If you are interested in Ethereum and NFT, this is for you! Find out how NFT’s affect Ethereum’s value.
Disclaimer: I am not a financial adviser and you should not take my word for any investment decision. You should always do your own research when investing in anything.
What does Google say about “Will NFT increase Ethereum?”
Google says, NFT’s are one-of-a-kind collectibles. In essence, an Ethereum-based token is also a collectible, thus increasing the value based on scarcity. So, as NFT’s value increases, the Ethereum used to make and purchase it will also increase. Developers have not created a cryptocurrency that does the job of Ether.
So basically, Google says yes, NFT could increase Ethereum’s value. But let’s dig deeper to see why this is so.
What is Ethereum?
Ethereum is a smart contract blockchain. A smart contract is a piece of code that interacts in a way of “if” and “then”, meaning IF something happens which is a trigger, THEN an action will be done, so Trigger and Action. That is what Ethereum is, it’s a blockchain based on a smart contract, which is a code that will wait to be triggered by something that will activate an action.
What is an NFT?
NFT stands for Non-Fungible Token. Non-fungible means anything that could not be fungible, for example, currency is fungible because you can exchange one currency for another currency without losing its value, like swapping a $1 bill for another $1 dollar bill will not lose any value because it is fungible. When it’s something non-fungible that means this thing is unique, for example, if one person has a painting and another person has a different painting and they exchange, these unique items do not have the same value because they are unique, hence being non-fungible. In addition, a token is something that lives on the blockchain that affects a digital ownership of something.
Today an NFT is seen as anything related to a digital artwork, but it’s not just that. Something to keep in mind is that it is a Non-Fungible Token that grants you digital ownership.
Why is there a link between Ethereum and NFT?
First is because Ethereum is the first smart contract blockchain. Ethereum can be seen as a proof of concept for a smart contract.
Vitalik Buterin, the founder of Ethereum published the Ethereum Whitepaper in 2013 and launched the project in 2015. Before working on Ethereum, Vitalik Buterin was on a project with Bitcoin and he noticed that Bitcoin was a good blockchain to store value and to handle a coin for value, but very difficult to handle ownership, because of that realization, Vitalik then started his own project, which is Ethereum and today Ethereum is the first smart contract blockchain.
Today, Ethereum is not the only smart contract blockchain, there are others who try to compete against Ethereum because it’s the first in the market. The main benefit of Ethereum is to be the proof of concept of a smart contract blockchain, but with that are some issues.
The main issue is that today, Ethereum is working on a proof of work. It’s a model of where the blockchain is working. It’s very energy consuming and it affects the network. The network can’t scale very well because it is based on proof of work.
What is proof of work?
It is a model in which all the nodes on the network compete with each other to validate a transaction. Every transaction that lives on the blockchain needs to be validated and to be validated that needs to be handled by a power. Today Ethereum is done by proof of work and all the others (Wax, Cardano, Polkadot, Solana, Tezos, Avalanche) work as a proof of stake.
What is proof of stake?
Proof of stake is completely different, it is not energy based and it is more efficient at scaling for energy purposes and for the environment. Proof of stake is, you have the validator of the network to validate a transaction, to do that you have to stake an amount of the currency of the network.
Today, you have 2 separate types of blockchain for the smart contract: the first one is Ethereum that is working on proof of work and you have all other competitors that work on a proof of stake.
Another connection between Ethereum and NFT
There is also a connection with Ethereum and NFT because there are more applications and developers on Ethereum. According to www.fool.com and www.stateofthedapps.com at the later part of the year of 2021 more than 90% of applications where based on the Ethereum network and the leader in terms of people actively contributing to the development of a network is Ethereum, with about 2,300 average monthly developers — those who were active on a monthly basis, according to the Developer Report. This explains why there is a link between NFT and Ethereum.
Not only is there on the provider side more applications and developers but on the consumer side, it’s the same idea.
More users on Ethereum
So, let’s focus on NFT, where, imagine you have the layer of the blockchain, on top of that you have the NFT and around the NFT, you have the community. As there is more NFT project on Ethereum, the community is more grounded around Ethereum. Compared to other competitor smart contract blockchains, the majority of the network world lives on Ethereum.
According to CryptoSlams tweet in the beginning of September 2021, based on secondary sales, more than 75% of the NFT market was based on Ethereum. This proves that Ethereum is number 1 on the NFT market, this also proves why there is a link between NFT and Ethereum.
We have made the connection on why, if we talk about NFT we will first think about Ethereum, because Ethereum is the leading smart contract blockchain today where the NFT world is grounded.
What gives value to NFT?
It is the scarcity, utility and interaction. Scarcity stands for the fact that if you are able to define a limited supply, by default, if you cap the limit, that will create a certain amount of inherent value.
Utility is everything you can do with NFT, because today NFT can be seen as only for art work purposes, but it’s not only that. The bottomline of this technology is to be the owner of something and to be able to prove it. This digital ownership, in the future, will enable some new use cases, for example, by owning a token to have access to a private club in the real world, or to gain royalty or access to an event, but in a VIP section.
The idea is, today, NFT is only a stack. Imagine a smartphone; the smartphone is the stack that enabled Uber and instagram, without this stack Uber and Instagram will be more difficult to build. Today, the NFT technology is here and a new use case will come with NFT.
The interaction stands for not being isolated in a closed ecosystem, meaning by owning NFT, not only will you own NFT, but you will be able to bring it wherever you go, in the physical world and in the virtual world. Meaning that, at some point, if we talk about gaming for example, let’s picture something where you will be able to come with everything that you own on some game, instead of using the library of the game, you will come with your own library. Your social proof will follow you wherever you go.
This is what makes the real value of NFT, it is around scarcity, utility and interaction where everything enables social proof and provenance at scale.
Comparing between the value of NFT and Ethereum
I quote from an article that said, people that invest in NFT see the value of the thing that lives in the virtual world, and people that invest in Ethereum are the people that see value in building this virtual world; they are 2 separate things. You either focus on building the virtual world, the smart contract blockchain side, or focus on where the world is going, the NFT side; but you can do both.
Let’s say, for example, there is a museum ,if you believe in investing in the world, you will invest in the museum, but if you believe in the thing that lives in that world, for example, the Mona Lisa painting, then you will invest in the Mona Lisa painting.
Whether you invest in the museum or in the Mona Lisa painting, it will affect the value of the other thing because the two things are connected. For example, fans around the world will go to the museum to see the Mona Lisa painting, the Mona Lisa painting value will increase the value of the museum.
Another example of the same principle of the world and the thing that lives in the world, is like, imagine on tiktok; investing in the world which is tiktok, or investing on an influencer of tiktok. Another example could be, investing in a football club, or investing in the player of this club. It’s a matter of investing in the thing holding the thing to happen, and the thing living within the world.
It is like a domino effect where there is an interconnection between the values of both things.
How inflation affects the value of NFT and Ethereum
I quote an article that says, “Now, know that anything related to crypto, blockchain, NFT etc. is anything but simple. But if one draws lessons from other industries, and, again, basic economics, one could imagine that the rise in NFTs will have a positive impact on Ethereum.” Another article gave the same feedback around the fact that we can predict what is going to happen, but if we take the approach around basic economics, the inflation of NFTs may increase the value of Ethereum.
How does inflation work?
It’s either by Demand-pull, meaning there is more demand than supply, meaning that if there is a demand-pull on the NFT market, this thing could affect the Ethereum value. It could also be by Cost-push, where production costs increase prices, or by Built-in which is like cost of life increasing, where the prices rise, wage rises too, in order to maintain living costs.
These 3 things could also happen for NFT and Ethereum relations. Meaning that if there is an inflation of the NFT market, the inflation on the NFT market could have a consequence on the value of the Ethereum.
The question is, did this thing already happen, did NFT already influence the Ethereum value?
According to data compiled by Coindesk at the beginning of 2021, a graph showed that the monthly Ether flow to centralized exchanges moved in tandem with the monthly NFT trading volume. We can see, it seems that these data were correlated.
My prediction
As I explained before, Ethereum is a blockchain working today on a proof of work, but is going to change and evolve to a proof of stake. When this prediction happens, the expectation is to have a better network consumption, because today, the issue with proof of work is, the Ethereum network is constantly congested with too many trying to use the network and the network can’t handle all the requests, and so the effect of that is to have an increase on the transaction fees. Bottomline is, when this change from proof of work to proof of stake takes place, the transaction fees will decrease and this thing should become like the last world to have more people using this network. Meaning, today, the narrative used on other blockchain around the fact that it’s more cost effective that you don’t have this high fee transaction, will not be true anymore. Ethereum will benefit from holding most of the NFT market already.
This prediction change, in my point of view will, in a short term, affect the value of Ethereum, meaning that as the transaction fees will be lower, that will be better for all the stakeholder, which is the creator and collector using the Ethereum network, so this change should also increase the use of the network, and so affect the value.
Investment risks
As with any investment, there are risks that come with it. The NFT market is very volatile and right now it’s like the far west, because a lot of people have been scammed and a lot of people are going to be scammed. You need to come prepared and know how to navigate this world.
Open questions
As we dig deeper into this, do you know someone, or if you yourself can answer these questions, I invite you to do so and share this to someone who may be able to answer these questions:
- What is the standard for interoperability between different blockchains?
I know there are some tools used to do that, but what is a real standard that pops up in your head when someone asks this question? What could be the thing to use if we need to move a token from Ethereum network to Solena, or from Solena and move that to Ethereum? - What viable solutions exist to transfer from one blockchain to another?
- Do you know of a case of a token having been transferred from one network to another that affected its value?
The Abstract
We have seen what an NFT and Ethereum are. We have seen what is basic economics around inflation and it seems that NFT has already influenced the Ethereum value. We’ve also seen the general investment rules to follow and the reply seems to be, we need to be very cautious, because only time can tell if this thing is true or not. Today, I can’t say 100% that, yes, NFT is going to increase Ethereum, but it seems that there is some information that may say that this can happen.
This blog is from Digest par ROBERT Episode #02. You can watch the full video here: https://youtu.be/Na65gy7AFtk
Digest par ROBERT is one of my segment where I discussed topics mostly asked in the NFT Market.
