The NFT market, once the hottest new frontier of digital ownership, is now enduring a collective debit and liquidity crunch. This contraction begs some very important questions. It calls into question the long-term viability of many NFT platforms and potentially the entire future of this new digital asset class. Thabo Nkosi, a crypto features writer, explores the implications of this developing landscape. He provides some perspective for creators and collectors alike, as both adventures continue to chart these rocky waters.

As with any alternative asset class, the NFT market’s explosive growth has come with significant risks. The biggest issue is that there’s no all-encompassing regulatory framework. This lack of direction encourages volatility and attracts bad actors, all of which lead to further liquidity crises. Apart from that, excessive transaction costs and the unchangeable character of blockchain technology can make issues worse. Bugs, security vulnerabilities, and the immutable aspect of smart contracts provide yet another risk to the platforms and their users. Our home market has had a substantial challenge with scams and fraud. These are operations of marketplaces for counterfeit NFTs, manipulation of metadata with deceptive intent, and the unauthorized copying of digital assets. These headwinds can chip away at investor confidence and further deplete liquidity.

The combination of pressure, opportunity, and rationalization creates a perfect storm for fraud in the NFT world. This pressure can be due to financial and economic incentives, or simply because actors want to take advantage of market hype. The opportunity comes from poor gatekeeping or no guards at all on some of these platforms. Rationalization is why even good people can self-justify their way into doing bad things, to the point where they’re comfortable with their choices. While this is a small step, addressing these lacks is an important element of creating a more secure, sustainable and trustworthy NFT ecosystem.

For instance, NFT liquidity has shown day-of-week effects, similar to those seen in the stock market. A large liquidity gap exists. Liquidity is often cyclical, with more available on certain days and less on others. By gaining insights into these price action patterns, both traders and investors can better tailor their strategies and drive value with more informed decisions.

Platform Darwinism in the NFT Space

These new market conditions are leading to the phenomenon we can refer to as “Platform Darwinism.” This concept suggests that only the strongest, most adaptable, and user-centric platforms will survive and thrive in the long run. Platforms that don’t have the announced features, strong security, or a supportive community will be at a disadvantage. As competition tightens and liquidity dries up, they will be dealt a harsher hand.

Several factors contribute to a platform's resilience. This is why having a big and engaged user base is key. It generates a larger pool of buyers and sellers, increasing liquidity. This makes platforms with relatively low transaction fees more attractive to users, incentivizing users to be more active and have greater volume. A seamless, intuitive onboarding experience is critical to getting prospective new users onboarded and growing the platform’s network effect. Powerful search and filtering capabilities allow buyers to quickly narrow down their search and find the exact NFTs they’re interested in, making transactions smoother and more efficient. Supporting multiple NFT types (music, art, etc.) diversifies the platform’s offerings and attracts a larger variety of users, further enhancing liquidity.

Mint Werx and Vivid Labs showcase just some of the entities at the forefront of sustainable blockchain technologies to provide innovative and scalable NFTs. Vivid Labs, in particular, have created an eco-friendly proof-of-stake platform that cuts down on environmental impact, costing, and resource allocation. Their partnership with the Natural Selection Tour to build an NFT platform offering unique utility, such as exclusive content and in-person events, demonstrates a commitment to innovation and community engagement. These initiatives demonstrate the critical role sustainability and user-centric design in the rapidly evolving world of NFTs will play.

Navigating the NFT Liquidity Squeeze: A Guide for Creators and Collectors

For NFT creators and collectors, the current liquidity squeeze means thinking critically about this new market and making smart, strategic decisions moving forward. Selecting the appropriate platform at the outset is critical to achieving the most possible liquidity with the lowest risk.

Here are some factors to consider when selecting an NFT platform:

  • User Base: Opt for platforms with a large and active community to increase the chances of finding buyers for your NFTs.
  • Fees: Look for platforms with reasonable transaction fees to minimize costs and maximize profitability.
  • Onboarding: Choose platforms with a simple and intuitive onboarding process to attract a wider audience.
  • Search Tools: Select platforms with robust search and filtering tools to help potential buyers find your NFTs easily.
  • NFT Types: Consider platforms that support a variety of NFT types to cater to a broader market.

Here are some steps to consider when selecting an NFT platform:

  1. Understand the Risks: Be aware of the potential risks in the NFT market, including liquidity concerns, ownership and hosting risks, fraud and manipulation risks, and volatility and pricing challenges.
  2. Diversify Your Portfolio: Spread your investments across various NFT projects, sectors, and platforms to minimize exposure to any one particular market or asset.
  3. Conduct Thorough Research: Research the NFT project, its team, and its potential for long-term growth before investing.
  4. Set Clear Investment Goals: Establish clear investment goals and risk tolerance to help guide your decision-making.
  5. Monitor Market Trends: Keep an eye on market trends and adjust your strategy accordingly.

We can’t overstate the importance of steering clear of one-size-fits-all approaches and finding strategies that meet unique needs like meeting regulatory compounding requirements. The NFT market is rapidly evolving, and being flexible will help you maneuver potential pitfalls while taking advantage of the unique opportunities NFTs present.