by Katherine Webb

NFTs In 2021

Over the last 12 months, Non-Fungible-Tokens (NFTs) have dominated media attention, even becoming the Collins dictionary 2021 word of the year.1 NFTs can be used to represent anything unique. They are recorded as blockchain based assets, which can be powered using smart contracts. NFTs contain identification codes and metadata which make them unique. These can represent an image, song, or even property ownership. Data provider NonFungible shows that in 2021, the total amount spent on NFT transactions increased by over 22,000%, the total number of NFT sales increased by over 1,400% and the number of unique wallets that bought or sold an NFT increased by over 2,000%.2

Number of unique wallet address which bought and sold NFTs during 2021:

Ethereum is the most popular smart contract platform, and has its own token standard ERC-721, which is used to create non-fungible tokens on the Ethereum network. As a result, there are a lot of NFT collections being launched on the Ethereum network, which currently has a maximum capacity of 30 transactions per second (TPS), predicted to increase to thousands of TPS with Ethereum 2.0.3 In order to obtain an NFT during a collection’s launch, miners on the network are required to validate the users’ transaction by minting the NFT onto the blockchain, assigning the users’ wallet address to become the new NFT owner. Gas fees associated with the blockchain network will vary depending on the demand for the network. During periods of high network demand, the gas price for a transaction will increase, whereas gas prices decrease during periods of lower demand. Fees for the Ethereum blockchain are given in the unit Wei, where 1 Ethereum is equivalent to 1×1018 Wei.

In 2017 anyone could have minted a CryptoPunk NFT for the price of the gas fees alone,4 in December 2021 a rare CryptoPunk #4156 was sold for 2,500 ETH, worth more than $12.2 million at that time.5 News headlines around the world combined with growing celebrity interest have brought an entirely new wave of investors interested in NFTs into the crypto space. The growing interest has led to popular NFT launches, these have caused congestion, bottlenecks and alarming gas fees on blockchain networks. A blockchain network has a set number of TPS, during a hyped NFT launch, users of the network can expect higher gas fees due to higher network demand as users mint the new NFT from the collection. A recent Chainalysis report shows that a 7,000 unit NFT collection called “The Sevens” which began minting on the September 7, 2021, at 7pm UTC resulted in over 26,000 failed transactions, costing over $4 million in fees during the first hour of the NFT mint.6

NFT Gas War

A gas war occurs when the demand to mint a new NFT collection is greater than the network can process. The winners claim their NFTs and the losers are left without their NFT, but still have to pay the gas fee for the failed transaction. Common reasons for an unsuccessful minting include insufficient gas being given for the transaction to be processed, or that all the NFTs in the collection have already been minted.

How To Increase Your Chances Of Success During A Competitive NFT Mint:

After you’ve carefully researched the NFT project and have decided that you want to purchase a new NFT during its launch, how do you increase your odds of winning the “war”? We will be using the Ethereum network for this example.

Preparing For The Launch:

  1. Note the official launch date and minting time of the project. This will allow you to time your transaction once the NFT collection is live, so you can be amongst first participants to mint an NFT from this collection.
  2. Decide how you’re going to purchase your NFT. On Ethereum, you will want to know the Ethereum smart contract address which the NFT will be minted from. Depending on the collection, the NFT can be minted directly from the project’s website. Users can also directly mint an NFT from the smart contract associated with the NFT collection.
  3. Ensure you have enough Ethereum in your wallet to cover the cost of the NFT and gas fees. Users can see the current Ethereum fees using https://etherscan.io/gastracker.

On The Launch:

  1. Be prepared to pay a higher transaction fee than the other participants. When sending a transaction on Ethereum there are 3 settings when deciding what gas fees to pay. Low where a transaction will be processed in less than 10 minutes, average, where a transaction is processed in 3 minutes and high where transactions are processed in less than 30 seconds. For this situation a user would want to choose the high gas fee option.
  2. Include a max priority fee. This is a tip that is paid to miners to incentivize them to include a transaction in the next block being mined.
  3. Increase your ‘Max fee’, this is the maximum gas you are willing to spend on the NFT.

Advanced (NOT for beginners)

  1. Manually increase the gas limit. Again, this information is intended for the level of understanding from an advanced users.

(Author’s Note: It is very important to note that just because you are paying high transaction fees, you are still not guaranteed to be successful in your transaction. If you are unsuccessful and have used the above methods, your gas fee will remain increased and you will have to pay for the failed transaction. Depending on the value of the NFT, this may only constitute a small percentage of the overall transaction cost.)

Reducing The Impact Of NFT Mints On Blockchain Networks

Methods to potentially reduce the impact of NFT collection launches on blockchain:

  • Mint NFTs on Layer 2 protocols such as Polygon, NFT marketplaces, or other dedicated services built on an underlying blockchain, such as Axie Infinity’s dedicated Ronin Side Chain.
  • Pre-allocate the NFT collection before the minting process.
  • Stealth drops: when a project sets a date for the project launch, but not a set time.
  • Minting passes: can be tokens bought before an NFT collection is launched and can be burnt in exchange for minting NFTs.

Sources

The opinions expressed in the CrossTower Classroom are those of the author(s) and not necessarily that of CrossTower. We appreciate diverse perspectives of our employees and we thank them for having a voice.

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CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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