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In 2021, Non Fungible Tokens exploded in popularity with trading volumes close to $17 billion. However, in the past year, NFT profits have fallen sharply. By some estimates, trading volumes are now down more than 90 percent from their peak in January 2022.
A number of indicators suggest that the industry is currently considered a low confidence environment. OpenSea, the largest NFT marketplace, reported that more than 80% of tokens minted for free on its platform were fake, plagiarized or spam. A survey by GetWizer found that only 28% of respondents considered NFTs a good investment, while 44% considered them a bad investment. This figure has been on the rise in recent years as awareness of NFTs has grown. Worryingly, this suggests that as more people get involved, trust declines. If adoption is to pick up, user trust concerns must be addressed.
Some of the lack of trust and transparency can be traced to the fact that this is still a nascent technology with limited data and no established norms. Most teams do not have established practices for keeping current owners and prospective members informed of the progress they have made. NFT marketplaces like OpenSea display very limited information about the NFT projects making it difficult for potential buyers to thoroughly research a project. Different players ranging from projects and marketplaces can play a constructive role in increasing trust and transparency in the market to further promote growth.
Incentive based on performance
Currently, there are few costs or consequences for forming NFT teams that do not deliver on their initial game plans. Roadmaps are a project’s aspirations, usually broken down into milestones and they greatly influence whether they are trusted or not. They exist for accountability and to manage expectations, but these “milestones” are not always met, with minimal impact on the team. This inadvertently sends a signal to members that it is okay to keep expectations and promises, while also sending a message to members. investors that roadmaps are not a valuable way to evaluate a project.
Founding team members should adopt incentives that match the team’s success instead of front-loading it. This shows that the founding team members are committed to the project’s success and building trust among NFT investors.
Several projects have already experimented with new incentive mechanisms. For example Nouns, an on-chain avatar project compensates the members with the proceeds of every 10th Noun’s auction. Curious Addys’ Trading Club, an educational NFT project, has implemented a return policy that allows miners to get a refund within the first 100 days.
Related: 3 Smart Ways to Use NFTs to Grow Your Business
Consolidate important updates
There is no need for teams to stick to just one platform. They should make important announcements and updates on an RSS feed to ensure timely distribution of important information. An RSS feed is a web feed that allows access to automatic website and content updates. This is accomplished by extracting data from XML files and feeding condensed content into an RSS reader, which turns text files into digital updates.
With an RSS feed, users registered with the feed can receive updates accurately as the information of teams is automatically compiled from the many sources and provided directly to users.
In keeping with web3’s goals of decentralization and user choice, users also have the freedom and flexibility to choose their own RSS feed client. Teams should include this RSS feed link in the metadata of the NFT project when it is created to ensure better discovery.
Related: Is It Time To Abandon Crypto?
NFTs are not currently regulated as securities and are not subject to insider trading rules by the Securities Exchange Commission (SEC).
Legality aside, when team members trade material information before an announcement, it violates the fundamental value of fair play and undermines trust. Without a defined policy to prevent this, allegations of price manipulation can tarnish the reputation of projects and by implication the entire sector. For example, in response to the indictment of one of their former employees, OpenSea instituted an insider trading policy.
To increase the confidence of potential investors, teams should have an anti-insider trading policy. This policy should also be made available to the public to ensure accountability. The policy open sourced by Tim Ferriss, a popular industry podcaster, can serve as a good starting point.
Provide better data to evaluate projects
Currently, NFT marketplaces provide limited data about their projects. Data presented now usually includes floor price, sales volume and transaction volume. This is insufficient for vet projects. Marketplaces should go a step further to flag projects with suspected wax trading. They should highlight any identified team members and reviews about the project from verified owners. These additional data points will enable potential investors to make more informed decisions.
Multiple players must make concerted efforts
While the current space is dominated by millennials, (a new survey of 2,000 25- to 34-year-olds, conducted by StarkNet, found that 42% of respondents claimed they would invest in NFTs if they knew more about them) sustained growth occurs only if the market can move beyond the niche groups that currently dominate the space. Without additional confidence, it is unlikely that there will be further growth in the space.
Related: Is the NFT Marketplace a boom or bust?