique artwork belong to the artists. When sold, the public ledger—in this case, Ethereum, can be used as a reference creating that track of history for provenance.
The Transfer Fee Problem
But while NFTs are “nonstandard” collectibles, like any other trade, each transaction can be tweaked to benefit the creator, often coming at huge costs for the buyers.
It doesn’t matter how long the trail is, but in the end, every subsequent sale pads the pocket of the originator because of long-term transaction fees.
These fees—exclusive of Gas, and especially Transfer Fees, Vitalik Buterin, has argued, are a bad idea for NFTs.
These impediments include platforms charging extra fees on transfers or bidding as a means of generating revenue. The model applied—meant to prevent platform spamming besides revenue generation-- will vary between platforms, with some not even minting an artwork unless there are previous sales to avoid energy wastage on pieces that people won’t buy.
Second, there are mechanisms in place where a percentage—or some fixed value, is sent back to the originator. While they may appear novel and designed to fund the artist continuously, this arrangement is flawed, even ending up stifling the growth of NFTs.
He said wrapper contracts and smart contract wallets to address the “Transfer Fee” problem charged by a marketplace—or platform. These can be effective in circumventing this trivial fee, ensuring that fees are paid only once.
Alternatively, Harberger taxes can be adopted. With the sale price arbitrarily defined by the creator, a proportional Harberger tax is charged every year independent of the number of transfers made—which is a lot of work for the artist!
Still, even the idea has been criticized, with some maintaining that Harberger taxes, specifically, will only work if there no substitute for the same.
Opposers argue that the idea of paying property tax on a digital asset is laughable and doesn’t make sense.
In their view, NFTs—even when held, don’t generate any income or pay a dividend. Therefore, they add, Harberger taxes equate to buying a license in exchange for nothing, explaining why they are not desirable. Furthermore, Harberger taxes would eliminate urgency over the need to sell NFTs besides excluding some assets from the equation.
Regardless of the system adopted, NFTs are here to stay. Just like DeFi.
The proposals made by Vitalik will continue ruffling feathers as expected, with the idea of wrapper contracts throwing a technical wrench that may affect NFT functionality due to de-authentication nullifying the tying certificate.
However, the immediate concern is to design a functional NFT resale system for art that is beneficial for both sides of the equation.
Different approaches have been experimented with before to ease NFT transfers but what’s required—for now, is standardization that balances the nuances of the law, technicalities, and triggers of adoption.
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