Non-Fungible Tokens and the Virtual Markets They Enable

No discussion of 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 blockchain-backed virtual assets.

But how exactly will NFTs fit into the big picture of the metaverse? Beyond the obvious use cases such as virtual real estate and game objects, 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 when demand increases, prices increase. But with NFTs, the supply is not over. So even if the demand for virtual assets skyrockets, prices can remain reasonable and accessible. In other words, NFTs have the potential to democratize access to assets through tokenization and fractional ownership, which could lead to the development of a new class of digital entrepreneurs.

In this article, we’ll talk about how virtual markets in the metaverse are likely to be fueled by NFTs and what implications this has for the real world.

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

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

The use of NFTs also has implications for how these marketplaces are taxed. In traditional markets, taxes are usually levied on the sale of goods or services. However, in an NFT-powered market, 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 exchanged. How? The system for valuing NFT transactions and the taxes levied on it could be much simpler than the current system for traditional assets.

Indeed, with NFTs, the value of an asset is intrinsically linked to the underlying blockchain. This allows the use of 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, that’s just speculation at this point. It remains to be seen how virtual marketplaces will be taxed in practice. But the use of NFTs opens up the possibility of a more efficient tax system.

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

The challenges of NFTs on virtual marketplaces

Of course, using NFTs is not without its challenges, one of the biggest being scalability. Currently, the Ethereum network can only handle a limited number of transactions per second. This means that any NFT-powered market would have to find a way to grow to meet the demand.

Another challenge is the high transaction costs associated with NFTs. Right now, it costs around $10 to mint a single NFT on Ethereum. This may be prohibitively expensive for many users, especially those looking to trade low value items.

Finally, there is the issue of interoperability. Currently, each virtual market is powered by its own blockchain. This means that users cannot trade assets between different markets. This will likely be a major impediment to the growth of the Metaverse, as it will prevent users from taking advantage of the full range of opportunities the Metaverse has to offer.

Overcoming the Challenges of NFTs

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

Another project working on scalability solutions is Plasma, which is developed by the team behind OmiseGO. Plasma is a layer 2 scaling solution that uses 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’s the Interplanetary File System (IPFS), which is a decentralized storage system that could be used to store NFTs of the future. IPFS is designed to be scalable and efficient, and could potentially be used to power a decentralized market for NFTs.

The future of NFTs in virtual marketplaces

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

Market inclusiveness and resilience are enabled by the design of NFTs. IPFS decentralized storage ensures that NFTs cannot be censored or deleted. In the event of a virtual marketplace closing, NFTs stored on IPFS would still be accessible and could be traded on other marketplaces.

The distribution of wealth is also fairer 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 market and allows for fairer rules of the game.

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

To conclude, NFTs are a major breakthrough for the virtual market industry. They have the potential to make these markets more resilient, efficient and inclusive. As the technology matures, we can expect to see more and more NFT-powered markets.

Daniel Saito is CEO and co-founder of StrongNode