The NFT market has been ever evolving and expanding. In chain activity, recent data indicates that various blockchains are flying high while others are floundering far below each other. Ethereum’s dominance remains unquestioned, as other platforms such as Polygon and BNB Chain have a hard time catching up. E18 blockchain editor Erik Lundström takes a deep dive into this divergence. His experience brings unique perspective on evaluating blockchain risk as you chart a course through the NFT universe.

Ethereum's Unchallenged Lead in the NFT Space

Ethereum's dominance is undeniable. The blockchain has an incredible 55x more NFT volume than BNB Chain, its nearest rival. This isn’t entirely happenstance. These three factors have converged to cement Ethereum’s position as the default home for NFTs.

This is one of Ethereum’s biggest advantages, its history. Battle-tested since 2015, Ethereum has a proven track record for reliability and security. This longevity breeds deeper trust among users, investors, and developers, creating a more powerful network effect that is hard to break. The more people that use Ethereum, the more valuable it is, bringing in even more participants in a self-reinforcing cycle. This resulting “flywheel effect” is something that many other blockchains can only dream of replicating.

In addition to all of that, Ethereum has experienced massive growth from enterprise adoption. In fact, institutions like National Australia Bank are using Ethereum for intra-bank cross-border transactions—proof that the blockchain can be used for practical, real-world uses. Everywhere you look, institutional interest in the NFT space is increasing. Day-by-day, we see evidence of increasing confidence in blue-chip NFTs on Ethereum, including a recent purchase of 45 CryptoPunks NFTs totaling over 2,080 ETH (then $7.8 million USD).

Polygon and BNB Chain: Facing an Uphill Battle

Despite Ethereum continuing to shine, Polygon and BNB Chain are still struggling to get any meaningful traction in the NFT arena. And yet, for all their competitive poaching of users and developers, these ecosystems have failed to achieve the runaway success of Ethereum. This begs the question: what factors are hindering their growth?

Both platforms possess unique strengths. BNB Chain has the advantage of Binance’s incredible downline of exchanges and customers to offer them a massive potential user base. Polygon has a robust Ethereum developer community and has provided grants to encourage developers to build on its platform. With fast 3-second block times, BNB Chain allows for truly lightning-fast smart contract execution. It uses a Proof of Staked Authority (PoSA) consensus mechanism to reach this speed.

Yet, these considerable strengths haven’t helped Tangled up to comparable NFT market share. Polygon and BNB Chain have huge NFT ecosystems, including all the necessary Minting tools, Smart Contracts, Bridge Services, etc. They’ve all struggled to replicate Ethereum’s user engagement and transaction volume. Polygon's scalability solutions, which use a multi-layer approach, and BNB Chain's single-chain optimization impact user engagement and transaction volume differently. Polygon's deep Ethereum integration and cross-chain bridging contrast with BNB Chain's native Binance exchange, Launchpad, and liquidity support, further differentiating their approaches.

Evaluating Blockchain Risk in the NFT Market

With the differences in performance of blockchains, NFT creators and investors need to thoughtfully assess the risk of various blockchains. Making the right blockchain choice can make a world of difference to the value, liquidity, and security of your NFT assets. Here’s what to consider:

Key Considerations for NFT Investors:

  • Market Liquidity: Is there an active market for NFTs on this blockchain? Higher liquidity makes it easier to buy and sell NFTs without significant price slippage.
  • Security Reputation: Has the blockchain demonstrated a strong track record of security and resistance to attacks? A compromised blockchain can devalue NFTs.
  • Community Support: Is there a vibrant and active community of developers and users supporting the blockchain? A strong community fosters innovation and growth.
  • Transaction Costs: What are the transaction fees associated with buying, selling, and transferring NFTs on this blockchain? High fees can erode profits.

Actionable Advice for Mitigating Risk:

  • Diversify Your Holdings: Don't put all your eggs in one basket. Spread your NFT investments across different blockchains to mitigate the risk associated with any single platform.
  • Platform Due Diligence: Thoroughly research the NFT marketplaces and platforms you use. Consider their security measures, reputation, and user reviews.
  • Stay Informed: Keep abreast of the latest developments in the NFT space. Monitor news, trends, and security vulnerabilities related to the blockchains you're invested in.

The NFT market carries huge risks. Leading factors are the absence of regulation, price instability, and illiquidity of the market. The analysis of NFT blockchain will find incomplete, inconsistent and possibly fraudulent documentation leading to deficiencies in reserves/disclosures. Risks from blockchain technology NFTs are deeply tied to blockchain technology, and as such are subject to potential risks from the technology itself that can affect NFT value.

Studies have shown that adding NFTs into investment portfolios brings substantial diversification benefits. Diversifying across blockchains, NFT marketplaces (e.g., OpenSea, Nifty Gateway, Rarible), and NFT segments (e.g., art, collectibles, gaming) can further mitigate risk.

As Erik Lundström emphasizes, understanding the strengths and weaknesses of different blockchains is essential for navigating the NFT market successfully. Identify blockchain risks and address them to improve your likelihood of success. Build a balanced portfolio to ensure you thrive in this dynamic but uncertain new world.