Day: February 9, 2023

No discussion about the metaverse would be complete without talking about Non-fungible tokens (NFTs). The synergy between the metaverse and NFTs is undeniable, with virtual marketplaces like Decentraland and The Sandbox already offering users a way to buy, sell, or trade virtual assets that are backed by the blockchain.

But how exactly will NFTs fit in with the big picture of the metaverse? Beyond the obvious use cases such as virtual real estate and in-game items, it’s hard to say for sure. But one thing is certain: The potential for NFTs to disrupt traditional markets is huge. Why? Because NFTs address the problem of scarcity.

With traditional assets, there is a finite supply. This means that as demand increases, prices go up. But with NFTs, the supply is not finite. So even if demand for virtual assets skyrockets, prices can stay reasonable and accessible. In other words, NFTs have the potential to democratize access to assets by means of tokenization and fractional ownership, which could lead to the development of a new class of digital entrepreneurs.

In this article, we will talk about how the virtual marketplaces of the metaverse are likely to be powered by NFTs and what implications this has for the real world.

As we have seen with Decentraland and The Sandbox, NFTs are already being used to create virtual marketplaces where users can buy, sell or trade assets that are backed by the blockchain. These assets can be anything from virtual real estate to in-game items.

The use of NFTs enables these marketplaces to operate in a trustless manner, without the need for a central authority. This not only makes them more resilient to censorship but also allows for the implementation of novel features such as trustless escrow and decentralized pricing.

The use of NFTs also has implications for the way these marketplaces are taxed. In traditional markets, taxes are typically levied on the sale of goods or services. However, in a market powered by NFTs, taxes could be levied on the transfer of ownership of the NFT itself.

This would have the effect of taxing all transactions equally, regardless of the value of the goods or services being exchanged. How? The valuation system for NFT transactions and the taxes levied on them could be much simpler than the current system for traditional assets. 

That is because with NFTs, the value of an asset is intrinsically linked to the underlying blockchain. This makes it possible to use automatic valuation algorithms that take into account the total supply of the token, the number of tokens in circulation, and the transaction history of the token on the blockchain.

Of course, this is all speculation at this point. It remains to be seen how virtual marketplaces will be taxed in practice. But the use of NFTs does open up the possibility for a more efficient tax system.

This could potentially lead to a more efficient tax system, as it would eliminate the need for complex valuation systems.

The challenges of NFTs in virtual marketplaces

Of course, the use of NFTs is not without its challenges, one of the biggest being scalability. At present, the Ethereum network can only handle a limited number of transactions per second. This means that any market powered by NFTs would need to find a way to scale up to meet demand.

Another challenge is the high transactional costs associated with NFTs. At present, it costs around $10 to mint a single NFT on Ethereum. This is likely to be prohibitively expensive for many users, particularly those who are looking to trade low-value items.

Finally, there is the issue of interoperability. At present, each virtual marketplace is powered by its own blockchain. This means that users are unable to trade assets between different marketplaces. This is likely to be a major hindrance to the growth of the metaverse, as it will prevent users from taking advantage of the full range of opportunities that the metaverse has to offer.

Overcoming the challenges of NFTs

Fortunately, there are a number of projects working on solutions to the challenges of NFTs. One is Polygon, which is addressing scaling solutions for Ethereum. Polygon has already achieved impressive results, with some suggesting that it could increase Ethereum’s transaction capacity by 100x.

Another project working on scalability solutions is Plasma, which is being developed by the team behind OmiseGO. Plasma is a Layer 2 scaling solution that makes use of side chains. It is designed to be scalable, cheap, and secure, and could potentially be used to power the virtual marketplaces of the future.

Finally, there is the Interplanetary File System (IPFS), which is a decentralized storage system that could be used to store the NFTs of the future. IPFS is designed to be scalable and efficient, and could potentially be used to power a decentralized marketplace for NFTs.

The future of NFTs in virtual marketplaces

It is clear that NFTs are going to play a major role in the virtual marketplaces of the future. The use of NFTs enables these marketplaces to operate in a trustless manner, without the need for a central authority. This not only makes them more resilient to censorship but also allows for the implementation of novel features such as trustless escrow and decentralized pricing.

Inclusiveness and market resilience are enabled by NFTs by design. IPFS decentralized storage guarantees that the NFTs cannot be censored or taken down.  In the event that a virtual marketplace is shut down, the NFTs stored on IPFS would still be accessible, and could be traded on other marketplaces.

Distribution of wealth is also more equitable with NFTs. The use of automatic valuation algorithms ensures that the value of an NFT is not arbitrarily determined by a central authority. This democratizes the virtual marketplace and allows for a more level playing field.

The use of NFTs also has implications for the way these marketplaces are taxed. In traditional markets, taxes are typically levied on the sale of goods or services. However, in a market powered by NFTs, taxes could be levied on the transfer of ownership of the NFT itself.

To conclude, NFTs are a major step forward for the virtual marketplace industry. They have the potential to make these marketplaces more resilient, efficient, and inclusive. As the technology matures, we can expect to see more and more marketplaces powered by NFTs.

Daniel Saito is CEO and cofounder of StrongNode