NFT: What’s Their True Value?
November 30, 2021
We first discovered what NFTs are in this article, with an overview of the main uses and sectors.
Now let’s explore the question that everyone is asking, the crux of the matter: why do they cost so much?
NFTs as a technology
Let’s leave aside for a moment the mechanics of the market, the art world and the human factor in general. NFTs, inherently, derive their technological value from the blockchain.
They are not so different from cryptocurrencies: currencies that thanks to the blockchain circulate in an immutable and decentralised way.
Similarly, NFTs are digital goods or objects that circulate immutably and in a decentralised way on the blockchain.
The only difference is that cryptocurrencies are fungible, whereas NFTs, as the name suggests, are not.
It means that cryptocurrencies behave like a currency: they are divisible, all the same, widespread and this facilitates their account, exchange and liquidity.
In contrast, NFTs are unique pieces, often organised into ‘collections’, so a single NFT cannot be divided into ‘decimals’ or freely divided into equal parts.
Another key feature that NFTs derive from the blockchain is programmability. Like any type of smart contract, NFTs can be developed to have additional features that increase their usefulness.
What are NFTs for?
The NFT format can potentially be applied to anything that needs to be scarce, unique and tracked, e.g. event tickets, bookings, collectables, certificates or digital identity.
MIT for example has recently started issuing digital diplomas based on blockchain, in the form of non-transferable NFTs. Meanwhile, both established players such as Facebook (now Meta) and start-ups are working on integrating NFTs into social media.
However, we know that currently, the most popular fields of application are art and video games.
The advantage is that if a digital work or any file exists as an NFT, the address of the creator and all the addresses of the people who bought and sold it will be recorded on its blockchain.
For example, if you use an image found online for your website, the information about the identity of its author is easily lost. However, if you use an NFT as a profile image, it means that you have actually bought it and are aware of its entire history.
At this point, you may ask what sets apart an NFT from a simple jpeg.
This depends on the NFT in question. Often the NFT images we see online are only previews of more complex works, such as animations or 3D graphics. Actually, all facets of the work are visible (or audible) in the virtual NFT galleries, profile images or screens physically displayed by the owners.
It is, therefore, possible to prove that you own an NFT and not just a jpeg.
Moreover, they are not always images and may have other uses than being aesthetic works.
What can be the uses of current NFTs?
First of all:
- They are digital goods that can be resold
Other use cases are under development or recent, and do not concern all NFTs:
- They can be used as collateral for DeFi loans
- They can be a requirement for access to restricted services or communities.
Identity and sense of belonging
Let us now move away from the technical and economic aspects and focus instead on the concept of community.
It is in this context that the hype around NFTs was born and can be exploited more, creating a sense of belonging and identity.
Let’s think about the most famous collections, among the first ones ever created: CryptoPunks and Bored Ape Yacht Club. These collections of very rare and very expensive characters have become a real status symbol. If you own a BAYC you have access to private parties or exclusive gifts and airdrops. It’s a bit like being part of a prestigious club or owning a luxury car.
This obviously applies to brands as well, who use their NFTs to create systems to promote and reward their community, making them feel part of the corporate mission.
The community that is built around NFTs actually creates the underlying value of those NFTs. And the more these communities grow and engage, becoming part of each individual identity, the more that value is reinforced.
As time goes on, by the way, some NFTs accumulate more and more interesting backstories (passed on on the blockchain), becoming more and more valuable.
Thus, on the one hand, owning certain NFTs affects one’s sense of identity or at least appearance, and on the other hand, it can even provide economic power and a right to participate in a certain context.
For these reasons, some people buy NFTs without even intending to sell them.
So, it’s not just hype?
You know, fads change, so even certain NFTs might go out of fashion if they do not offer enough benefits or lasting use cases.
As a result, part of the NFT market might disappear over time, as happened to many cryptocurrencies or ICOs in the early years of the market.
This does not mean that all NFTs will be less relevant. It is likely that the most valuable projects will remain, and with a bit of effort, they will be able to make the technological leap that will allow them to effectively fit into the many possible sectors.
In short, some of the challenges for the future are:
- Clarifying the legal aspects of NFTs e.g. regarding ownership
- Solving environmental and transaction costs for NFTs on Ethereum
- Discovering and facilitating more applications