Why NFT fees are so high and why Layer 2 might solve it

The NFT fees are too damn high

NFT fees are sky-high, and that’s a problem for the long-term growth of the industry. The fees come in many forms, but the most common complaints are about gas fees, the term for transaction fees on the Ethereum network. The high fees are in part a symptom of success: The more people who use the Ethereum network’s limited capacity, the more it costs to push a transaction through.

“The best analogy for it is: There’s a train, and a whole bunch of people want to get on it. There’s only so many seats, and there’s more people who want to get on it. So they pay more for that seat.” said Dorian Banks, CEO of Looking Glass Labs, an NFT design company.

Fees, fees everywhere. There are a variety of fees with NFTs; “gas fees” can mean different things.

• There are fees for getting ether in the first place, if you’re starting with different cryptocurrencies.
• There are often fees for buying or selling an NFT on a marketplace. OpenSea, the largest NFT marketplace, charges 2.5% per transaction. Others, like SuperRare, charge more. OpenSea also allows creators to charge up to 10% as a royalty fee. Meanwhile, a growing new marketplace, LooksRare, is charging 2% per transaction.
• And there are fees for minting, or creating, a new NFT, which can pose an obstacle for creators. OpenSea allowed people to mint an NFT for free, but the vast majority created that way ended up being fake, plagiarized or spam.
• OpenSea is the single largest generator of gas fees. When I spoke to Banks recently, gas fees were about $500 per transaction. He noted that $100 for a transaction is considered cheap now.

Layer 2 networks are an increasingly attractive alternative. These networks process transactions on top of Ethereum, bitcoin or other so-called Layer 1 chains and add them to the core blockchain later in the bundle.

• Polygon is the largest at the moment, with its sidechain on the Ethereum network, Banks said. GameStop and Gary Vaynerchuk are using Immutable X, a Layer 2 network designed for NFTs. These transactions happen for pennies instead of hundreds of dollars. GameStop is promising no fees for NFTs.
• A coming upgrade, Ethereum 2.0, is designed to reduce gas fees by moving to proof of stake instead of proof of work. That will make lower-cost NFTs more popular and greatly increase the quantity of NFTs, Banks said. Right now, cheaper NFTs don’t make sense if the gas fees are almost as high as or higher than the NFT price.
• Meanwhile, there are also a variety of other Layer 1 blockchains that are faster and offer cheaper fees, and therefore cheaper NFTs.
• But cheaper NFTs can also increase chances of fraud. Some sophisticated NFT buyers prefer Ethereum-based NFTs because there is less chance of fraud and “rug pulls” than on other Layer 1 networks, Banks said.

Some question whether the NFT market needs to pay for gas. A number of companies have tried to obscure gas fees, get rid of the need for a crypto wallet and otherwise make buying NFTs simpler.

• Dapper Labs’ NBA Top Shot allows users to pay with a credit card and not have to ever touch cryptocurrencies. It charges 5.26% of the purchase price plus a flat $0.30 for each purchase to cover credit-card fees and other costs. People can choose to pay with crypto, but they’ll have to cover the gas themselves.
• Separately, Dapper charges a 5% fee for sales on its secondary marketplace.
• Others, such as Nifty Gateway, have offered a credit card option for purchasing NFTs.
• Coinbase has a deal with Mastercard for its upcoming NFT marketplace which will let people buy NFTs with Mastercard debit or credit cards in fiat currency.

NFTs require a blockchain, but not cryptocurrency. They’re often confused, because NFTs emerged from the crypto world as a proof that blockchains could be used for more than just financial purposes. And because OpenSea has become so popular and it chose Ethereum, unpredictable and expensive gas fees have become part of the NFT experience for many. But these are all technical and operational choices. And the industry can make different ones. It may have to if it wants to break into the mainstream.

— Tomio Geron (email | twitter)

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