A Brief History of NFT
The concept of value in NFT
-History of ownership
-Supply and demand
-Highly speculative market
-Lack of liquidity
-Whales and market makers
NFT assets vs. real world assets
-NFT assets are not fully equivalent to their real-world counterparts
-NFT assets are valued much lower than their real-world counterparts
-Physical art vs. digital art
Problems Facing Digital Assets
Disrupting the Internet to deliver new value
NFT is a unique, non-fungible digital asset, powered by blockchain ledger technology. Non-homogenized tokens, a digital crypto asset, are unique, scarce, and irreproducible.
In recent years, the range of use cases for NFTs has grown to include digital art, domain names, games, collectibles, etc. NFTs are created (i.e. minted) on a blockchain, such as Ether, and can be used to verify ownership of an asset (where it comes from, who owns it, etc.). According to data from a joint report by Nonfungible.com and L’Atelier BNP Paribas, the total market value of the NFT market in 2020, excluding laundered transactions and abandoned items, is approximately $338,035,012, representing an annual growth rate of 299%.
Some NFTs are very expensive, with prices in the millions of dollars. Many people may ask, how can one objectively assess the value of NFTs? Before answering this question, let’s take a brief look at the history of NFT.
A brief history of NFT
The origins of NFT can be traced back to 2012-2013, when small denominations of colored bitcoins – “Colored Coins” – were introduced to represent different assets for different purposes, including collectibles, access to tokens, and more. These colored coins are “unique and recognizable from regular bitcoin transactions” and are embedded with bitcoin’s scripting language, which encodes specific properties in the metadata. In this way, even a satoshi (0.00000001 BTC) can represent any asset, whether it’s a dollar, a stock, a house, or a digital collectible.
In 2014, Counterparty, a peer-to-peer financial platform built on colored coins, was founded to issue non-homogenous and semi-non-homogenous tokens. Counterparty’s founders understood that Bitcoin did not support the creation of robust asset creation and trading capabilities.
Trading cards and memes became popular in 2015 and beyond. Various video games made digital assets stored on blockchain technology popular, including: swords, shields, and even digital real estate plots, to name a few.
In 2017, Cry ptoKitties came into the spotlight, a game that is breedable, collectible, and centered around crypto cats. Each crypto cat is unique and 100% owned by the owner and cannot be copied, taken away or destroyed.
In 2021, NFT gains more momentum and begins to penetrate the mainstream economy in some unexpected ways. As the foundations and underpinnings of this space continue to improve, NFT is about to create a whole new face of the digital economy.
The interesting and challenging aspect 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 flows, which can be estimated and discounted to an actual amount to determine intrinsic value. Not all investors do this, but nevertheless, the intrinsic value of a stock can be estimated.
But such future cash flows do not exist in the collectibles space and rely purely on consensus to establish value. It is the public’s collective demand for collectibles based on their value and marketability that shapes them. Anyone can have a particular preference for an artist’s work, but it is the collective acceptance and consensus of the public about the artist’s talent that creates the demand for his or her work and drives the price of his or her work through the roof.
From a financial point of view, a collection does not have intrinsic value, but for the holder who likes it, it will at least have some value. That’s why the first rule for any collector buying an asset is to buy something he or she really likes. That way, even if the asset is worthless in the worst case scenario, the holder will still get some enjoyment value out of it.
The popular consensus on collectibles is why NFT assets are recognized and attracting more and more attention in the virtual world.
Under normal circumstances, in addition to the enjoyment value, NFT also has what value? How can I get the most material benefit from NFT? How can we get the most spiritual enjoyment from NFT?
The concept of value of NFT
In the economic literature, there are often two camps of values for objects: functional value and enjoyment value, i.e., “What can I do with this thing?” and “How much do I like this thing.”
For functional value, this is where most of the discussion around NFTs takes place: you can show off your NFT holdings, show people your cryptocurrency wallet, show off your NFT art or musical tastes. Beyond that, functional value includes how much money speculative holders can make with NFTs in the resale market. The practice of putting real-world assets on the blockchain to mark them up is also maximizing the functional value of NFT.
Analytical Framework for Functional Value
Value of NFT = utility + ownership history + digital scarcity + supply and demand + future value + liquidity premium
Depending on the asset represented by the NFT, these six components have different value weights. Investors can use this framework to evaluate whether NFTs are worth investing in, and developers can consider how to increase the value of NFTs to attract users and investors based on this value framework. Notably, NFT creates many new ways for developers and asset owners to create value.
The utility value of NFT depends on how the NFT is used, and game assets and tickets are representative of the two main categories of high utility value. For example, the LAND plots in The Sandbox virtual world, etc. The value of an NFT ticket refers to the price of a ticket to an event, such as when a user needs to buy a ticket to attend an art exhibition in Decentraland.
Another dimension of usefulness is the ability to use NFT in different applications. Imagine if the same asset could be used in different games, enabling cross-chain and cross-platform use, then the utility value of NFT assets would naturally be higher.
However, interoperability still faces difficulties. Currently, 90% of NFT gamers are focused on only one game. This requires developers to build out a huge ecosystem of games that provide interesting use cases and attract more users, a direction that both Dapper Labs and Enjin are working toward today. While uncertainty remains and a lot of time and effort will need to be invested, the opportunities that lie ahead are exciting for the industry as a whole.
Another way to add value to the utility of NFTs is to form partnerships with other companies to provide benefits to NFT holders. For example, Dapper Labs could work with NFT event organizers to negotiate discounted prices for CryptoKitties owners. And since technologies such as AlphaWallet’s tokenScript can effectively validate NFT issuers and owners, a partnership would make it easier for event organizers to attract more participants. It’s a win-win for both parties involved.
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 distributed by well-known artists or companies with strong brands.
Take for example the recently released Meebits, created by the famous Larva Labs, known for releasing one of the most popular NFT projects on the web, the pixel portrait game CryptoPunks.
There are a total of 20,000 Meebit distributions, each with its own style, character and identity. Many Meebits were distributed to reward early Larva Labs supporters as well as the blockchain community. Of the 20,000 Meebits, 10,512 will be reserved for previous Larva Labs asset holders, leaving 9488 Meebits to be placed with other users and sold out quickly with a Dutch auction mechanism. ETH, or nearly $8,500, for a chance to generate rare characters.
The public’s enthusiasm for Meebits is a good indicator of the recognition of CryptoPunks and the expectations of Larva Labs. At this point, Meebits, a first-timer, has already gained a head start with its “background” compared to many NFT projects that are trying to get attention. In addition to the primary market, Meebit will continue to sell at a higher price in the secondary market, and its historical ownership value will be significant.
There are two ways to increase the historical value of ownership. First, by partnering with a company or individual with a strong brand to issue NFT tokens, which will naturally bring significant traffic and users to the ecosystem.
The second way is to resell NFTs held by previous influencers. Currently, it is difficult to find out who the previous owners are, and this extremely valuable historical data remains to be mined. Marketplaces and sellers can provide easy-to-use tracking interfaces to increase the value of NFTs. Take OpenSea, for example, a platform that can tag the addresses of investors who have profited the most from NFT trading and list other NFTs they own.
Scarcity is a value-creating multiplier for collectible brands. Scarcity, like branding, has three sub-criteria: absolute scarcity, relative scarcity and availability. Next, we will take the example of Cryptopunks, one of the first “non-homogenized tokens” based on Ether and the inspiration for the ERC-721 protocol that has driven most of the digital art and collectibles industry’s The ERC-721 protocol is the inspiration for most of the digital art and collectibles industries.
Absolute scarcity is how many items are available for a given brand. 10,000 crypto-punks will only ever be 10,000. There will be millions of hot moments in the market, but only the number of releases will be the absolute number in supply to reflect absolute scarcity.
Relative scarcity is the degree of scarcity of a given item in the absolute set. For example, out of 10,000 crypto-punks, there are 6039 male NFTs and 3840 female NFTs, but there are only 88 zombies, 24 apes, and 9 aliens among the scarce punks, which makes these scarce punks more valuable because there are fewer of them.
Known scarcity is the main characteristic of NFT. The buyer knows exactly how many of the selected items are available on an absolute and relative scarcity basis. However, collectors of physical items such as sports cards, cars or shoes will never know exactly how many of a given item are available.
Both absolute and relative scarcity are determined by the developer and have the potential to have an impact on the brand. If scarcity is desirable, then greater scarcity will always add value to the brand. But no brand is popular purely because of scarcity; the brand also needs to be marketed to create initial value.
Absolute and relative scarcity ultimately affects availability, i.e., how many items associated with a given brand are available for sale at a given time. Greater absolute scarcity means that buyers will have fewer opportunities to collect items from that brand, while greater relative scarcity of items means that buyers will have fewer opportunities to collect that particular collection. Greater scarcity means limited supply, and with strong growth in demand, the price of the supplied asset may rise dynamically.
Supply and Demand
When thinking of supply and demand, many people inevitably think of the digital scarcity mentioned in the previous section. But supply and demand should be considered from two perspectives. Platforms that utilize NFT technology bring supply, and the less supply there is, the more likely it is that digital scarcity will naturally result. It is important to note, however, that these platforms do not directly lead to demand. Making the most of digital scarcity is indeed worthy of reference, but at the same time, even if supply is very scarce, there must be a corresponding demand.
Beeple’s popularity has sparked a stir inside and outside the NFT field, and a while ago, Beeple completed the first online auction of its digital collection Everydays: The First 5000 Days at Christie’s with a starting bid of $100, and after 220 auctions, finished with the highest price of any online auction After 220 bids, it sold for the highest price of any online auction, setting a world record for a digital art auction and the third highest price ever paid by a living artist. This successful auction was seen as a “watershed moment in the development of digital art.
But most stories tend to be the opposite. Some artists carefully mint NFT art, spend the $10 GAS fee, upload the piece, post a tweet thinking it will sell for $1,000, only to have it go untouched forever. In a way, they lost $10 and wasted time and effort. Therefore, building the concept of demand while focusing on supply is necessary to leverage digital scarcity.
Also, this is related to the emergence of a superfan economy in the NFT space. The advent of the Internet has made the marginal cost of copying files essentially zero. In economics, it is traditionally believed that fan economies are created by these low marginal cost technologies, such as radio or television, and most importantly – the Internet.
There is no doubt that before NFT goes mainstream, the fan economy is important to watch and will continue to expand based in large part on attention.
Those with large followings on Twitter, Instagram or YouTube, and those who are more active in the community, are likely to have access to more potential customers and have more of a first-mover advantage. Supply and demand is a two-way process, not something that can be solved by digital scarcity alone, and creating demand is the means to truly realize the value of NFT assets.
And for the NFT industry as a whole, the emergence of a fan economy is also likely to bring more attention to the underlying technology and the actual utility of NFT, rather than just the gimmick of price.
The future value of NFT comes from both changes in valuation and future cash flow scenarios. Valuations are driven by speculative activity and can sometimes be the primary driver of price appreciation.
For example, in December 2017, the price of CryptoKitty #18 spiked from 9 ETH to 253 ETH in just three days, when it equated to $110,707 U.S. dollars, and there have been countless recent cases of Meetbit’s price spike. Some may argue that price volatility due to valuation may have a negative impact on NFT, but speculation has always been a natural part of most humans and is an integral part of the current financial system. If the right balance is struck, developers can increase the value of NFT while attracting more new users.
Driven by a non-homogeneous supply of tokens and speculative behavior, NFT price movements have gradually become oriented towards financial investment expectations.
For example, the famous sneaker marketplace, StockX, has seen a $1 billion valuation, in part because the platform encouraged speculation on the price of sneakers, successfully creating some scarcity in the sneaker market.
Future cash flow is the interest or royalties earned by the original owner of the NFT. For example, SuperRare allows the creator of NFT artwork to receive a 3% royalty each time their artwork is subsequently sold on the secondary market. Similarly, in Rarible, the NFT artwork creation platform, a percentage can be set as a royalty on secondary sales every time an author creates an NFT collection. For example. An artist creates a digital work and sells it for 0.2 ETH with a 10% royalty. Later, the buyer of that work resells the painting at a higher price point – 0.5 ETH – and the royalty system comes into play. As the original content creator, the original artist will receive 10% of that sale, or 0.05 ETH.
In the future, developers can borrow concepts from DeFi innovations to give real use to NFT that function as real-world assets. NFT is an asset that can be leased and collateralized and can be resold speculatively to create additional cash flow and increase revenue for the holder.
Liquidity premium (Liquidity premium) is the time and cost required to convert an investment asset into cash. An asset is said to be highly liquid if it can be converted to cash in a relatively short period of time at a price close to market value. In the NFT space, the liquidity premium refers to the use of high liquidity to translate into a higher NFT value.
Simply put, on the one hand, market participants are generally bullish on the trading prospects of an underlying NFT and holders are more willing to hold it for the long term; on the other hand, market participants believe that the future prospects of other underlying assets are inconveniently inferior to the underlying NFT. the intertwining of these two expected psychologies, which are constantly reinforced, gives rise to a high liquidity of the underlying NFT, generating a liquidity premium.
The liquidity premium is the main reason why tokens created on-chain should have a higher value than off-chain assets.ERC-standard NFTs are easily geared to increase exposure in the secondary market for those who hold ETH, increasing the number of potential buyers. In general, investors prefer to invest in the higher-volume NFT category because the high liquidity reduces the risk of holding NFTs.
Moreover, even in the extreme case where NFTs lose their utility value after the relevant platform closes, highly liquid NFT assets remain valuable as long as there are people willing to buy and sell NFTs. On the other hand, those NFT standards that are not based on Ether are generally illiquid, and the value of NFTs created on these platforms is often greatly diminished.
Developers can leverage the economics of their tokens to encourage users to increase the frequency of transactions, increase asset holder engagement, and increase the liquidity of NFTs. For example, games can design mechanisms that prompt players to swap assets to remain competitive in the game, with a corresponding depreciation in the value of NFT assets if they sit idle for too long.
In addition, NFTs have an enjoyment value. Although enjoyment value is not as much as functional value material gain on the surface, it can more clearly outline the enjoyment element brought by digital scarcity, and can reflect that NFT is a warm technology product.
An ordinary crypto cat may not sell for much in market transactions, but it may come from a transfer from a friend or encounter with a coincidence, and then the unique characteristics of NFT make the asset in hand more precious. For most digital assets, this inherent hedonic value is meaningless. For NFTs, however, it can be an added value that attracts buyers or owners.
The hedonic aspect of value is very abstract and has a term called “biographical indexicality”. In collectibles theory, people like collectibles because they have some sort of biographical element that indexes to some important event in the past or someone’s historical life. And this concept is spilling over into the digital space in the form of NFT, which is no longer algorithmic or computational, but becomes an integral part of life.
While the formula for valuing NFT was mentioned above, the value of NFT is far from a blanket statement using these few metrics, nor can it be said that using this one time formula will definitively measure how much NFT is accurately valued in the marketplace.
Even the relatively much simpler process of estimating the market value of homogenized tokens faces various challenges, such as token supply issues, and possible laundering transactions, among others.
Valuation of non-homogenized tokens is naturally more difficult, facing challenges including a highly speculative market, lack of liquidity, NFT diversity, whales and market makers, and market size, among other factors.
Highly Speculative Markets
Many people have the question of whether the price of an NFT asset for sale with some comparability can be used to define the value of that NFT when performing an NFT valuation.
The answer is no, the current list of prices of NFTs with some comparability is not very informative. While the NFT ecosystem is maturing, it is still highly speculative. As a result, many buyers (more or less aware of the real market trends) buy assets in an attempt to resell them, even at 10 times their resale price. It is for this reason that in the Decentraland market, even the less desirable $LAND bids can go up to 10 million MANA.
Lack of liquidity
Market liquidity is another difficult factor in valuing an asset. If no comparable asset is being sold, or if the last sale was more than 6 months ago, the current market valuation of the asset may not be as accurate.
It is important to note that the higher the digital scarcity of an asset (e.g. Gods Unchained cards) and unique assets (artwork released in 1 copy and not subordinate to an artwork series), the more difficult it is to find a relevant point of comparison for valuing market value.
NFTs are known to be unique in nature, but there are far more than one type of NFT, there are hundreds of them. NFTs can be classified into several categories based on their underlying digital assets. For example, a Pokémon card NFT sold by Youtuber Logan Paul could be classified as a digital trading card; a limited edition album NFT with record sales by DJ 3LAU could be classified as a digital artwork.
Each project releases its own NFT, and each NFT consists of its own metadata, reflecting different characteristics within the respective project. Therefore, the valuation of NFTs can sometimes be based on objective criteria, and sometimes on their value in the community.
Therefore, properly valuing each type of NFT requires consideration of the metadata that defines its value.
Some examples of criteria to define the value of an asset.
Decentraland – $LAND
The Sandbox – $LAND
Proximity to a central, roadside, busy area, close to developed or popular real estate areas…
Gods Unchained – $CARD
Card name, rarity, traits ……
CryptoVoxels – $CVPA
Land Location, Land Size ……
Of course, as NFT projects and markets evolve rapidly, these criteria need to be continually adjusted and taken into consideration. Under the CCA valuation methodology, NFT validators can carefully select peer comparables in the same category (excluding the overly speculative sales mentioned above) to produce a large range of values that are not limited to a few fragmented metrics and provide a relatively reasonable pricing range for novice buyers. As the number of NFT sales increases, a more reliable valuation can be achieved based on a larger sample.
Whales and Market Makers
Different types of participants in the NFT market participate in the NFT program in different ways. Market makers can currently list a purchase price for an asset, even though the asset may be higher than the market price of a previous sale.
These sales create precedents/exceptions that cannot be ignored in asset valuation, but should also not be considered the norm for NFT valuation.
If Musk decides to buy a parcel of land on The Sandbox tomorrow for $500,000, does that mean that all the land on The Sandbox is worth that price? Or is it only Musk’s land that is worth that price? Did he overpay, or did he define a new connotation and trend for adding value to the item?
If the global market follows suit, he has defined a new trend. In the future, such scenarios will be frequent in the NFT ecosystem as well.
Finally, another reason why evaluating NFT is complex is that the NFT ecosystem and the markets associated with it are still small.
This is even more pronounced and problematic in market segments such as art, trading card games, wearables, etc.
As a result, the more extreme and speculative non-standard sales tend to overshadow the larger number of “classic” sales, resulting in a disruption of market consistency.
General Market Trends
NFT Market Trends
Possibly, the quantitative difficulties faced by the NFT ecosystem valuation may only be solved by machine learning, which requires evaluating various methods, conducting extensive testing, and finally selecting which methods yield the best results.
In addition, another challenge facing NFT valuation is related to crypto asset prices. Crypto asset prices can fluctuate significantly over time, which further complicates the modeling of NFT valuation.
NFT assets vs. real-world assets
As more companies and brands are approaching the NFT space, which is now a relatively young and abstract field, many are beginning to wonder if there might be a groundswell of interest in tying NFT to the real world.
Many people talk about NFT with this in mind. There is no denying that there have been many such experiments, and they have been successful. Such as the advent of the Real World Asset NFT (RWANFT) introduced by MATTEREUM. rwaNFT is a pronoun describing the virtual ownership of physical commodities and is dedicated to bringing trillions of dollars of investment-grade assets such as gold, real estate and art into the virtual economy to be effectively traded globally in the form of NFT. rwaNFT, a universal file format, allows physical commodities to be uploaded to the Internet for security, governance, trading and use on a global scale. So, using NFT as a symbolic real-world asset is indeed particularly valuable.
In addition, taking inspiration from CryptoKitties, Nike is patenting a design based on algorithmic tokens for tokenized sneakers. The patent allows secure encrypted digital assets to be attached to a physical product via blockchain technology, generating a unique ID based on the shoe and creating tokens (ERC 721 or ERC1155 standard). The Nike platform will also use blockchain technology to track the ownership of sneakers and verify their authenticity.
In the platform, buyers will be able to securely trade both physical sneakers for sale and virtual sneakers to be stored in a cryptocurrency wallet or other digital blockchain locker. Among other things, virtual sneakers can be mixed and “bred” with each other to create “shoe offspring. Newly bred sneaker offspring can also be customized to become substantive sneakers under acceptable footwear manufacturability rules.
NFT assets are not fully equivalent to real-world assets
However, NFT is not fully representative of the real world and cannot achieve full parity. For example, if you hold a token representing a $100,000 pair of sneakers, what happens if someone steals the physical sneakers they hold? You still can’t use virtual tokens to guarantee your ownership of real-world assets.
If we revert back to the division between functional and enjoyment value mentioned above, in this example, owning a real-world asset is more like using its functional value, while an NFT asset provides more of an enjoyment value. People are mostly attracted to Nike patents because the new NFTs they cultivate really do have the potential to give them cool new sneakers in real life.
NFT assets are valued lower than their real-world counterparts
The two images above show the physical artwork of the 300-year-old Jain deity in the ancient temple and the NFT Vajra digital artwork on the blockchain.
Even in small communities, the “right to touch” price for this physical artwork during the opening of a new temple is $2,000-$5,000. (This is just one example to highlight the limitations of physical art).
In contrast, Media Distribution, which has an 88-year history and a large global audience, offers perpetual trading ownership of King Kong’s digital artwork for about $1,000.
Thus, we can see that today, physical and virtual NFT artworks sell for far different prices, with the latter being valued far lower than the former, so it is somewhat premature to conclude whether NFT digital assets are significantly undervalued or whether they are inherently positioned as such.
How to increase NFT valuation?
- develop digital infrastructure to increase the utility of NFT (use NFT as collateral, in VR, etc.) Increase utility, increase value.
- Establish partnerships with various companies, such as Harry Potter, Star Wars, Disney, etc., into the NFT space to exploit its value.
- make NFT a significant revenue stream for the entertainment industry as well as a community channel for monetization. (Mark Cuban has similar expectations for the NBA).
- Brand marketing to become the “next Beeple” and allow the value of artwork to increase over time.
- Bitcoin, ethereum and cryptocurrency growth against the US dollar. Disrupting the Internet
We have to admit that right now for many people who post their work to the Internet, anyone with access to a computer or cell phone can access their work for free. But the arrival of NFT may change the way we conceptualize and understand the open Internet.
The idea of an open Internet has had a profound impact on us. In a sense, NFT will indeed bring scarcity to something that is not already scarce.
One might immediately retort that why would people want to make something more scarce when they want it? Elinor Ostrom, a Nobel laureate in economics, conducted an interesting experiment that examined the way people manage their assets with and without government intervention and concluded that the tragedy of the commons – overconsumption can be detrimental to everyone in society.
The freedom afforded by the Internet and social media can deplete the inventory of content as well as its value. Once any work – which takes a lot of time and effort – is put on the Internet, the marginal cost of reproducing it is zero, and the price of the work is essentially zero. This means that no matter how much experience is put into it, no one will pay for that work. Considering this situation, more scarcity does pay off.
The dualistic nature of NFT provides just the solution to this problem. Someone willing to pay a large sum of money wants to establish a connection to a piece of art or music, but that work remains publicly available for free viewing. This duality preserves the public nature of the Internet while providing material rewards for the original author. In the future, this may overturn the perception of traditional Internet openness and build more demand for digital scarcity.
NFT Labs provides information only and does not constitute any investment advice.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-do-you-value-nft/
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