NFTs have skyrocketed from a comparatively obscure technology used by a few crypto fans to a concept that most of us will have heard about at the water cooler in the office.
The technology and society surrounding NFTs are also constantly changing, resulting in new problems that have never been faced before.
The new NFT delivery model has many issues, including the cost that is required for running NFTs.
To mint and upload and NFT requires computational power, electricity, time and labor to upload it onto the blockchain, which is basically a digital ledger. This is known as the gas cost or congestion cost.
Other issues with manufacturing NFTs include front-running, and false scarcity, which comes as a result of the exponential growth in popularity of NFTs and Ethereum in general.
These three factors significantly slow down the acceptance and progress of NFTs, and are considered by experts to be the main roadblocks in many NFT initiatives.
If you are an Ethereum trader who deals in NFTs then you might already be aware that gas costs are continuing to climb, with purchases now costing over 100 times as much as they did only a few years earlier.
The main reason for this increase in congestion is due to a rise in the number of users attempting to access a network with insufficient bandwidth.
The one solution to this problem is POW NFTs, which stands for Proof Of Work Non-Fungible Tokens. This mining process takes place off the blockchain, with a user only having to submit their POW to the blockchain once the mining process has been successful.
But how does a user go about mining an NFT? How time-consuming is this process and how much money can you stand to make at the end of it? What obstacles block the creation of NFTs and is it worth your while to commit a substantial portion of your day to them?
Well, we’ve got some answers to those questions and a few more, with our comprehensive how-to guide for creating POW NFTs that you can mine for a profit. We’ll also discuss the issue of gas fees and artificial scarcity and how they affect the NFT currency market.
What Is Front Running?
Front-running bots have taken over the Ethereum network. These sneaky little creatures track your transactions as they are uploaded to the blockchain, and if they spot a potentially lucrative trade, they outbid you and beat you, cheating you out of the money you were looking to make.
A front-runner will be able to check up on your bid before it is approved and purchase the token before you.
These bots are always faster and more adaptable than you, so making a purchase can seem almost impossible at times.
The bot's owner knows they'll be able to sell the token quickly and recoup their investment. A lot of Ethereum traders employ this tactic, as you can have many front-runners operating on multiple transactions, potentially leading to large pools of revenue.
It is necessary to implement a scheme that prohibits front-runners from interfering with consumer transactions. This scheme will make sure that the front-running droids cannot steal your transaction from right under your nose.
What Is Artificial Scarcity?
Many NFTs have a very strict limit on the number of tokens that can be generated. It is important that a cap is placed on these NFTs, simply because that if there was an infinite supply of them then the quantity would not be very scarce and they would be worthless.
This operates on the same principle as money. When a government prints more money this leads to hyperinflation, where the value of each monetary token plummets.
So, if you have a limitless number of NFTs available in an infinite quantity, then it will be pointless to manufacture them because their value will never increase.
The main concern is decentralization, which is at the heart of blockchain. This is an open economy that augments the blockchain, with a certain number of verified users allowed to alter the transactions based on proof of work credentials.
The central contradiction is that imposing an arbitrary cap on NFT availability goes against crypto's principles. However, it is critical to devise a mechanism that keeps NFTs scarce while encouraging market forces to reach a natural balance.
POW NFTs - A Problem Solved?
But how do you solve the issue of artificial scarcity and these front-running bots? With the implementation of a Proof-of-Work mining method, then you can go some way to resolving these problems.
Mining will not take place on the blockchain, with miners only needing to apply their evidence as a transaction if they are approved.
The POW NFT is a pioneering project that uses this system. Tokens can only be created via the mining process, although this is becoming extremely complicated.
Minting prices are increasing as each successive generation demands more NFTs, and if you combine this capping system with that, then you can be sure that an organic balance will be reached when it comes to scarcity.
When you include the gas prices and proof of work labor involved, then this establishes the new basic price of NFTs.
However, it is very hard to get your hands on one of these POW NFTs, although they are not designed to disadvantage people who have tokens, whales (that is, people who own large amounts of Bitcoin), or people who have established mining rigs that will be able to harvest vast amounts of Bitcoin.
Token holders, rather than the contract creators, will be the recipients of any token fees. The logic behind this is that because the token holders determine the market value of each token, then they should be the ones that profit from its sale.
This is very different from the usual approach where the user creating the contract gets the sum of the profits.
But what is a POW NFT token? Well, when you mine a token, you get a hash, which is a random string of numbers that determine certain factors of the depiction of an Atom, including the color pallet and where each electron is placed.
Some of these elements are determined by the existing laws of the market, so you will find that some elements of coding in your hash are very similar and will crop up frequently.
How Do You Mine A POW NFT?
If you are going to mine a POW NFT, then you can see that there’s an algorithm that runs over and over again with a different set of data to get a certain hash result.
Your hash has to be below a target number. If it is not, then the mining software changes a slight element of the data and starts again.
When you are running your mining software, it will be looking for 3 different sets of data: the hash of the previous token, the address of the miner and a nonce.
A nonce is a random number that can only be generated once for the purposes of a one-off transaction. This cannot be duplicated and requires precise time synchronization between users and organizations.
With every successful NFT mining operation, the success rate of the next mining operation decreases. However, because your mining is occurring off the grid, then you’ll avoid any astronomically high gas fees that can occur when you are mining Bitcoin in the usual fashion.
The transaction will only be submitted to the grid once you have found a successful hash, you won’t be paying any fees up until that point.
Also, it is highly unlikely that anyone will find a similar hash as you, so you won’t have to worry about it being invalidated. It will also split user activity, preventing multiple buyers from multiplying the gas prices.
This method can avoid the effects of a front-running bot for two reasons. Firstly, it contains the address of the miner, so the bot will not be able to get in front of the transaction.
Secondly, the nonce will only be valid for one single transaction. This means that if a bot tries to replicate it for the next transaction, then the client will no longer recognize it and will not approve the transaction.
Owing to the fact that a token must be mined on the hash of the token that came beforehand, then it makes it even more impervious to front-running bots.
It creates an impenetrable token chain that is eventually submitted as a whole to the transaction, limiting the gas fees that usually come with multiple token transactions.
However, it is not as lucrative as it might first seem. With the general demand for tokens and NFTs growing exponentially, then it will become a lot harder to mine tokens and their hashes.
This way the market tells you when the cost and labor of mining for more tokens outweighs the profitability of bidding higher on the price of existing tokens.
Does POW Mining Work?
POW mining solves a lot of the issues that come with NFTs, including front-running bots and artificial scarcity. Decentralization should be applied to all crypto problems in order for it to maintain its ethos of non-third-party involvement.
There are many other solutions that could be employed to reduce the issues facing artifical NFT scarcity, all of which mimic the method of POW NFT mining in some way or other.
One method that has been proposed is having a period of cooldown after the mining of one token. By having the mining difficulty raised to maximum level after minting, then you can expect the difficulty level to decrease slowly as the general scarcity levels drop in the marketplace.
This would result in the tokens being distributed on a more even keel and not result in any sharp decrease in scarcity on the market.
Removal Of Difficulty/price Coupling
As the number of tokens increases, then the minting cost and difficulty of minting your NFTs naturally increases.
However, there are many people who have suggested that implementing a model that gives you some wriggle room when it comes to the difficulty of the minting process regarding a higher cost.
Multiple Token Chains
Some users have proposed having an NFT smart contract that could employ multiple difficulty targets that could be set to manage the mining of various tokens at different rates.
Each mining process would monitor the levels of the other mining processes and adjust themselves according to the fluctuations.
Adjusting Difficulty Levels At intervals
Normal Bitcoin mining adjusts its difficulty levels depending on how quickly the Bitcoin blocks are being mined. Some have proposed that will could also be applied to NFT mining, with exemptions made for the amount of time required to authorize the transaction on the blockchain.
Making Difficulty Scarce
If you make NFTs minable, then the fcat is that it will become more popular rather than less, resulting in NFTs becoming devalued.
However, if you can create a barrier to mining NFTs so that only the most aggressive will be admitted, then you can be sure that tokens will have value beyond being pumped by those with vast stores of Bitcoin.
However, the key principle must remain that NFT mining must still be very accessible and decentralized. This way you can ensure that everyone stands to still make a profit if they randomly decide to mine NFTs.
Otherwise, the process of POW NFT mining only becomes the pursuit of a tech-savvy and wealthy cabal of Bitcoin miners that are able to skim profits off the top of any token or token chain that they happen to want to mine.
We hope that our in-depth guide to POW NFTs and NFT mining will help you to negotiate this tricky world and give you a head start on gaining profits in the future.