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Company/Blog/The NFT Economy: How Are They Selling For So Much?

The NFT Economy: How Are They Selling For So Much?

NFTs are selling for hundreds of thousands, and sometimes millions, of dollars. What is this new type of token, and where does its value come from? Are people really paying vast sums, often in crypto, for GIFs, JPGs and tweets? Yes and no.

NFTs aren’t just a way to repackage extant digital materials. They have use cases beyond the sale of digital artwork and value sources beyond hype and speculation. 

What is an NFT?

NFTs are non-fungible tokens. That means they’re tokens that aren’t interchangeable with other tokens of the same type. We just did a post on what NFTs are, so we won’t go into much detail here. But because they’re not fungible and can’t be swapped out for any other token, they can be used to prove ownership of unique items and act as a licensing system. They can be used across applications developed by different companies and traded freely on secondary markets including crypto exchanges.

What do you own when you own an NFT?

You own the token you bought, sure. But what does that entitle you to? If you buy the deeds to a house, you own the deed, sure, but it’s probably the house you’re interested in. Non-fungible tokens are proof of ownership, but ownership of what?

Imagine you’ve bought a painting, with traditional proof of ownership. There may be a huge number of imitations of that painting in the world. Some may be incredibly accurate and detailed, so much so that you need to be an expert to discern the difference. But there’s only one original, and you own it. You have the paperwork that says so — and even if you keep it in safe, secure storage rather than hanging it on your wall, you have the painting too.

Buying an NFT sometimes works this way, but it doesn’t always. For one thing, when you buy an NFT for a digital artwork you might buy the actual piece itself, encoded into the (usually) ERC 721 token. But in most cases, as with Beeple’s ‘Everydays: the First 5,000 Days,’ which sold for $69 million on March 12, 2021, you’re buying a resource that leads to the piece itself, which is often hosted on the distributed, but off-chain Interplanetary File System.

It’s also likely to contain significant metadata. In the majority of cases — and this is an increasing trend, as more things are sold as NFTs that aren’t susceptible to being encoded in tokens. This includes digital properties of all sorts as well as physical assets and artworks.

What the purchaser then receives is proof of purchase plus metadata. The proof of purchase is the most immediately obvious value; a certificate can be forged, a computer database can be hacked, but a blockchain-based proof of ownership linked to a private key only you possess is the absolute and secure form of evidence of ownership.

What do people use NFTs for?

Again, we’ve covered this in our introductory post, so I’ll be brief. NFTs can be used to demonstrate ownership or encode actual digital property. They’re popularly used for expensive in-game assets from MMORPGs, artworks digital, entertainment and real estate. 

The most expensive NFT sales (so far)

NFTs are in headlines for million-dollar price tags and ‘most expensive sale’ is a trophy no-one has kept for long. But these are some of the record-breakers so far.

NyanCat, by Chris Torres

Sold for 300 ETH, or about $590,000, on Foundation

NyanCat is a nostalgic piece of internet culture from the days before people said ‘meme,’ and its original creator remastered it before selling the GIF on NFT art platform Foundation in February 2021.

The Complete Collection, by Beeple

Sold for $777,777.77 on Nifty Gateway in December 2020 — resold at Christie’s for $69 million in March 2021

Beeple’s Complete Collection is unusual for an NFT art sale in that it includes several physical components including a sample of Beeple’s hair and a physical representation of the NFT itself, complete with titanium backplate.

Not Forgotten, But Gone, by WhIsBe

Sold for $1 million on Nifty Gateway in March 2021

WhIsBe specializes in gummy bear themed art, and several other pieces are still available on Nifty Gateway. This one, a 16-second clip of a spinning gold skeleton gummy bear, is the artist’s most financially successful piece.

First Tweet, by Jack Dorsey

Sold for $2,915,835.47 on Valuables on March 22, 2021

Twitter founder and CEO Jack Dorsey’s first tweet is also the first tweet. After a lengthy bidding process it sold for nearly $3 million in ETH on Valuables, a platform set up specifically to buy and sell NFT tweets.

CryptoPunks #7804 and #3100, by Larva Labs

Sold for $7.6 million each on Larva Labs on april 4 and March 11, respectively, 2021

CryptoPunks are among the oldest NFTs in the world, dating to the comparatively ancient date of 2017. They’re a range of 10,000 algorithmically-generated digital collectibles that provided both the impetus and the first test case for the ERC 721 token protocol.

We don’t want to spend too long window-shopping for NFTs here, but the trend — an expanding market with quickly-growing prices — is clear. 

What isn’t clear is why people are willing to spend millions of dollars to own a tweet or a digital toy.

Where does the value come from?

NFTs contain four sources of value:

Utility

This is referring to the concept of economic utility, or the value of what you can do with the NFT or what you can get out of it. The value of an NFT that proves ownership to an artwork is the value of the artwork. The value of an NFT that proves ownership of a ticket to see Kings of Leon is the same as the value of the experience, or the price of the ticket. The value of an NFT for an in-game asset is the value of the asset. 

Note that utility depends to some extent on interoperability: the more interoperable a token is, the more portable it is and hence the higher its utility. Interoperability remains a challenge for NFT creators and users, though developments in blockchain technology aimed at expanding interoperability between chains may change that.

Ownership history

Just like any other asset, some of the value of an NFT depends on who has owned it previously. (That’s why ordinary items fetch extraordinary prices when they have unusual ownership histories.) 

Sometimes, NFTs gain this type of ownership history when they’re created by strong brands or in partnership with celebrities. Sometimes, they develop it organically during secondary trading. 

Future value

Sometimes, assets are purchased not for what they may be used for today, but for what they may be sold for tomorrow. NFTs are no different and many are bought as investments. This value can be driven by speculation, by increased demand as more investors discover the market, or by developments in the token’s utility; for instance, CryptoKitty #18’s price leapt from 9.8 ETH to 253 ETH in just four days in 2017 as bidding intensified. It can also be driven by scarcity of supply.

Some NFTs build consideration of future value in. For instance, SuperRare allows creators of NFT artworks to earn 10% royalties every time those artworks sell on secondary markets. In the future, NFTs will tie in more closely with DeFi as the value derivation systems of both spaces move together; NFT-collateralized loans, securities and even stablecoins will participate in the DeFi ecosystem.

Liquidity premium

Liquidity is itself an economic utility; hence the value, and price, of cash money as against assets. ERC standard tokens, including NFTs, can be traded on-chain and off across secondary markets by anyone who holds ETH; thus they’re more liquid and have access to a larger pool of potential buyers. This is a major selling point for investors, who often consider the longer-term possibility that the native platform of an NFT might be shuttered. A low-liquidity NFT could lose all value when that happens; a high-liquidity one — meaning, for now, an Ethereum-based one — will continue to be tradable.

Where are people buying and selling NFTs?

OpenSea 

OpenSea is currently the largest NFT marketplace. It includes ERC 721 and ERC 1155 assets, and users can buy, sell, and discover assets including big-name NFTs like CryptoKitties and in-game assets for Decentraland as well as over 700 other projects. 

As well as artworks and game assets, OpenSea is the testbed for other types of NFT’s including the first attempt to sell a house by NFT. You can also mint NFTs using OpenSea’s item minting tool

Rarible

Rarible is a community-owned NFT marketplace, owned by users who hold the RARI token; these are distributed at a rate of 75,000 per week to those who participate in the platform or marketplace.

With a focus on art pieces and an easy minting tool, Rarible buys and sells art, games, domains, music, memes and more.

SuperRare

SuperRare is mainly a digital art sales platform, and most art pieces there have been created and tokenized by SuperRare’s own network participants. There’s a social network built on top of the marketplace proper, and all transactions are in Ether.

Nifty Gateway

Nifty Gateway is one of the most successful NFT marketplaces, home to several of the nascent scene’s early record-breaking sales and recently acquired by the Winklevoss twins; with Google and Facebook APIs, and a $775 million to $1.2 billion market valuation, this privately-held company is a different breed from the participant marketplaces trading in low-cost art pieces. Everything sold through the platform has been curated by the Nifty team, and offerings include collaborations with sports organizations like OG Esports.

Conclusion

The NFT economy certainly has aspects of a bubble, but it also has aspects of a nascent industry. After all, NFTs provide immutable evidence of non-fungible asset ownership — and we should remember that even the famous Amsterdam Tulip bubble eventually gave way to a stable tulip industry for which Holland is still famous. Will we be willing to pay millions for tweets? Probably not; but even those NFTs, once minted, are likely to have a long half-life in a secondary market that will define them by their previous ownership. 

NFTs for real estate and other physical property are being trialed on popular platforms right now. The value of some NFTs is definitely over-inflated; but many will probably appreciate and the space as a whole seems ripe for integration with DeFi and the burgeoning stablecoin economy.

— — — — —

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