Have you ever wondered why an NFT can sell for $69 million while it seems like just a JPEG image that anybody can download? From the outside in, the NFT space can look like a bunch of mega-rich people having play-pretend games with each other to prank everybody else. But when you look into it, there is more than one way NFTs can provide real-world value.
Value Comes From the Function of NFTs
First of all, part of any NFT’s value lies in what it is: a non-fungible token. One NFT is not interchangeable with another, their properties on the blockchain are one of a kind, verifiable and can’t be faked. This is what separates NFTs from cryptocurrencies and it’s why one NFT can be worth $1 while the other is worth $1 million.
Moreover, NFTs are intended to represent ownership of an asset, which means how much an NFT is worth mostly depends on that asset. A painting by a famous artist has more value as a non-fungible asset than a blank canvas, so an NFT representing a famous painting will be worth more than an NFT representing a blank canvas.
Next time someone asks: “Why would I ever pay for an image that I can copy to my computer for free?”, remember that it’s about the proof of ownership to that image. Everyone can buy a copy of the Mona Lisa, but only the original Mona Lisa has value. In the digital world, since every file can be duplicated, NFTs invent a way to make digital assets irreplaceable, and thus valuable.
Think of NFTs as the digital version of the deeds that prove you own an object in real life, although their utility extends beyond being a deed. Thanks to blockchain technology, NFTs can provide artists with a commission every time their artwork gets resold. In some cases, NFTs can gain their holder’s access to an exclusive merchandise store, chat room, products, or even additional NFTs.
The Task of Estimating Value in the NFT Space
Most people only know about NFTs as a form of digital art but in theory, an NFT can represent anything, digitally or physically. This means an NFT can be used to prove ownership of an apartment.
In this case, it’s easy to measure its value: more or less the price tag of that particular apartment. But when an NFT represents digital collectibles/artwork, social media posts or domain names with no real pre-established price tag, its value becomes a lot more speculative.
So how do we measure the speculative value of this NFT? In theory, if you create NFT and sell it on the NFT market, you can set the price as high as you want and as long as there is a buyer who is willing to meet the said price, that becomes its speculative value. There are several factors that can help to determine this figure:
- Similar market value: Look at the prices of other works from the same artist and how much are they selling for. What about similar types of artworks on the market? These types of numbers can indicate the NFT’s underlying value.
- Future value: There are works/artists that are undervalued at the moment but have the potential to be a much bigger name in the future.
- Scarcity: How many NFTs are there of this same digital asset? The rarer the NFT, the more valuable it is.
- Cultural Importance: Does the NFT mark an important moment culturally? The first-ever tweet on Twitter saying ‘just setting up my twttr’ by Jack Dorsey was made into an NFT and sold for almost $3 million. A big part of that price tag revolves around the fact that this tweet marks the birth of a mega social media platform, used by almost 4 million people around the world.
- NFT Value/Utility: Does the NFT provide any other value besides being proof of ownership? For instance, the NFT ‘Clock’ literally counts every day that Wikileaks founder Julian Assange has been imprisoned. Many people see Assange and Wikileaks as a figure of justice for exposing the wrongdoings of the US government so over 10,000 of them bought ‘Clock’ together to raise funding for Assange’s legal defense. Another example is how a Bored Ape Yacht Club NFT can act as a ticket to social events where people can meet celebrities like Eminem and Paris Hilton.
Conclusion: More Than Just Digital Art
Overall, NFTs (non-fungible tokens) create real-world value because they act as a digital certificate of ownership, especially for digital assets that previously had no other way of transferring ownership from one to another. NFT can also give commission back to the original creator, provide membership to clubs, unlock additional products…