Art, Tech

The Value of NFTs and How They Work

Around the globe, non-fungible tokens, or NFTs for short, are coming more and more into everyday usage. A variety of different research firms, such as L’Atelier BNP Paribas and NonFungible.com, examined the NFT market and discovered that throughout 2020, NFTs controlled a $250 million dollar market, with rises in investments by up to 299% year to year.

Naturally, since the market for such items is growing quickly and can be quite a profitable source of income, many investors are seeking to cash in on the craze and make a lot of money in the process. 

Perhaps part of the reason why the craze has taken off is due to the benefits that come with NFTs. For artists, NFTs bring freedom of expression. Since they don’t follow the same conventions as canvas art, it can be attractive for artists to create their work digitally.

Both investor and creator alike are drawn to the lack of a middleman or a gallery, where no money is lost to the person working in-between the two. For many, it’s also an alternative kind of investment, with many diverse items available. The rules of the game are far different to the conventional way of doing things.

Fungible means any unit which can be exchanged simply, such as money.

$10 notes can be seen as the equivalent of two $5 notes or five $2 notes. In terms of our everyday terms, a non-fungible item any which could not be simply exchanged for something of a similar value.

Everyone would agree that the Mona Lisa is priceless. The house which you live in is totally unique and different from all the other houses around. Your furniture, your computer, a rare and unique Pokemon card, all of these are non-fungible assets. 

Originally just a fringe activity, NFTs have catapulted into mainstream cryptocurrency activities as just another playground for those with a significant amount of money.

As a collectible digital asset, these tokens can be traded digitally through the blockchain network. They are all one-of-a-kind, unique items, owned by individuals on an incorruptible database.

Popular among artists and art collectors, gamers as well as big business brands, NFTs can be anything from artwork to memes, video game skins or characters, videos, social media posts, trading cards, or GIFs. The possibilities and the scope are endless. 

It gives new meaning and purpose for those who create incredible digital works of art and opens a lot of potential for both artists and investors alike. For many of these items, the cost is just as high as any other artwork in a gallery or a museum.

So, as we continue, we are going to delve more into the world of non-fungible tokens and explore exactly what it is that makes these digital items so very valuable. 

The Emerging Trust economy

When considered socially, trust has a variety of different meanings and connotations.

Trust will normally refer to situations that are characterized by two different aspects. First, one party trusts the other party. They are prepared to rely on their actions and believe they will do as they say. The second, when the situation is directed towards meeting a certain objective.

Even without delving into all the controversies that surround the world of cryptocurrency, part of the most promising deliverables of the economic system is the entirely brand-new sense of trust that it offers to people.

Societies of our day and age operate based on trust in the systems we have in place, throughout the government and economic processes we have, be it state power, judiciary processes, or money. As time has progressed, new types of trust develop in different systems, which has led towards more decentralized models, offering much more security, transparency, and efficiency in managing the trust.

This means opening the internet.

The idea of the open internet is an incredibly powerful idea. In some ways, NFTs place a limit and a scarcity on items that typically are not lacking in circulation.

There’s some opposition to the reasoning why people would want to make something more scarce and more difficult to find if people want it. Nobel Prize-winning economist, Elinor Ostrom, suggests that the ways communities manage resources with or without governments and that overconsumption hurts the entirety of society has something to do with it.

What is value?

There are two main definitions of the meaning of value. First and foremost, value is a principle or standard, as of behavior, that is important or desirable. Secondly, value is to rate or evaluate something according to a relative estimate of worth or desirability. 

In economics especially, an object or service’s value is typically defined as the price that it would bring on an open, fair, and competitive marketplace. The marketplace price determination is identified based on the object’s relative supply and demand in society.

How are the values of NFTs defined, then?

The value of a non-fungible token is based on three different variables. These are known as the subjective quotient, utility, and provenance.

1. Subjective Quotient

There are two kinds of values, subjective value, and objective value.

An objective value is where someone’s belief, perception, or preference doesn’t impact the real importance of a value.

Objectively, the value remains the value, no matter what you say or do. Subjective is the idea where an item’s value depends entirely on that person’s beliefs, preferences, choices, or ideas. Values can change and be altered based on the whims of the individual.

For example, a person attending a soccer game might spend many thousands of dollars for premium seats because they are huge soccer fans, and it has incredible value to them. For those of us who are not soccer fans, thousands of dollars on a premium seat are a huge waste of money and next to worthless for us.

A vintage car lover may be willing to spend millions of dollars to own a vintage car and many more dollars in upkeep. This, however, is very uninteresting to anyone who views cars simply to get from A to B. The purchase of an ultra-rare Pokemon card, while meaningless for most of the population, is a literal goldmine for certain buyers.

Across any marketplace, whether online or in your local town, all objects and commodities have a value assigned to them based on the target consumer, their likes, and their desires. It is based on them subjectively. Some of those who enter an art gallery is going to be impressed by certain pieces of art and place subjective value on it. Some of those who enter won’t consider the same. This is exactly the same with NFT art and items.

The $69 million-dollar Beeple’s sale at Christie’s is one of the costliest non-fungible token sales that has ever taken place in NFT’s short history. The artwork sold, “Every day’s – The First 5000 Days” was able to find a customer who understood and was able to perceive the subjective cost of such incredible work. The customer understood the piece was worth a whopping $69 million dollars and was totally willing to pay as such.

This subjectivity of the customer and therefore the subjective quotient are totally foundational to defining the actual value that an NFT holds. One man’s trash is another man’s treasure.

2. Provenance

Another issue that is regularly raised when it comes to NFTs is that of provenance. Most NFTs exist digitally, online, and that makes it quite difficult in some respects in comparison to something such as a house.

While some NFTs can be used to show ownership of physical objects, now in the digital world, some consumers are showing the value of owning original and valuable digital media and objects, upon validating their provenance. So, what exactly is provenance?

Provenance can be defined as the history of a valued object or work’s ownership over its history. Provenance is important since it can conclusively prove just how authentic a piece of work or art is and therefore able to greatly increase its value. At one point in history, provenance was viewed as the best methodology for verifying just how authentic an item was.

Provenance has always been a valuable tool in the marketplace for expensive items and is applicable in art, luxury, and collectibles markets. Likewise, the same process can be applied to NFTs. In the NFT world, the value of an object, artwork, or collectible is directly linked to who the owner is or who initiated it, which could be an individual artist, a major luxury brand, or a major sporting brand.

Non-fungible tokens that have a significant ownership value are normally those which were created or issued by world-famous artists or worldwide companies that maintain a strong brand. For example, luxury fashion such as Burberry and Louis Vuitton are seeking to work in NFTs and gaming to further promote their luxury brands, capitalizing on the worldwide interest in digital art and NFTs. 

Those observing the current trend in NFTs carefully can see three things happening. Firstly, many artists are cooperating with big brand companies across the world to create and issue NFT artworks.

Secondly, some very influential people have been creating entirely new classes of wealth through NFTs. Thirdly, mass resells of non-fungible tokens previously owned by influential people have been occurring. 

All thanks to the incredible blockchain technology, the provenance of all these digital items, the brands, and the influential people they came from can be accurately traced and tracked, with platforms such as Opensea, Raible, and others seeking to develop into this scene. 

The blockchain certificate that comes with digital items on the blockchain technology is the guarantor of their provenance, their previous ownership, and their total authenticity as a sellable item.

Because of the way it is added to the blockchain, this blockchain certificate can be viewed by almost everyone, but there is no ability to change or alter the certificate. It can be distributed without the risk of losing any ownership of a design or an artwork and its value is assured. 

3. Utility

The utility value of an NFT is wholly dependent on how the NFT can be used. Gaming platforms, systems and items are one of the more practical and real-world examples of utility in NFT form.

Across the NFT market, there are many ways that NFTs can be applied, from gaming to digital property ownership, to ownership of avatars and the like. The options are endless, and many developers will capitalize on as many ways as possible to produce income for their companies.

Games form many different NFTs that can be used by players within games. These could be things such as swords to fight an enemy, skins to change the look of their character, art, or furniture to decorate their homes or fashion for their person. Whatever the purpose, being able to make and use items such as these in a game creates value across the entire game.

Players have the unique ability to use whatever valuable assets they want, as well as sell these off to other players if they so wished. With purchases, game creators can make more items, improve the game, and pay their people, as well as program a contract into the NFTs that grants a small commission on future buys. In addition to the normal and traditional methodology of in-app purchases, non-fungible tokens provide a whole new avenue for developers to earn more income.

Another such dimension on the utility of an NFT is the ability to see or use the NFT in any context or application. This means it is independent of the ecosystem where it was purchased and can be operated anywhere by nature.

Some developers will do partnerships to provide such utility for developers. For example, Dapper Labs can cooperate with non-fungible token event organizers to create a discount for owners of CryptoKitties. Through the formation of technologies such as AlphaWallet’s tokenScript, cooperation is very efficient and the issuer of the owner of NFTs can be easily authenticated. In this way, those who organize events don’t need to do much to partner with other organizations. It’s a simple, easy, win-win process for those companies seeking to work together.

Examples

Genies, a virtual identify platform, very recently decided to host a large fundraiser to create digital avatars and wearable goods.

– The largest game on Ethereum, Axie Infinity is modeled as a Pokemon-Esque monster collecting game, where players battle and breed for glory and profit. All these NFT items can be traded and sold. In addition to this, it is also one of Ethereum’s most used applications.


– Yet another game on the Ethereum ecosystem is Gods Unchained, a trading card game in a similar vein to the game Magic: The Gathering. In Gods Unchained, those who play form decks of cards of different fantasy beings and battle them with others. The winner takes renowned and tokenized prizes on the blockchain network.


– As many people are aware, virtual reality has been a reality for several years now. Ethereum however is the first technology that truly allows virtual reality projects to make their real estate items scarce and easily tradable around the world. For all these reasons, the virtual reality projects lead to a new sort of internet, defined by virtual worlds, called a metaverse.


– An example of one such virtual reality system is that of Cryptovoxels. This project on Ethereum has formed its name through taking good care of its development team and creating an enjoyable system for users. Within this virtual reality project, users can buy parcels as an NFT and then develop and build digital installations at top of them, such as an art gallery. 


– A fashion platform, RTFKT, made $3 million dollars in revenue in only seven minutes. They were selling virtual sneakers.


-In another virtual reality world, Somnium Space, the user can own land or is able to produce sellable avatars. Every single item which can be purchased, from land to avatars to digital art pieces is a non-fungible token.

Conclusion

NFTs, as we can see, are truly valuable commodities.

They impose scarcity on items that by nature are not scarce and as a result are able to fetch incredible value on the market. As with many items, non-fungible tokens are priced quite subjectively, their price depends on the people who are buying them.

The provenance on such items is easily tracked, with previous owners identified and better increasing the value of these items.

For all NFTs, their utility will only increase their value, and the ability to be used in many ways and locations is a bonus for any NFT owner. Naturally, all of these things add up to increase the value of NFTs and as a toy for the rich and for the collector of arts, designs, gaming items, avatars, and all sorts of different digital bits and bobs, NFTs are going to be a part of all crypto ecosystems going forward.

Also, check out  What is NFT Art.

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