NFT is a unique, non-fungible digital asset supported by blockchain ledger technology. Non-homogeneous tokens, digital encrypted assets, are unique, scarce, and non-replicable. NFTs are generally known as a particular type of digital collectible, such as digital art, digital trading card, a short video, a picture. NFTs are unique items verified and secured by a blockchain, the same technology used for cryptocurrencies. An NFT provides authencity of origin, ownership, uniqueness, scarcity, and permanence for any particular item.
In recent years, the scope of NFT use cases has become wider and wider, including digital art, domain names, games, collectibles, and so on. NFT is created (ie minted) on the blockchain, such as Ethereum , which can be used to verify ownership of assets (where they come from, who is the owner, etc.). According to the joint report data of Nonfungible.com and L'Atelier BNP Paribas, in 2020, excluding wash trades and obsolete items, the total market value of the NFT market is approximately US$338,035,012, with an annual growth rate of 299%.
Some NFTs are very expensive, with prices in the millions of dollars. Many people may ask, how to evaluate the value of NFT relatively objectively? Before answering this question, let us briefly review the development history of NFT.
A brief history of NFT
The origin of NFT can be traced back to 2012-2013, when small denominations of colored bitcoins- "Colored Coins" appeared , representing different assets for different purposes, including collectibles, access tokens, etc. These colored coins are "unique and identifiable from regular bitcoin transactions", embedded bitcoin scripting language, and assigned specific attribute codes to the metadata. In this way, even a satoshi (0.00000001BTC) can represent any asset, whether it is dollars, stocks, houses, or digital collectibles.
In 2014, based on colored coins, the peer-to-peer financial platform Counterparty was established to issue non-homogeneous and semi-non-homogeneous tokens. The founder of Counterparty understands that Bitcoin does not support the creation of powerful asset creation and trading functions.
In 2015 and beyond, transaction cards and meme became popular. Various electronic games have made digital assets stored on blockchain technology popular, including swords, shields, and even digital real estate plots.
In 2017, CryptoKitties entered people's field of vision. This is a game centered on breedable, collectible and crypto cats. Each crypto kit is unique, 100% owned by the owner, and cannot be copied, taken or destroyed.
In 2021, NFT gained greater momentum and began to penetrate the mainstream economy in some unexpected ways. With the continuous improvement of the foundation and underlying buildings in this field, NFT is about to create a new face of the digital economy.
Collectibles consensus
The interesting and challenge of investing in collectibles is that they have no objective intrinsic value. When investing in stocks, you are buying a share of the company's future cash flow. You can estimate the future cash flow and discount the cash flow to the actual amount to determine the intrinsic value. Not all investors do this, but despite this, the intrinsic value of stocks can be estimated.
But this kind of future cash flow does not exist in the field of collectibles, and it relies purely on consensus to build value. It is the public's collective demand for the collection that has shaped its value and marketability. Anyone can have a special preference for a certain artist's work, but the collective acceptance and consensus of the artist's talent by the public has created a demand for his work, and its price has been soaring.
From a financial point of view, collectibles have no intrinsic value, but for those who like it, it will at least have some value. This is why the first rule for a collector to buy assets is to buy things you really like. In this way, even in the worst case, the asset is worthless, and the holder can get a certain amount of enjoyment value from it.
The public's consensus on collectibles is exactly why NFT assets can be recognized in the virtual world and attract more and more attention.
In normal circumstances, besides enjoyment value, what value does NFT have? How can I use NFT to get the most material benefits? How can I get the most spiritual enjoyment with NFT?
The value concept of NFT
In economic literature, goods often have two value camps: functional value and enjoyment value , that is, "what can I use this thing for?" and "how much do I like this thing."
Functional value
For functional value, this is where most of the discussions around NFTs are: you can show off your NFTs, show people your cryptocurrency wallets, and show NFT art or music taste. In addition, the functional value also includes how much money speculative holders can make using NFT in the resale market. The practice of placing real-world assets on the blockchain is also maximizing the functional value of NFT.
Functional Value Analysis Framework
The value of NFT = practicality + ownership history + digital scarcity + supply and demand relationship + future value + liquidity premium
According to the assets represented by the NFT, the value weights of these six components are different. Investors can use this framework to evaluate whether NFTs are worth investing in, and developers can also consider how to increase the value of NFTs to attract users and investors based on this value framework. It is worth noting that NFT has created many new value creation methods for developers and asset owners.
Practicality
The practical value of NFT depends on how to use NFT. Game assets and tickets are representative of two major categories of high practical value. For example, the LAND plot in the virtual world of The Sandbox , etc. The value of NFT tickets refers to the price of event tickets. For example, users need to buy tickets to participate in art exhibitions in Decentraland .
Another dimension of practicality is the ability to use NFTs in different applications. Imagine that if the same asset can be used in different games to achieve cross-chain and cross-platform use, then the practical value of NFT assets will naturally be higher.
However, the realization of interoperability still faces numerous difficulties. Currently, 90% of NFT gamers focus on only one game. This requires developers to build a huge game ecosystem, provide interesting use cases, and attract more users. Dapper Labs and Enjin are now working in this direction. Although uncertainty still exists and a lot of time and energy are needed, for the entire industry, the opportunities contained therein are exciting.
Another way to increase the practical value of NFTs is to establish partnerships with other companies to provide benefits to NFT holders. For example, Dapper Labs can work with NFT event organizers to negotiate discounted prices for CryptoKitties owners. The AlphaWallet of tokenScript NFT technology can effectively verify publisher and owner, so after the establishment of cooperative relations, event organizers can more easily attract more participants. It is a win-win situation for both parties involved.
Ownership history
The value of ownership history depends on the identity of the NFT issuer and previous owners. NFTs with high historical value are often created or issued by well-known artists or companies with strong brands.
Take Meebits , which was just released not long ago, as an example. The creative team of Meebits is the famous Larva Labs, known for launching one of the most popular NFT projects on the Internet, the pixel portrait game CryptoPunks.
Meebit has a total circulation of 20,000, and each Meebit has its own style, characteristics and characteristics. Many Meebit distributions are to reward early Larva Labs supporters and the blockchain community. Of the 20,000 Meebits, 10,512 will be reserved for the previous Larva Labs asset holders, and the remaining 9,488 Meebits will be used for placement to other users, which will be quickly sold out through the Dutch auction mechanism. Meebit casting is completely random, no one knows exactly which one will be received, but many people still spend 2.5 ETH, or nearly $8,500, to have a chance to generate rare characters.
The public's enthusiasm for Meebits is not difficult to reflect people's recognition of CryptoPunks and their expectations for Larva Labs. At this time, compared to many obscure NFT projects that are struggling to gain attention, the new Meebits has already seized the first mover advantage by virtue of its "background" bonus. In addition to the primary market, the price of Meebit in the secondary market will continue to rise, and its historical ownership value is naturally very impressive.
There are two ways to increase the historical value of ownership. First, cooperate with companies or individuals with strong brands to issue NFT tokens, which will naturally bring considerable traffic and users to the ecosystem.
The second method is to resell NFTs held by previously influential people. At present, it is difficult to find out who the previous owners are, and this extremely valuable historical data remains to be discovered. Markets and sellers can provide easy-to-use tracking interfaces to increase the value of NFTs. Taking OpenSea as an example, the platform can mark the addresses of those investors who profit the most from NFT transactions and list other NFTs they own.
Digital scarcity
Scarcity is a multiplier of the value created by collectible brands. Scarcity, like a brand, has three sub-criteria: absolute scarcity, relative scarcity and availability. Next, we will take Cryptopunks as an example. Cryptopunks is the first batch of "non-homogeneous tokens" based on Ethereum, and it is also the source of inspiration for the ERC-721 protocol. It is the ERC-721 protocol that promotes the vigorous development of most digital art and collectibles industries.
Absolute scarcity refers to how many products are available for a given brand. There will always be only 10,000 cryptopunks. There will be millions of hot moments in the market, but only the number of releases is the absolute quantity of supply and can reflect absolute scarcity.
Relative scarcity refers to the scarcity of a given item in an absolute collection. For example, among 10,000 cryptopunks, there are 6,039 male NFTs and 3840 female NFTs. However, among the scarce punks, there are only 88 zombies, 24 apes, and 9 aliens. This makes these scarce punks even more so. Valuable because they are fewer in number.
It is known that scarcity is the main feature of NFT. The buyer knows exactly the quantity of the selected item on the basis of absolute scarcity and relative scarcity. But collectors of physical items such as sports cards, cars, or shoes will never know exactly how many of a given item is.
Absolute scarcity and relative scarcity are both determined by the developer and may have an impact on the brand. If scarcity is desirable, then greater scarcity will always add value to the brand. But no brand is welcomed purely because of scarcity. Brands need to go through marketing to create initial value.
Absolute and relative scarcity ultimately affects usability, that is, how many products related to a given brand are available for sale at a given time. Absolutely stronger scarcity means that buyers will have fewer opportunities to collect items from the brand, while relatively scarce items mean that buyers will have fewer chances to collect that particular collection. Greater scarcity means limited supply, and as demand grows strongly, the price of supply assets may rise dynamically.
Supply and demand
When thinking of supply and demand, many people will inevitably think of the scarcity of numbers mentioned in the previous section. However, the relationship between supply and demand should be considered from two perspectives. Platforms that use NFT technology will bring supply, and the less the supply, the more likely it is to bring digital scarcity. But it should be noted that these platforms will not directly bring demand. Making full use of digital scarcity is indeed worthy of reference, but at the same time, even if the supply is very scarce, there must be corresponding demand.
The popularity of Beeple caused a sensation inside and outside the NFT field. A while ago, Beeple completed the online auction of the first digital collectible Everydays: The First 5000 Days at Christie’s. The highest transaction price of the online auction was completed, and the final transaction price was approximately US$69.3 million, setting a world record for digital art auctions and also reaching the third highest auction price of living artists. This successful auction was regarded as "a watershed moment in the development of digital art."
But most stories tend to be the opposite. Some artists meticulously cast NFT artwork, spent 10 US dollars in GAS fees, uploaded the work, and posted a tweet, thinking that it would be sold for 1,000 US dollars, but no one cares about it forever. To some extent, they lost $10 and wasted time and energy. Therefore, while paying attention to supply, it is necessary to establish the concept of demand to play the role of digital scarcity.
At the same time, this is also related to the emergence of the super fan economy in the NFT field. The emergence of the Internet makes the marginal cost of copying files basically zero. In economics, it is traditionally believed that the fan economy is created by these low marginal cost technologies, such as radio or television, and most importantly, the Internet.
There is no doubt that before NFT enters the mainstream market, the fan economy is important to pay attention to, and to a large extent it will continue to expand based on the attention.
Those who have a large number of followers on Twitter, Instagram or YouTube, as well as those who are more active in the community, are likely to have the opportunity to reach more potential customers and have more first-mover advantages. The relationship between supply and demand is a two-way process, not a problem that can be solved by digital scarcity alone. Creating demand is the way to truly realize the value of NFT assets.
And for the NFT industry as a whole, the emergence of the fan economy may also make more people pay attention to the underlying technology and practical utility of NFT, not just the price gimmick.
Future value
The future value of NFT comes from both valuation changes and future cash flow conditions. Valuation is driven by speculative activity and sometimes may be the main driver of price appreciation.
For example, in December 2017, the price of CryptoKitty #18 soared from 9 ETH to 253 ETH in just three days, which was equivalent to US$110,707 at that time. The recent price spikes of Meetbit are also numerous. Some people may think that price fluctuations caused by valuation may have a negative impact on NFT, but speculative (capital) behavior is always a nature of most humans and an indispensable part of the current financial system. If the right balance is reached, developers can increase the value of the NFT while attracting more new users.
CryptoKitty #18
Driven by the supply of non-homogeneous tokens and speculative behavior, the price trend of NFT has gradually become oriented towards financial investment expectations.
For example, the famous sports shoe market, StockX, had a valuation of 1 billion US dollars, partly because the platform encouraged people to guess the price of sports shoes and successfully created some scarcity in the sports shoe market.
Future cash flow is the interest or royalties earned by the original owner of the NFT. For example, SuperRare allows creators of NFT artwork to receive 3% royalties each time their artwork is subsequently sold on the secondary market. Similarly, in the NFT artwork creation platform Rarible, whenever an author creates an NFT collection, a certain percentage can be set as the royalty for the second sale. for example. An artist created a digital work and sold it for 0.2 ETH with a royalties of 10%. After that, the buyer of the work resold the painting at a higher price of 0.5 ETH, and the royalty system began to work. As an original content creator, the original artist will receive 10% of the sales, which is 0.05 ETH.
In the future, developers can borrow concepts from DeFi innovations and give NFT the real-world asset functions. NFT is an asset that can be leased and mortgaged, and can be speculatively resold to create additional cash flow and increase income for the holder.
Liquidity premium
Liquidity premium refers to the time and cost required to convert an investment asset into cash. Converting an asset into cash at a price close to the market price in a relatively short period of time means that the asset has higher liquidity. In the field of NFT, liquidity premium refers to the use of high liquidity to convert into higher NFT value.
To put it simply, on the one hand, market participants are generally optimistic about the trading prospects of a target NFT, and holders are more willing to hold it for a long time; on the other hand, market participants believe that the future prospects of other targets are not as inconvenient as the target NFT. The continuous interweaving and strengthening of these two expectations psychology will give rise to the high liquidity of the underlying NFT and generate a liquidity premium.
The liquidity premium is the main reason why the tokens created on the chain should have higher value than the off-chain assets. ERC standard NFTs can easily increase exposure to ETH holders in the secondary market and increase the number of potential buyers. Generally speaking, investors prefer to invest in NFT categories with higher trading volume, because high liquidity reduces the risk of holding NFTs.
Moreover, even in extreme cases where NFTs lose their utility value after the relevant platforms are closed, as long as someone is willing to buy and sell NFTs, highly liquid NFT assets will still have value. On the other hand, those NFT standards that are not based on Ethereum generally lack liquidity, and the value of NFTs created on these platforms is often greatly reduced.
Developers can make full use of the characteristics of its token economics to encourage users to increase the frequency of transactions, increase the participation of asset holders, and improve the liquidity of NFTs. For example, the game can design a mechanism to encourage players to exchange assets to maintain their competitiveness in the game. If the assets are idle for too long, the NFT assets will depreciate accordingly.
Enjoyment value
In addition, NFT also has enjoyment value. Although the enjoyment value is not as much as the material benefit of the functional value on the surface, it can more clearly outline the enjoyment elements brought by digital scarcity, which can reflect that NFT is a technological product with warmth.
An ordinary crypto cat may not sell too high in market transactions, but it may come from a gift from a friend, or a chance coincidence. At this time, the unique characteristics of NFT make the assets in hand even more precious. For most digital assets, this intrinsic hedonic value is meaningless. But for NFTs, this can be an added value to attract buyers or owners.
The enjoyment aspect of value is very abstract, and there is a term called " biographical indexicality. " In collectibles theory, people like collectibles because they have a certain biographical element that can index certain important events in the past or someone’s historical life. And this concept is spreading to the digital space through the form of NFT. NFT is no longer an algorithm or calculation, but an organic part of life.
Valuation challenge
Although the formula for NFT valuation is mentioned above, the value of NFT is far from being able to generalize with these indicators, nor can it be said that this time formula can clearly measure the accurate value of NFT in the market.
Even in the relatively simple process of estimating the market value of homogenized tokens, it faces various doubts, such as the supply of tokens and possible wash transactions.
The valuation of non-homogeneous tokens is naturally more difficult, and the challenges faced include factors such as highly speculative markets, lack of liquidity, NFT diversity, whales and market makers, and market size.
Highly speculative market
Many people will have this question: When conducting NFT valuation, whether the price of a comparable NFT asset for sale can be used to define the value of the NFT.
The answer is no. The current price list of NFTs with a certain degree of comparability is not very informative. Although the NFT ecosystem has matured, it is still highly speculative. Therefore, many buyers (more or less aware of the real market trend) purchase assets in an attempt to resell, and the resale price even reaches 10 times its value. It is for this reason that in the Decentraland market, even the less than ideal $LAND list price can be as high as 10 million MANA.
Lack of liquidity
Market liquidity is another difficult factor in asset valuation. If no comparable asset is being sold, or the last sale was more than 6 months ago, then the current market valuation of the asset may not be so accurate.
It should be noted that the higher the digital scarcity of assets (such as Gods Unchained cards) and unique assets (artwork released in 1 copy, not belonging to a certain art series), the harder it is to find a market value assessment Relative points of comparison.
NFT diversity
As we all know, NFT is unique in nature, but NFT is far more than one type, but there are hundreds of types. NFTs can be divided into several categories based on their basic digital assets. For example, the Pokemon card NFT sold by Youtuber Logan Paul can be classified into the digital trading card category; DJ 3LAU's limited-edition album NFT, which has set a new high in sales, can be classified into the digital artwork category.
Each project will publish its own NFT, and each NFT is composed of its own metadata, reflecting different characteristics in their respective projects. Therefore, the valuation of NFT can sometimes be based on objective standards, and sometimes it is based on its value in the community.
Therefore, to correctly evaluate the value of each type of NFT, you need to consider the metadata that defines its value.
Some examples of standards that define asset value:
Decentraland – $LAND
The Sandbox– $LAND
Close to the center, roadside, close to the bustling area, close to the developed or popular real estate area...
- Gods Unchained – $CARD
Card name, scarcity, characteristics...
- CryptoVoxels – $CVPA
Land location, land size...
Of course, with the rapid development of NFT projects and the market, these standards need to be continuously adjusted and taken into consideration. According to the CCA valuation method, NFT verifiers can carefully select peer-to-peer comparables in the same category (excluding the excessively speculative sales mentioned above) to generate a large value range, not limited to a few scattered indicators, Provide a relatively reasonable pricing range for novice buyers. As the number of NFT sales increases, more reliable valuations can be achieved on a larger sample basis.
Whales and market makers
Different types of participants in the NFT market participate in NFT projects in different ways. The market maker can list the current purchase price of the asset, even if the asset may be higher than the market price of the previous sale.
These sales create precedents/exceptions and cannot be ignored in asset valuation, but they should not be regarded as the norm for NFT valuation.
If Musk decides to buy a piece of land on The Sandbox for $500,000 tomorrow, does this mean that all the land on The Sandbox is worth this price? Or is it only Musk's land worth the price? Did he overpay, or did he define new connotations and new trends for the value of the item?
If the global market follows suit, he defines a new trend. In the future, such scenarios will frequently appear in the NFT ecosystem.
Market size
Finally, another reason for the complexity of evaluating NFTs is that the NFT ecosystem and related markets are still small.
In market segments, such as art, trading card games, wearable devices, etc., this is more prominent and can better reflect the problem.
Therefore, non-standard sales that are more extreme and speculative tend to conceal the larger number of "classic" sales, causing market consistency to be undermined.
General market trends
NFT market trends
Possibly, the magnitude of the difficulties faced by the NFT ecosystem valuation may only be solved by machine learning. It is necessary to evaluate various methods, conduct a large number of tests, and finally select which methods can produce the best results.
In addition, another challenge facing NFT valuation is related to the price of encrypted assets. The price of encrypted assets will fluctuate sharply over time, which also complicates the modeling of NFT valuation.
NFT assets vs real world assets
As more and more companies and brands begin to come into contact with the NFT field, and NFT is now a relatively young and abstract field, many people are beginning to wonder whether there may be a way to bind NFT with the real world. Frenzy.
Many people have this idea when they talk about NFT. It is undeniable that there have been many such experiments and they have been successful. Such as the emergence of the real world asset NFT (RWANFT) launched by MATTEREUM. rwaNFT is a pronoun that describes the virtual ownership of physical commodities. It is committed to bringing trillions of dollars of investment-grade assets such as gold, real estate and art into the virtual economy, and conducting global effective transactions in the form of NFT. rwaNFT is a universal file format that can upload physical goods to the Internet for security, governance, trading and use on a global scale. Therefore, using NFT as a symbolic real-world asset is indeed particularly valuable.
In addition, taking inspiration from CryptoKitties, Nike is applying for design patents based on algorithm tokens and launching tokenized sports shoes. The patent can attach secure encrypted digital assets to physical products through blockchain technology, generate unique IDs based on shoes, and create tokens (ERC 721 or ERC1155 standards). The Nike platform will also use blockchain technology to track the ownership of sports shoes and verify their authenticity.
In this platform, buyers can safely trade and sell physical sneakers as well as virtual sneakers, and store them in a cryptocurrency wallet or other digital blockchain lockers. Among them, virtual sneakers can also be mixed and "bred" to create "shoe offspring". According to acceptable footwear manufacturability rules, the offspring of newly cultivated sneakers can also be customized into practical sneakers.
NFT assets are not exactly equivalent to real-world assets
However, NFT does not fully represent the real world and cannot achieve complete reciprocity. For a simple example, the tokens you hold represent a pair of sneakers worth one hundred thousand dollars. What should you do if someone steals the physical sneakers you hold? You still cannot use virtual tokens to guarantee your ownership of real-world assets.
If we return to the two value divisions of functional value and enjoyment value mentioned above, in this example, owning real-world assets is more like using its functional value, while NFT assets provide more enjoyment value . Most of the reasons why people are attracted by Nike patents are because the new NFTs that are cultivated really make it possible for them to have cool new sneakers in real life.
NFT assets have a lower valuation than their real-world counterparts
The two pictures above are the physical art works of the 300-year-old Jain gods in the ancient temple and the digital art works of NFT King Kong on the blockchain.
Even in a small community, during the opening of the new temple, the price of the “right to touch” the physical artwork can reach US$2,000-5,000. This is just an example to emphasize the limitations of physical art).
In contrast, a media distribution company with 88 years of history and a large global audience has launched permanent trading ownership of King Kong's digital artwork, but the price is only about $1,000.
Therefore, we can see that nowadays, the prices of physical works and virtual NFT works of art are far different. The valuation of the latter is much lower than that of the former. So, is the NFT digital asset greatly undervalued, or is it its own positioning? , It’s too early to make a conclusion.
Physical artwork vs digital artwork
Digital assets face problems
How to improve the valuation of NFT?
Develop digital infrastructure and increase the utility of NFT (using NFT as collateral, using it in VR, etc.). Increase utility, increase value.
Establish partnerships with various companies, such as Harry Potter, Star Wars, Disney, etc., and incorporate them into the NFT field to develop their value.
Let NFT become an important revenue stream for the entertainment industry and a monetized community channel. (Mark Cuban has similar expectations for the NBA).
Brand marketing has become the "next beeple", allowing the value of artworks to increase over time.
Bitcoin, Ethereum and cryptocurrencies have grown against the U.S. dollar.
Subvert the Internet
We have to admit that now for many people who post their work on the Internet, anyone who has access to a computer or mobile phone can access their work for free. But the arrival of NFT may change our concept and understanding of the open Internet.
The idea of opening the Internet has a profound impact on us. In a sense, NFT will indeed bring scarcity to things that are not scarce.
Someone might immediately retort, why do people want to make something more scarce if they want it? Elinor Ostrom, who won the Nobel Prize in Economics, once conducted an interesting experiment, studying the way people manage their assets with or without government intervention, and came to the conclusion of the tragedy of the commons -excessive Consumption will bring harm to everyone in the society.
The freedom brought by the Internet and social media may deplete the inventory and value of content. Any work-which consumes a lot of time and energy-once put on the Internet, the marginal cost of copying it is zero, and the price of the work is basically zero. This means that no matter how much experience you give, no one will pay for the work. Considering this situation, more scarcity does bring benefits.
The duality of NFT provides a solution to this problem. Someone is willing to pay large sums of money and want to establish a connection with a certain piece of art or music, but the work can still be viewed openly for free. This duality can not only preserve the openness of the Internet, but also bring material rewards to the original author. In the future, this may subvert people's perception of the openness of the traditional Internet and build more people's demand for digital scarcity.
Reviewed by Nischal Lal Shrestha
on
November 26, 2021
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