How NFTs Work and Where they get Their Value?

The market for NFTs (non-fungible tokens) in 2021 is not showing any signs of slow down. A look at Nonfungible.com reveals that the total USD sales of NFTs have surged over 10,000% from $2.4 million to $300 million. While NFTs like Meebits are generating weekly sales of $19 million, there are a few NFTs that are not generating sales at all. Basically, the sales are a direct indicator of adoption. It is clearly evident from the sales figures that Meebits is enjoying better adoption than other NFTs in the market. While an NFT development company can help you mint and list NFT, it can also help you increase the value of your NFT by strategizing two out of four components that determine the value of an NFT.

How is the value of NFT determined?

Look at an NFT as a collectible. What do you think will determine the value of a collectible? Here is what our analysis established:
• Ownership history
• Future Market Value
• Utility of the collectible
• Market buy/sell demand of the collectible
• Scarcity of the collectible

Now let us apply all these parameters to the NFTs.

Scarcity
The scarcity of an NFT is not an absolute term but it has 3 components that determine it. These are availability, absolute scarcity, and relative scarcity. Let us understand these components in relevance to Cryptopunks, the #2 selling NFT currently.

Absolute scarcity: Crypto punks are 10,000 unique collectible characters. While no two punks are alike, they are also indivisible and each Cryptop unk can be owned only by a single Ethereum address. The number of crypto punks is capped at 10,000 which means there will only be 10,000 crypto punks available ever. This is what makes them scarce. But this component of scarcity is known as absolute scarcity and it represents the NFTs of a particular brand available. For Meebits, the absolute scarcity is 20,000.

Relative scarcity:
In an absolute set of 10,000 Cryptopunks, there are zombies, apes, aliens and many more punks. While there are 88 zombies and there exist only 9 alien punks. This increases the relative scarcity of the alien punks, making them more valuable. Similarly, there are different types of Meebits like elephants, skulls, and aliens and their numbers determine the relative scarcity of the NFTs and hence their value.

Availability:
Absolute scarcity and relative scarcity work together to determine the availability of an NFT. While absolute scarcity restrains the overall availability of an NFT in the market, the relative scarcity limits the supply of unique NFTs in the brand market. Greater scarcity means lower supply and finally translates into the NFT value.

An NFT development company can help the NFT developer strategize the scarcity of the NFT by coding the smart contract in a way that it limits the number of NFTs of that brand are limited or their resales are limited.

Utility
Another very important aspect that determines the price of an NFT is its utility value. An NFT like a gaming asset or a ticket has a higher utility attached to it generally. One dimension of a utility NFT is its use in the game. For example, Axie Infinity, a game on the Ethereum platform sold a virtual property “Flying Falcon” for $1.5 million. This land might not have a real-world value but it does have a lot of value in the game.

Another aspect of the NFT utility is how it can be used across different platforms. For example, a gift card on a loyalty platform is tokenized and it is designed in a way that the owner can go to some other loyalty platform and redeem it. For this to happen, first of all, blockchain interoperability needs to be established.

Ownership history:
Just like real-world collectibles, the NFT ownership adds value to it. For example, Jack Dorsey sold his first tweet as an NFT and it attracted a value of $2.9 million.

Future value Market Value

The future value of an NFT is based on its scarcity component and market speculation. While the NFT development company can help design the scarcity by capping the unique NFTs that can be created, no one has control over the speculation.

Liquidity premium

Liquidity means how easily does an NFT sell in the market. The higher the liquidity, the higher is the value. One of the aspects that determine the liquidity of an NFT is the token standard that it uses. For example, currently, ERC721 NFT tokens enjoy higher liquidity than the ERC1198 tokens. This is because ERC721 is easily tradable in secondary markets.

Also, the higher trading volume of an NFT increases its liquidity and attracts more buyers. An NFT development company helps NFT owners design tokenomics that enhances NFT liquidity and encourages users to trade the NFT.

If you are planning to build an NFT, Antier Solutions can help. We have a team of in-house blockchain development experts and strategists who offer comprehensive solutions – from conceptualization to token development, launch, and marketing.
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