So how exactly is NFT value created?
The law of supply and demand is operative here, and in the unique world of NFTs during the crypto winter of 2022, there are on three traits successful projects must have: A strong concept, the right collaborators and a vibrant community.
The underpinning, however, of value when no copyright is exchanged, however, is the concept of provenance.
Provenance, or the record of ownership, is a French word for proof of origin, established by tracing a work through multiple owners back to the original author. NFTs provide a permanent record of ownership, since the date of the first minting and the sale is permanently recorded on the blockchain. This is not a copyright, but rather a permanent record from the creator through to the legitimate owner.
If someone buys an one of a kind NFT, say part of a piece of art with unreleased music by Beyoncé, an NFT can help prove that indeed was Beyonce’s and orginal, when it is sold again and again, since the record of each sale dating back to the original cannot be lost or destroyed. This is true, even though you cannot sell the song on your own label or put it in your movie, unless Beyoncé agrees. Remember that either the creator, or payor in the case of work-for-hire, typically holds the original copyright. The resale value comes from your ability to prove the asset you own is unique and original.
In the case of Lamborghini, a real world use case, buyers could purchase an NFT piece of art, that came with a Lamborghini, and even a private cocktail party at the factory in Italy assuming they met a price threshold for the sale.
Whomever buys that art, can pass it on to their children or sell it again – or add to the resale value of the car – with the additional documents that authenticate its origin. Remember that anyone can copy the digital art, use it as a screen saver, or even post it for sale on another blockchain so long as they don’t get caught and banned. But in the event of a dispute, there is a permanent record.
To put the value of provenance in historical perspective, consider all the cases of art looted by the Nazzi’s during World War II, in which records of ownership were often lost. In one case, a famous Gustav Flint painting, “Woman in Gold” was finally returned to the heirs of the original artist in 2006, 50 years later, after a drawn out court battle.
The origin – or provenance – of The Last DeVinci, an alleged discovery of an original painting by Leonardo Devinci, broke sales records at auction, though the origin is still in dispute today and subject of a Netflix documentary disparaging the major auction house that approved and marketed the sale.
Thousands of people have inadvertently bought a Rolex or Hermes knock-off from an online counterfeiter and paid full-price.
So NFTs solve the issue of provenance by providing a record of ownership from the original author of the brand or art through subsequent sales that include:
- Proof of authenticity – that it came from the original creator and is not a counterfeit
- Proof of ownership – that the work is not bootleg or stolen
- A permanent record of this proof that cannot be altered
This proof alone often adds value when the item or NFT is resold.
Here are the other factors that add value, starting with the law of supply and demand.
Please watch the video, first and the review the discussion below.
1. Popularity, ie Demand
Valuation starts with the law of supply and demand, and in NFT world, that often means popularity, relative to the number offered.
There are a variety of ways to create a large community of people interested in an NFT project, in order to create scarcity. The most common are NFTs linked to a celebrity, a well-known brand, or a super large community. A variety of digital agencies now promise ways to build these communities via association with brands, partnering with numerous other projects, enlisting influencers and boosting communities with massive social content distribution. However, all these factors are really just feeding the demand side of the supply and demand equation.
2. Scarcity/rarity, ie Supply
On the supply side, creators can limit the quantity of NFTs created relative to the size of the demand to drive up the price, and thus, the value. For an artist, the limitation may be 1 of 1, for a series of 7 NFTs of original paintings. Even if the artist has a following of only several hundred, they may sell out based on scarcity.
For a “First right to purchase” a Delorean manufactured for the first time in 100 years, was worth $25,000 to buyers at the 2022 NFT conference in LA, because it was a limited number, and only NFT holders could purchase the cars when they were released. Collections with 1000 or more NFT’s typically need very large communities on the demand side; think 6,000 plus Discord users or a 100,000+ Twitter followers, at the minimum, so for creators just starting out, it makes a lot of sense to keep collections smaller, and add only as the interested community grows.
With large, well known collections, rarity takes on a different meaning. It is something that is rare within the collection. Opensea does a great job, as you will find in the live demo, of enumerating scarcity within a collection, based on the metadata that creators put in, which is why we recommend structuring the data for your collection at least in Google sheets so that the customers see the rarity you have created. However, this mostly applies to art and collectibles with major backers.
3. Utility ie Real world value
In 2022, utility is the new “darling’ of NFT marketplaces. Entrepreneurs are getting creative about Memberships that come with the ability to use proprietary apps or dapps and QR codes for ticketing or other forms of access. Others are attempting to solve the problem of brand counterfeiting at scale. Valuations for these projects can be tied to the pricing of other off-chain products and services. If a similar app costs $3 for example, and a lifetime membership NFT gives access to 15 DAPPs, it may sale for somewhere from $25 to $100 depending on demand and the value of the dapps.
4. Historical firsts
Many of the projects such as Bored Apes and others that sell at Sotheby’s or Christi’s may have a historical component, as the first NFT in a category, or a catalyst to a generation of projects. Their value is link to this historical, if geeky, accomplishment.
5. Entertainment & community
An increasing number of metaverse and gaming projects are selling NFTs that create a different kind of value to the purchaser: The feeling of belonging in the community and the experience of engaging in the game and metaverse with the NFT.
6. Addition of physical items
Often, ownership of physical items is contained in the NFT. Sometimes this is a physical piece of art or a frame for the digital NFT, but we’ve also seen projects that have sold a shoe with the NFT printed on it, an NFT that came with the deed to a house (mostly for marketing effect since the local TV stations all covered it), and more recently high end cars. Some physical object transfers depend on the buyer meeting a “threshold” price, so that if unmet the object is not transferred.
7. Market conditions
Market conditions can and have certainly added value to NFTs, although in 2022 market conditions have not been ideal. We don’t expect the days of general FOMO for anything NFT to return.
8. Marketing spend (and Wash trading)
Everything discussed up to this point involves organically achieved value for an NFT project. However, the largest ones today tend not to be accidents of chance and FOMO, but rather projects that have considerable investment behind them to reach, partner with and/or pay numerous influencers and collaborators, get in the most popular NFT newsletters and paid comparisons, keep up a robust content schedule and participation on Instagram and Twitter, and Discord. Some NFT agencies recommend a minimum spend of $10,000 to $15,000 to start a project, and the ones typically at the top of the rankings can spend $100,000 and up. Buyer beware, however! We’ve seen an agency that charge $7500 simply for setting up multiple channels, a task that in the digital marketing world would be far less, and can be easily accomplished by a creator using an Upwork contractor. Finally, many projects also have a team of investors behind the teams buying out 50% and driving prices up, a practice call “wash trading.”
9. The project works best – or only works – as an NFT.
This is a golden rule for NFT projects, since they attract only a fraction of the off-chain market, even if they internationalize the selling opportunity. The need for a crypto wallet limits the market to 3% of what is otherwise available in the U.S. There is a better case for international markets, but take this into consideration. Builders and creators need to ask themselves whether the NFT is really necessary to the business model, or just a way to raise money from unsophisticated investors who respond to the story? For example, is the utility of anti-counterfeiting a project that can best be done via blockchain technology? Can the brand attract a new and higher tech audience by incorporating an NFT strategy? Does the NFT marketplace Audius provide an option more disruptive to Spotify than an alternative that is off the blockchain? If the answer is yes, the value is also likely to be there.
What lowers value
Keep in mind that as these factors are driving values higher, NFTs have a number of things that act against their valuation status: Newness itself provides a barrier, since not many people really understand these new marketplaces. The requirement to have a crypto-based wallet limits the market further to a fraction the population. The relatively lower status of collectibles & graphic arts in the art world puts downward pressure on pricing. Even with a few giantic sales in 2021, and enormous prices of few giant fish in the sea, the average NFT sold for $199 in 2022. Without the whales NFT prices would be even lower.
Vast collection size is a great way to obliterate individual collection value. And finally, the volatility of the market overall is much more uneven as an investment, than say, a purchase on Sotheby’s of almost any other kind of high end property.