NFT Labs: Emotions? Scarcity? Application? This article analyzes where the value of NFT comes from

Emotions？ Scarcity？ Application？ This article analyzes where the value of NFT comes from

NFTs are used more in our daily life globally. Since February 2021, NFTs have exploded, with weekly trading volumes exceeding $2 million. Over months, the total market capitalization of large NFT projects has grown by as much as 2,000%.

As the market for such items is growing rapidly and can be quite a lucrative source of income, many investors seek to profit from this craze. For many, it is also an alternative investment, with many different projects to choose from. The rules of the game are very different from the traditional way.

We fully understand FOMO sentiment, but until then, perhaps part of the reason for the craze was the practical cases for NFTs.

For artists, NFTs bring freedom of expression. Since they don't follow the same conventions as a physical art, works created digitally by artists may be easier to achieve and, therefore, more appealing.

Fungible refers to any exchangeable unit, such as currency.

A $10 bill can equal two $5 bills or five $2 bills. In our daily life, irreplaceable items cannot be exchanged for things of similar value. Like everyone will agree that the Mona Lisa is priceless.

The “value” of any object is not defined by the amount of resources and the labor time required to create and produce it, but varies according to its context and the rationale or perspective of its users. To simplify it, the value of any item is determined by an individual buying or selling it.

NFT starts as a fringe activity but has become a mainstream blockchain application and another playground for giant whales. These NFTs can be digitally transferred through the blockchain network, and each is a unique item.

Popular among artists and art collectors, gamers, and major commercial brands, NFTs can be anything from artwork, game characters or gear, music, videos, social media posts, or GIFs. The possibilities and scope are endless.

It gives new meaning and purpose to those wonderful digital works of art. It opens up many new paths for artists and investors—even many of which cost as much as physical art in galleries or museums.

So what exactly makes these digital items so valuable？

What is value？

There are two main definitions of what value means.

First, value is a principle or standard that is important or desirable in behavior. Second, something is valued or appraised relative estimates of value or desirability. Especially in economics, the value of an object or service is often defined as the price it would bring in an open, fair, and competitive market.

Market prices are generally determined based on the relationship between the supply and demand of objects in society.

How to assess the value of NFTs？

The value of an NFT is based on three different variables. These are called Subjective Sentiment, Utility, and Provenance.

1. Subjective Sentiment

Typically, value is defined in terms of an item's subjective or objective value.

Objective value is when someone's opinions or preferences don't affect what really matters. Objectively, no matter what you say or do, value is still there, and the Mona Lisa will not drop in price because of the critique from a few of us.

On the other hand, subjective values can change at the whim of an individual. Subjective means that the value of an item depends entirely on someone's beliefs, preferences, choices, or thoughts.

For example, someone watching a football game might spend thousands of dollars on a front-row seat because they're a football fan and think the game is worth it. For those who are not football fans, a front-row seat of thousands of dollars is a huge waste and worthless to them. Sneaker enthusiasts may be willing to spend tens of thousands of dollars on a pair of limited-edition sneakers or even put them in a cabinet to watch rather than wear them on their feet, but it may not be understandable to most non-sneaker enthusiasts.

In any market, whether online or offline, all items and commodities have a value set based on target consumers, consumption preferences and consumption goals. This value is subjective, just like some people who enter a museum will be impressed by specific artworks and rate them subjectively, while others will not.

This is the same as NFT art and items.

Christie's $69 million Beeple's auction is one of the most expensive NFTs in NFT history - “Everydays: The First 5000 Days NFT”. The logic behind the client knowing that the piece was worth as much as $69 million and being willing to pay was that there was a client who understood and could perceive the subjective value of the piece.

Therefore, this subjectivity and subjective value are the basis for defining the actual value held by NFTs. Everyone's perception of value is different, and some works that you think are worthless may be regarded as treasures by others.

2. Provenance

Another frequently asked question about NFTs is provenance.

Most NFTs exist digitally and online, which in some ways is very difficult compared to things like houses. Of course, this does not refer to circulation and transaction records but to who it came from; although applications such as OpenSea already have marking function, most NFTs still come from nowhere.

Provenance is important because it can ultimately prove the authenticity of a piece of art and can greatly increase its value. Historically, provenance has been seen as the best way to verify the authenticity of an item. Provenance has always been the fundamental value in the market for expensive items, art, luxury, and collectibles markets. Likewise, provenance applies to NFTs.

In the NFT world, the value of a digital item, artwork, or collectible is directly related to who the creator or originator is, an individual artist, a major luxury brand, or a major sports brand - a big part of Moonbirds' success is that its founders have strong VC background.

Those familiar with the NFT market can see that many artists have cooperated with big global brands to create and issue NFT artworks; some very influential stars and athletes created a new category of wealth through NFT.

Based on blockchain technology, the provenance, brand and KOL of all these digital items can be accurately located and tracked; the blockchain certificate attached to digital items on blockchain technology guarantees their provenance, previous title and complete authenticity as saleable items.

It can be distributed without losing ownership of the design or artwork, and its value is guaranteed.

3. Practical Application

The utility value of NFTs depends entirely on the practical application of NFTs.

The Gamefi platform, the metaverse, and the backing of the physical combination are one of the practical and real examples of NFTs. Across the entire NFT market, there are many practical cases for NFTs, from gaming to digital property ownership to avatar ownership, and the options are endless.

Here we have explained it in detail in an article before, so I won't go into detail here. You can review “Top Ten Social Practical Cases of NFTs.”

4. Digital Scarcity

We must admit that for many people who post their work on the Internet, anyone with access to a computer or mobile phone can access their work for free. But the arrival of NFT (blockchain) may change our concept and understanding of the open Internet.

The idea of an open Internet has had a profound impact on us. In a sense, NFTs do bring scarcity to something that is not scarce.

One might immediately retort, why would people want to make something more scarce if they want it？ Elinor Ostrom, a Nobel laureate in economics, once conducted an interesting experiment to study how people manage their assets with or without government intervention, and he came to the conclusion of the tragedy of the commons - excessive consumption hurts everyone in society.

The freedom brought by the Internet and social media can deplete the inventory and value of content. Any work - which takes a lot of time and effort - once put on the Internet, the marginal cost of copying it is zero, and the price of the work is basically zero. This means that no one will pay for the job, no matter how much effort goes into it. Given this situation, more scarcity does have benefits.

The duality of NFTs provides a solution to this problem. Someone is willing to pay a lot of money to establish a connection to a piece of art or music that is still publicly viewable for free (just like someone is willing to pay for an album even though the song is available for free). This duality preserves the Internet's openness while providing material rewards for the original author. In the future, this may subvert people's perception of the transparency of the traditional Internet and create more demand for digital scarcity.

In Conclusion

As we have seen, NFTs are truly valuable commodities.

They impose scarcity on items that are not inherently scarce and thus can gain incredible value in the market. Like many items, the pricing of NFTs is highly subjective; their price depends on who buys them.

The provenance of these items is easy to trace, identifying previous owners and better-adding value to these items.

For all NFTs, their utility only increases their value; as artwork, finished designs, game items, proof-of-stake, and even digital identities, NFTs will be part of all crypto ecosystems in the future.

Of course, there are far more practical cases for NFTs. What will their final form look like？ Perhaps only god will know the answer.