[Paper Review] Non-fungible Tokens: Promise or Peril?

Arsalan Parham, Corinna Breitinger|arXiv (Cornell University)|Feb 13, 2022

Blockchain Technology Applications and Security7 citations

TL;DR

This paper examines non-fungible tokens (NFTs) as a blockchain-based technology enabling unique digital asset ownership, analyzing their potential across art, gaming, and conservation. It evaluates NFTs' technical foundations on blockchains like Ethereum, identifies scalability and fee issues, and discusses their market growth and risks despite current hype.

ABSTRACT

Non-fungible tokens or NFTs are the digital assets on a blockchain. NFTs are unique and they cannot be divided like cryptocurrencies. NFTs could store digital ownership of an artwork or collections or can be fan tokens or tickets for clubs. NFTs are based on a smart contract on a blockchain network which supports them, such as Ethereum, Cardano or Polkadot. Most of the NFTs are now minted on Ethereum (ERC-20) network, but it has some main issues like high transaction fees and low speed. There are lots of domains which can be benefited from NFT technology such as art, music, gaming, sport and wildlife conservation. NFTs could be also bought or sold on lots of NFT marketplaces such as OpenSea and Chiliz. The trend is in a huge hype because the market cap and popularity of NFTs are growing significantly.

Motivation & Objective

• To analyze the technical and economic foundations of non-fungible tokens (NFTs) on blockchain networks.
• To evaluate the current state of NFT adoption across domains such as art, music, gaming, and wildlife conservation.
• To identify key challenges facing NFTs, including high transaction fees and low throughput on networks like Ethereum.
• To assess the role of smart contracts and blockchain platforms such as Ethereum, Cardano, and Polkadot in enabling NFT functionality.
• To examine the growing market infrastructure, including NFT marketplaces like OpenSea and Chiliz, and their impact on NFT popularity.

Proposed method

• Analyzes NFTs as unique digital assets stored on blockchains using smart contracts.
• Examines the ERC-20 standard on Ethereum as the primary technical foundation for most current NFTs.
• Reviews the role of decentralized marketplaces such as OpenSea and Chiliz in facilitating NFT trading and adoption.
• Assesses scalability and performance limitations of existing blockchain networks, particularly Ethereum’s high fees and low transaction speed.
• Evaluates the use of alternative blockchains like Cardano and Polkadot as potential solutions to Ethereum’s limitations.
• Discusses the broader implications of NFTs across industries, including digital collectibles, fan engagement, and conservation efforts.

Experimental results

Research questions

• RQ1 What technical mechanisms underlie the creation and management of NFTs on blockchain networks?
• RQ2 How do current blockchain platforms like Ethereum support NFTs, and what are their limitations in terms of cost and performance?
• RQ3 In which real-world domains—such as art, music, gaming, and conservation—can NFTs provide tangible value?
• RQ4 What role do NFT marketplaces like OpenSea and Chiliz play in driving NFT adoption and liquidity?
• RQ5 To what extent do the current market trends and high popularity of NFTs reflect sustainable innovation or speculative hype?

Key findings

• Most NFTs are currently minted on the Ethereum blockchain using the ERC-721 or ERC-1155 standards, which are based on smart contracts.
• High transaction fees and low processing speeds on Ethereum are significant technical challenges limiting broader NFT adoption.
• NFTs are being explored and applied in diverse domains, including digital art, music rights, gaming assets, and wildlife conservation initiatives.
• Marketplaces such as OpenSea and Chiliz have become central hubs for NFT trading, contributing to the rapid growth in market capitalization and public interest.
• Despite growing popularity and market potential, the NFT ecosystem remains vulnerable to speculative bubbles and technological constraints.
• Alternative blockchains like Cardano and Polkadot are emerging as potential alternatives to Ethereum, offering lower fees and improved scalability.