NFTs and their value
Surely there has to be more behind why NFTs are selling for thousands of dollars?
When my family and I showed our uncle a Bored Ape on OpenSea, his initial reaction was confusion and shock. “How is that monkey worth $200,000?” he exclaimed.
For many, it is difficult to comprehend how NFT art is selling for hundreds of thousands of dollars, and without a clear understanding of what happens under the hood, it can leave them feeling perplexed about what really goes on in the NFT space. The question that many are asking is do aesthetics really matter? Surely not if a couple of pixels are selling for thousands of dollars. Or is there something more fundamental behind the psychology of collecting, there must be more substance behind why they attribute value to the NFTs they do?
The answer is yes…
The underlying value of NFTs is enriched by a number of important variables, from ownership, identity, scarcity, aesthetics, community, technology, and utility. Each value is important in its own right and serves to increase the desire and value of a certain NFT.
In this article, we will explore these questions and the logic that collectors apply when collecting NFTs, specifically what influences the value and why they are important.
Value of ownership
Firstly let’s consider how NFTs accrue value, how is this possible? Well, they are valuable for a number of reasons, many of which fall outside the realms of the art itself.
Despite it taking centuries for money to be inherently valued and exchanged, cryptocurrency is quickly challenging the status quo whereby NFTs are providing a way of channeling and capturing the public attention through non-fungible forms. For the first time, NFTs are providing proof of ownership over digital assets through the use of the blockchain, wherewith each NFT contract there is a token ID number, and following this, an address that belongs to the owner. In the web 2.0 world, to own something digitally would be difficult to determine, the word ‘ownership’ is multi-faceted and can be interpreted through multiple meanings. For instance, someone could right-click and save an image and claim that they own it, technically they would because now it belongs as a download on their PC. But is this really true ownership?
Importantly, NFTs are a completely novel asset class, while also being non-fungible in nature meaning that they are 1/1 and unique. They cannot be replicated or copied due to the fact that they are stored on the blockchain, a web of public ledgers where both the provenance and transactions are tracked. Subsequently, anyone can find out things like, who owned the NFT first, how much it was purchased and sold for, as well as when it was first minted. As a result, we can quite easily determine what is authentic, and what is fake, and thereby we can also attribute value.
NFTs have metadata, arguably this is another source of value whereby information can be inserted via properties. The most widely used are descriptions, images, and names. Furthermore, it is not just images that fall under the umbrella of NFTs, a whole array of media forms such as GIFS, texts, videos, music, and games can all be minted and sold as NFTs.
It is also important to note that the blockchain is trustless, meaning that there is no requirement for psychological trust involved in any of the interactions or transactions, it is decentralized, automated by computer technology and no one person owns or commands them. This is the key difference between web 2.0 and web 3.0.
So to recap, NFTs are stored on the blockchain, they have clearly defined owners, and they point to metadata files, which link to the creations themselves. These 3 components will therefore allow you to buy and sell NFTs. Essentially, you have the ability to purchase ownership and transfer it to other owners without the influence of centralized platforms or third parties. As a result, this form of true ownership is what enables NFTs to accrue value.
Value of membership
It is not just the provenance that serves to create value for NFTs, membership is just as important.
Humans are cultural, tribal and have a desire to communicate. Community is a concept that is innate within all of us, something that every person yearns for, or is a part of in some form. Whether it be niche interests, hobbies or friendships, we all have our own circles where we catch up with like-minded individuals. It may be in the real world, or it may be online digitally.
NFTs are one tool of fostering community, and many NFTs serve as membership tokens. NFTs provide us with a means of recording, in a community, which members of the community own the particular NFT. Take for instance the BAYC, anyone who can prove that they own a bored ape are welcomed into a community where a number of different utilities await them. There is the opportunity to enter a private discord, they are invited to social events and meet ups, and their investment presents them with the opportunity to connect with other BAYC holders.
Not only this, but they also have the chance to access additional tokens such as through airdrops including the bored ape kennel club and the mutant ape yacht club. This same concept has been mirrored by many NFT collections that have preceded whereby purchasing the NFT provides you with an exclusive ticket into that specific community, whereby holders have the chance to enter the ecosystem and benefit from the community that they are in, socially and economically. Someone without the NFT would not have the same access, or ability to network, build their brand and profit from the collection.
Evidently then, value arises from the micro-level, much deeper than what is illustrated through the art of the NFT. Value can be created amongst a tight-knit group of even 100 collectors, and it is the community that can help to sustain the value dependent on how committed they are.
Value of identity
Just like the community, our identity is inherently important to our everyday life, and in many ways, it is intertwined with status. We present ourselves in a way to the world so that they can understand our identity and background. We may wear an expensive watch, we might style our hair in a certain way, or we could even grow a big bushy mustache. All of these things are conscious decisions, and we maintain them often in an attempt to tell the world something about ourselves. Although NFTs are abstract concepts and are not physical, they work in the same way whereby we use NFTs to tell the digital world something about ourselves. Whether it be a valuable 1/1 painting displayed in your metaverse gallery to express your taste, or perhaps it is an avatar that you set as your profile picture, they each have implications towards how the wider world sees you, and thus value is similarly attached.
Subsequently, many collectors have begun to attach NFTs as their digital identity, and it has been this active identity that has expanded ecosystems and encouraged NFTs to thrive. I use a bored ape as my profile picture on Twitter and Linkedin, it is how I see and represent myself to others. Moreover, it is an effective networking tool, it verifies that I am a part of the BAYC community, and I reap the benefits for this.
As an example, Crypto Punk holder Richerd turned down a $9.5 million offer on his NFT, preferring to opt with the longevity of his identity over the mouth-watering sum. Clearly, in some cases, the identity interwoven within our NFTs is proving to be invaluable, whereby brand value and community are seemingly more important than anything else. When discussing this with Richerd he stated,
“You could make the case that our online identities are just as strong—if not more powerful—than our real-life personas. Online you can be anyone you want if you chose, the metaverse does not discriminate against age, gender, or race. So for a lot of people, you can actually be more free with your thoughts and ideas.”
I wrote more about this in the article below.
Value of aesthetics
NFTs are given value directly by the community, it is only they who can attribute monetary value and they share this agreement with each other. Subsequently, it is up to the community and market to decide what is valuable and what is not valuable. But it is not just reflective on the artwork itself, a number of factors can be considered regarding the art and artist. For instance, we are able to find out what their previous work sold for, we can see how long they have been creating, we can see who has collected their work, we can compare it to other art forms and as a result, we can make well-informed choices about whether the art is valuable or not.
Scarcity and rarity
Collectors find beauty in the number or size of a collection, for instance, 1/1s are seemingly more valuable than an NFT from a collection of 10,000 given that there will only ever be 1 of the NFT created. Take Andrew Wang, a Cool Cat collector who purchased the 1/1 upside down cat. It has exploded in value over the months as the project has become more popular and desirable. It is also the reason why he turned down a $1 million dollar offer, proving that scarcity is a fundamental contributor to the value of NFTs.
Similarly, this is the case for rarities, a collection may only have a number of traits that can be attached to a certain NFT. Evidently, the scarcer the rarity the higher it will be valued. However, rarity can also accrue from personal preference, a number of low ranking traits have evolved over the months into traits that are sought after and thereby suggesting that trends and the community are paramount to the attribution of value.
Value can be arbitrary, something may suddenly gain value without any reason why. But more often than not there is something that instigates the spark, and it can also be provoked by forces outside of the art. Take for instance Crypto Skulls a collection that has been around since 2017. They failed to gain any significant traction for years until recently, popular influence in the NFT scene Gary Vee swept the floor and thereby encouraged a wave of hype. The NFT collection was thought to have had the same cultural significance as Crypto Punks and it skyrocketed in sales as the floor rose to over 4 ETH in a matter of 24 hours. Reflecting on this, it is not just the value of the art itself but it can also be through the force of individuals and influence.
Value of royalties
Unlike the web 2.0 world where artists would have to enforce copyright laws to maintain the ownership of their work, web 3.0 and NFTs ensure that the art is inherently their creation, and only when it transfers is the ownership changed.
Artists have typically suffered whereby making money from their art in the traditional world has proven difficult. For a long time platforms have retained power over the art world, and those that have been able to make money off their craft have had hefty chunks taken away from these third-party platforms. However, now NFTs have increasingly attracted the art sector given that there is the opportunity to profit from your work via automated royalties. For instance, an artist could sell an NFT, and from there onwards, they would also make a royalty each time that it trades, and the royalty would increase as the value increases. Subsequently, if the artist becomes more famous and the art becomes valuable, the artist also received the share of increased wealth. This, therefore, demonstrates the value that NFTs can provide where the technology is presenting the opportunity to benefit from the sales of their art for the first time.
Value of utility
Perhaps one of the most important contributors to the growth of value for NFTs is utility.
Although when NFTs first came into fruition the entire focus of value was on the art, this has significantly shifted in recent months whereby a number of additional factors are considered. Namely, what the team proposes in their roadmap, a vision of their plans, and what they can provide to the community. NFTs that have gained the most traction have offered utility through airdrops, in real-life events that can only be accessed via the NFT, access to the metaverse, governance through DAOs, or even opportunities to mint other projects. As a result, these benefits and plans are what make an NFT more valuable, and thus it becomes clear why NFTs such as the bored ape yacht club are selling for hundreds of thousands of dollars. It is an accumulation of all of the factors discussed in the article so far. Ownership, membership, identity, rarity, scarcity, utility, and aesthetic. They make the NFT more meaningful and help to engrain sentiment and attachment, both of which make the NFT much harder to just flip for financial investment.
The application of NFTs is endless, more recently, the intersection of DeFi and NFTs has become more prominent whereby collections are offering the ability to stake NFTs in exchange for tokens. Subsequently, collectors have the opportunity to make passive income without having to do anything, other than investing in the NFT project.
However, as demands for more utility grow and collectors diverge from the value seen within just art. Communities are becoming less satisfied with the prototypical roadmap and are expecting more of the teams themselves, irrespective of whether it is just an artist. The problem is, sometimes these expectations are not realistic. The greatest collections have succeeded based on the novel, exciting and unique ideas, and once this has been done, it is difficult for derivatives to sustain the same model for a long period of time, it becomes repetitive. Given the speed and high stakes on the table, it is similarly difficult to estimate what the space will look like in a years time, what was popular last week can quickly fall out of fashion a week later, and thus speculation is just as important as a utility in attributing value.
At the time of writing, gamification and tokenomics are two of the most sought-after utilities that a project can develop and provide for its community. However, this may also change by the time that you are reading.
Reflecting on all of the above, value does not simply arise from the art itself. Although this is equally important and possible, is the utility and factors beneath the art that add the most value to the NFT. From membership, identity, ownership, and functions such as royalties, it is the projects that incorporate these together that see the most success. It is not possible for a project to create a collection and hope to sustain value in the long term without one or more of these elements, and this had been made evident by some of the biggest blue-chip collections that continue to build beyond the art itself.