What are NFTs? What makes them valuable?

In a world where everything is going digital, from ordering food to finances, NFTs are the latest addition. And it’s come to point of becoming mainstream, leaving us with no choice but to sit back and take notice!

NFTs started making all sorts of noise in early 2020, which left us both excited and confused at first. In 2021, sales of NFTs reached some $25 billion (roughly Rs 1,84,690 crore) as the speculative crypto asset exploded in popularity, data from market tracker DappRadar shows. A possible investment and a viable source of digital transaction, we are here to decode what makes NFTs so expensive

WHAT IS AN NFT? WHAT DOES NFT STAND FOR?

Non-fungible token.

That doesn’t make it any clearer.

Right, sorry. “Non-fungible” more or less means that it’s unique and can’t be replaced with something else. For example, a bitcoin is fungible — trade one for another bitcoin, and you’ll have exactly the same thing. A one-of-a-kind trading card, however, is non-fungible. If you traded it for a different card, you’d have something completely different. You gave up a Squirtle, and got a 1909 T206 Honus Wagner, which StadiumTalk calls “the Mona Lisa of baseball cards.” (I’ll take their word for it.)

How do NFTs work?

At a very high level, most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin or dogecoin, but its blockchain also supports these NFTs, which store extra information that makes them work differently from, say, an ETH coin. It is worth noting that other blockchains can implement their own versions of NFTs. (Some already have.)

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How Many NFT Collections Are There
There are lots of NFT collections. At the time of writing this answer, there are 16078 NFT collections. But this article will cover top 5NFT collections

• Doodles
  Doodles come in a rainbow of colors, characteristics, and sizes, with a total collection of 10,000. Doodles are a quirky group who enjoy playing dress-up or transforming into tasty delicacies. Some aren’t even Doodle-sapiens!

By holding a Doodle, you can help coordinate the Doodles Community Treasury.

• Art Blocks

Storefront for Ethereum-based generative artwork that is really programmable and on-demand. Choose your favorite look and start minting! Each item is created at random using an algorithm established by the artist, so there are no limits to what your one-of-a-kind creation could look like.

• Bored Ape Yacht Club

BAYC is a collection of 10,000 Bored Ape NFTs, one-of-a-kind digital collectibles that exist on the Ethereum blockchain. Your Bored Ape also serves as your Yacht Club membership card, allowing you to take advantage of special member benefits.

• Lazy Lions

Each Lazy Lion is unique and programmatically produced from over 160 potential qualities, including attire, mane, expression, and more.

• CryptoPunks

Proof of ownership for 10,000 distinct collectible characters is stored on the Ethereum blockchain. The project that spawned the CryptoArt movement of today. This was the inspiration for the Ethereum ERC-721 standard, which powers most digital art and collectibles.

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The Four Pillars of NFT Value

• Utility
  Utility is one of the most hotly discussed topics within the wider crypto space within the context of NFTs. Does it do anything beyond its expected future value? Some really interesting applications of NFTs have begun to appear over the last six months. Be that enhancing video games by adding scarcity/provability to in-game loot or power-ups, through to creating a wrapper for many other token types within one NFT, the utility of an NFT (or its expected future utility) plays a part in its value.

Some NFTs are yield-bearing, giving them value beyond a simple resale. Owning an asset that provides returns will create demand for that asset. Gamifying the yield given raises the value even more because it inserts user interaction and attention into the asset. Synesis One gamifies data farming for AI language learning, for example. A word game on the project website lets players earn their native token, SNS, in exchange for playing the game and building the information database. AI companies can then tap into this data to help teach their AIs. NFTs of individual words give the holder yield every time their word is used by the AI to learn the language data.

• Ownership History
  Value depends on the identity of the initial issuer, or the previous owners of the NFT. Those with high ownership history value are often created by famous artists, globally recognized celebrities, or brands. Examples of these are digital artist Beeple, who has three of the top 10 NFT sales of all time, or Sir Tim Berners-Lee who recently sold an NFT of the code for the World Wide Web for over $5M USD.

Judging value can often be difficult if only looking at ownership history. Unless the artist or celebrity is set to be even more famous in the months and years to come, is your asset realistically going to see a 10X increase in value? However, if celebrities and notable individuals have owned the NFT at some point in time, it does increase in value. For example, an NFT of a collectible card that was used by a top player to win a large competition will have sentimental value over a similar card without that history.

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• Rarity
  Rarity is inherent within NFTs as they are, by nature, unique. What is becoming clear, however, is that some are more unique than others. And this is what we mean when we say rarity. Let’s say that a collection has 10,000 totally unique characters such as CryptoPunks. Some will have different traits, features, or characteristics which make them rarer than others from the same collection. It’s these rarities that drive massive increases in value. Jack Dorsey’s first tweet, “Top Shots” of popular NBA clips, and Beeple’s NFT are very rare, unique, and visible, which is what gives them value.

• Liquidity
  High liquidity means a higher value NFT. The liquidity premium is the essential justification for why tokens that are made on ETH have a higher value than off-chain resources. ERC standard NFTs can be exchanged easily across secondary markets, by anyone holding ETH. That being said, if the market for your specific NFT, or NFT collection is not purchased, then you may run into liquidity problems. In other words, if no one wants to buy your asset, you can’t sell it. At least not for the price you may want.

Investors prefer to invest in NFT assets that have a high trading volume because liquidity lowers the risk of holding the NFTs you no longer want.

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Conclusion
Millions upon millions of NFTs out there in the marketplace, selecting those which have strong provenance/history is one way of selecting your next NFT purchase, but it may not be the most valuable. By measuring your next purchase against the above mentioned one or all of these pillars, you will have a much higher chance of picking up something which may be highly profitable.

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