NFT is a unique, non-fungible digital asset powered by blockchain ledger technology. Non-homogeneous tokens, a digital encrypted asset, are unique, scarce and non-replicable.
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Some NFTs are very expensive, costing 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 of NFT.
Under normal circumstances, besides enjoyment value, what value does NFT have? How can NFT be used to obtain the greatest material benefits? How can NFT be used to get the most spiritual enjoyment?
The value concept of NFT
In the economic literature, there are often two camps of value for goods: functional value and hedonic value, that is, "what can I do with this thing?" and "how much I like this thing."
functional value
For functional value, that's where most of the discussion around NFTs happens: you can show off your NFT holdings, show people a cryptocurrency wallet, show NFT art or musical taste. Beyond that, functional value also includes how much money speculative holders can make with NFTs in the resale market. The practice of marking real-world assets on the blockchain is also maximizing the functional value of NFT.
Analytical Framework for Functional Value
Analytical Framework for Functional Value
The practical value of NFT depends on how NFT is used. Game assets and tickets are representative of two categories of high utility value. For example, the LAND plot in The Sandbox virtual world, 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.
Practicality
The practical value of NFT depends on how NFT is used. Game assets and tickets are representative of two categories of high utility value. For example, the LAND plot in The Sandbox virtual world, 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 utility is the ability to use NFTs in different applications. Imagine 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.
There are a total of 20,000 Meebits in circulation, and each Meebit has its own style, features and characteristics. Many Meebit distributions were made to reward early Larva Labs supporters as well as the blockchain community. Among the 20,000 Meebits, 10,512 will be reserved for the previous Larva Labs asset holders, and the remaining 9,488 Meebits will be distributed to other users, and will be quickly sold out through the Dutch auction mechanism. Meebit minting is completely random, no one knows for sure which one will receive, but many people still spend 2.5 ETH, or almost $8,500, for the chance to spawn a rare character.
Another way to increase the utility value of NFTs is to form partnerships with other businesses to provide benefits to NFT holders. For example, Dapper Labs could work with NFT event organizers to negotiate a discounted price for CryptoKitties owners. And AlphaWallet's tokenScript and other technologies can effectively verify the issuer and owner of NFT, so after establishing a partnership, 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, for example, Meebits, which was just released a while ago. The creative team of Meebits is the well-known Larva Labs, known for launching one of the most popular NFT projects on the Internet, the pixel portrait game CryptoPunks.
There are a total of 20,000 Meebits in circulation, and each Meebit has its own style, features and characteristics. Many Meebit distributions were made to reward early Larva Labs supporters as well as the blockchain community. Among the 20,000 Meebits, 10,512 will be reserved for the previous Larva Labs asset holders, and the remaining 9,488 Meebits will be distributed to other users, and will be quickly sold out through the Dutch auction mechanism. Meebit minting is completely random, no one knows for sure which one will receive, but many people still spend 2.5 ETH, or almost $8,500, for the chance to spawn a rare character.
The public's high enthusiasm for Meebits is not difficult to reflect people's recognition of CryptoPunks and expectations for Larva Labs. At this time, compared to many unknown NFT projects trying to win attention, the newcomer Meebits has already seized the first-mover advantage by virtue of its "background" bonus. In addition to looking at the primary market, the selling price of Meebit in the secondary market will continue to rise, and its historical ownership value is naturally very considerable.
Relative scarcity refers to how scarce a given item is in an absolute set. For example, among the 10,000 cryptopunks, there are 6039 male NFTs and 3840 female NFTs, but among the scarce punks, there are only 88 zombies, 24 apes, and 9 aliens, which makes these scarce punks even more Valuable because there are fewer of them.
The second method is to resell NFTs previously held by influencers. Currently, it is difficult to find out who the previous owner was, and this extremely valuable historical data is still to be unearthed. Marketplaces and sellers can provide easy-to-use tracking interfaces to increase the value of NFTs. In the case of OpenSea, the platform can flag the addresses of investors who have profited the most from NFT transactions and list other NFTs they own.
digital scarcity
Scarcity is a multiplier for the value created by collectible brands. Scarcity, like branding, has three sub-criteria: absolute scarcity, relative scarcity, and availability. Next, we'll use Cryptopunks as an example. Cryptopunks were the first Ethereum-based "non-fungible tokens" and were the inspiration for the ERC-721 protocol that powers most of the thriving digital art and collectibles industry.
Absolute scarcity refers to how many items are available for a given brand. 10,000 cypherpunks are always only 10,000. There will be millions of hot moments in the market, but only the number of releases is the absolute quantity of supply, which can reflect absolute scarcity.
Relative scarcity refers to how scarce a given item is in an absolute set. For example, among the 10,000 cryptopunks, there are 6039 male NFTs and 3840 female NFTs, but among the scarce punks, there are only 88 zombies, 24 apes, and 9 aliens, which makes these scarce punks even more Valuable because there are fewer of them.
Known scarcity is the main characteristic of NFT. Buyers know exactly how much of a selected item there is on a basis of absolute scarcity and relative scarcity. But collectors of physical items like sports cards, cars or shoes will never know exactly how many of a given item there are.
At the same time, this is also related to the superfan economy emerging in the NFT field. The advent of the Internet has made the marginal cost of copying files essentially 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.
Absolute and relative scarcity ultimately affect availability, how many items associated with a given brand are available for sale at a given time. Greater absolute scarcity means fewer opportunities for buyers to collect items from that brand, while greater relative scarcity means fewer opportunities for buyers to collect that particular collectible. Greater scarcity means limited supply, and as demand grows strongly, the price of a supply asset can dynamically rise.
Supply and demand
When thinking of supply and demand, many people inevitably think of the digital scarcity mentioned in the previous section. But the relationship between supply and demand should be considered from two aspects. Platforms utilizing NFT technology will bring supply, and the less supply, the more likely it will be to bring about digital scarcity. But it should be noted that these platforms do not directly bring demand. It is indeed worthwhile to make full use of digital scarcity, but at the same time, even if the supply is very scarce, there must be corresponding demand.
Beeple's popularity has caused a sensation inside and outside the NFT field. A while ago, Beeple completed the online auction of the first digital collection Everydays: The First 5000 Days on Christie's, with a starting price of $100. After 220 auctions, all The online auction's highest transaction price was completed, and the final transaction price was approximately US$69.3 million, setting a world record for a digital art auction and reaching the third highest auction transaction price for a living artist. This successful auction is regarded as "a watershed moment in the development of digital art".
But most stories tend to be the opposite. Some artists carefully minted NFT artwork, spent $10 in GAS, uploaded their work, tweeted about it, thinking it would sell for $1,000, but no one ever cared about it. In a way, they lost $10 and wasted time and energy. Therefore, while focusing on 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 superfan economy emerging in the NFT field. The advent of the Internet has made the marginal cost of copying files essentially 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 has entered the mainstream market, the fan economy is an important thing to pay attention to, and it will continue to expand based on the degree of attention to a large extent.
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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 actual utility of NFT, not just the gimmick brought by the price.
future value
Driven by non-homogeneous token supply and speculation, the price trend of NFT has gradually become oriented by financial investment expectations.
For example, in December 2017, the price of CryptoKitty #18 shot up from 9 ETH to 253 ETH in just three days, which was $110,707 in USD at the time. There are also numerous cases of the price surge of Meetbit recently. 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 human beings and an integral part of the current financial system. If the right balance is struck, developers can increase the value of NFTs while attracting more new users.
Driven by non-homogeneous token supply and speculation, the price trend of NFT has gradually become oriented by financial investment expectations.
For example, the well-known sneaker marketplace, StockX, has seen a $1 billion valuation in part because the platform has managed to create some scarcity in the sneaker market by encouraging people to speculate on sneaker prices.
To put it simply, on the one hand, market participants are generally optimistic about the trading prospects of an underlying 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 underlying objects are not as convenient as the underlying NFT. The continuous interweaving and strengthening of these two expected psychology will give rise to the high liquidity of the underlying NFT, resulting in a liquidity premium.
In the future, developers can borrow concepts from DeFi innovations to put NFTs to real use for the functionality of real-world assets. NFT is an asset that can be leased and mortgaged, and can be resold speculatively to create additional cash flow and increase returns for holders.
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 short period of time means that the asset has high liquidity. In the field of NFT, liquidity premium refers to the conversion of high liquidity into higher NFT value.
To put it simply, on the one hand, market participants are generally optimistic about the trading prospects of an underlying 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 underlying objects are not as convenient as the underlying NFT. The continuous interweaving and strengthening of these two expected psychology will give rise to the high liquidity of the underlying NFT, resulting in a liquidity premium.
The liquidity premium is the main reason why tokens created on-chain should have higher value than off-chain assets. The NFT of the ERC standard can easily increase exposure to those who hold ETH in the secondary market and increase the number of potential buyers. Generally speaking, investors prefer to invest in NFT categories with higher transaction volume, because high liquidity reduces the risk of holding NFT.
enjoy the value
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 NFT. For example, the game can design a mechanism to prompt players to exchange assets to maintain competitiveness in the game. If the assets are idle for too long, the NFT assets will depreciate accordingly.
enjoy the value
In addition, NFT also has enjoyment value. Although enjoyment value is not as good as functional value and material income on the surface, it can more clearly outline the enjoyment elements brought about by digital scarcity, and it can reflect that NFT is a warm technology product.
An ordinary encrypted cat may not be sold at a high price in the market, but it may come from a gift from a friend, or encounter a coincidence. At this time, the unique characteristics of NFT make the assets in hand more precious. For most digital assets, this intrinsic hedonic value is meaningless. But for NFTs, this can be an added value that attracts buyers or owners.
The hedonic aspect of value is so abstract that there is a term called "biographical indexality". In collectibles theory, people like collectibles because they have some sort of biographical element that references some important event 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.
