NFT Analytics: Understanding Asset Value

Over the past few years, the concept of non-fungible tokens (NFTs) has evolved to represent one of the most prominent technological innovations in recent memory. At their core, NFTs are digital assets that are created, bought, sold and traded on blockchain marketplaces, most commonly via cryptocurrency such as Ethereum. The integration of blockchain technology allows each NFT to have its authenticity verified as a unique digital resource by other users. Blockchain also helps trace the chain of ownership.

Since their wider introduction in 2017 through games such as Axie Infinity, CryptoKitties and My Crypto Heroes, NFTs have continued to generate immense worldwide popularity with their successful integration into the realm of digital art. With some NFTs selling for millions – and even Tens of millions
— of dollars, there has been widespread speculation about the true value of NFTs as a newly emerging class of digital assets.

However, like many other commodities and digital assets, most NFTs themselves have minimal or no intrinsic value; rather, the value of NFTs lies within the fluctuating demand of consumer markets.

How NFTs create value

Basically, the draw of NFTs is their ability to give those who buy them ownership over the specific digital asset, whether it’s a piece of art, an item to be used in a video game, or even a file of former Twitter CEO Jack Dorsey’s first-ever tweet. Even if another person technically “owns” the original piece that has been embodied in an NFT (eg, a musical artist who releases a song or music video as an NFT), the purchasing owner of the NFT can boast ownership rights to it original file. That owner can then hold on to the purchased NFT or sell it on to someone else at a profit.

By understanding this, we see how the value of NFTs lies in their perceived value to users. For example, if more users within a specific consumer market view a specific NFT as rarer than others, the greater value those users will place on that NFT. The same applies to collectors of art or sports memorabilia; value is not inherent in the pieces they acquire, but is instead found in the perception of the market. However, there is one aspect of NFTs that may allow them to generate additional value through the integration of smart contracts.

Create value forever through smart contracts

Because the programming for smart contracts exists on the blockchain, these contracts allow users to verify the authenticity and ownership of any NFT when a transaction is made to buy or sell it. In addition to allowing users to see who was the original creator of a specific NFT, smart contracts allow the original creators to receive a portion of each verified transaction performed as a form of royalty payment.

This is perhaps the truest way that NFTs, as a newly emerging class of digital assets, can offer direct value to both creators and consumers. The higher a certain NFT sells for, the more its original creator will be able to claim royalties via the asset’s integrated smart contract.

Nerdwallet investment writer Andy Rosen says, “On the other hand, a buyer backing a struggling creator with an NFT purchase could potentially secure a share of future revenue from other projects.” Rosen explains that another way NFTs can create value is using serial entrepreneur and investor Gary Vaynerchuk’s VeeFriends as an example. For this collection of NFTs, each purchaser receives a free entry ticket to Vaynerchuk’s annual business conference, VeeCon. It is described as “a multi-day event exclusively for [VeeFriend] NFT Holders.”

Some may be surprised to find that NFTs as a general concept have no intrinsic value. This does not mean that NFTs as a digital asset class are not valuable. Although there are several factors that can affect the perceived value of any individual or collection of NFTs, these factors are almost unilaterally influenced and determined by the user markets. The rarer or more useful an NFT is, or the higher the investment potential of a particular asset may be, the more valuable many users will see it as. Without the perceived value of a market, no NFT is more valuable than any other asset or commodity.

Because NFTs are still an innovation for many, their true potential as a value generator remains to be fully seen or actualized. While this may change in the near future, until that day comes, NFTs as a whole are no more valuable than the market deems them to be.