The non-fungible token (NFT) market is skyrocketing, with more and more people creating, purchasing, selling, and exchanging NFTs.
This new market presents many challenges, one of the biggest being the valuation of NFTs.
The valuation of NFTs is a big unknown. There are no case studies on how NFTs should be valued, and the closest analogy, which is the valuation of art, is also quite vague.
NFTs need a new valuation method and a better means of managing digital assets related to NFTs in order to maintain their value.
Fair market valuation
Fair market value is the price at which an NFT changes hands between a willing buyer and seller, neither being under any compulsion to buy or sell, both having reasonable knowledge of relevant facts. This value may include the digital image associated with the NFT, smart contracts based on the NFT, and rights to display and replicate the image in the real world based on contractual obligations between the seller and buyer.
Fair market value largely depends on the concept of the “most relevant market” – the market where the item is most commonly sold to the public.
While in some cases auctions may be considered the “most relevant market,” the specific nature of each NFT and the market it is in, such as OpenSea, will be used to determine the “most relevant market.”
NFT valuation factors to consider
Blockchain security
The underlying blockchain maintaining security is important for buyers.
Ethereum
As the most secure smart contract platform currently, Ethereum can enhance the value of NFTs over time.
On-chain or off-chain metadata
Due to storage limitations of the Ethereum blockchain, on-chain refers to merging metadata directly into the smart contract representing the token, while off-chain means hosting metadata separately.
On-chain metadata makes NFTs more valuable, partly because the metadata is merged into the token, allowing NFTs to exist forever, and partly because on-chain tokens must adhere to certain Ethereum standards, providing them with liquidity premiums and making trades easier.
In determining whether an NFT is on-chain or off-chain, the key question is the NFT’s hosting location, using a digital asset management system (DAMS).
NFT creation date
Since NFTs are so novel, NFTs created before 2020 may be considered “digital antiques” with greater value.
Creators and community
The broader marketability and recognition of celebrity artists will impact the value of their NFTs. Some creators in the sports industry have realized this and collaborated with renowned artists to produce unique NFTs. These NFTs are especially appealing to buyers as they are one-of-a-kind and different from the types of physical items available for purchase.
Scarcity and authenticity
Platforms like SuperRare only support unique, single-edition digital artworks. Some markets also subdivide their NFT products based on scarcity, for example, NBA’s Top Shot divides its NFTs into “Common,” “Rare,” “Legendary,” and “Ultimate” tiers. Products in higher tiers have higher values than those in the “Common” tier.
Authenticity and scarcity complement each other – for example, the Uffizi Gallery in Florence created an NFT for a Botticelli work they own, which is more valuable than an NFT created from a visitor’s iPhone picture. However, verification of the authenticity of internet sellers and the management of NFT-related intellectual property rights is still challenging without access to DAMS.
Mintage
The total number of NFTs minted by creators will affect the value of NFTs. A project with an unlimited number of NFTs issued by an artist is generally less appealing than purchasing NFTs from an artist committed to minting 25 NFTs.
Richness
Richness is related to additional features of an NFT. Audio components can add value – featuring well-known artists or creating an addictive loop for the audience. NFTs that combine digital assets with real-world assets or experiences also have greater value. Recently, the Golden State Warriors auctioned their former championship ring NFTs, offering tangible benefits to buyers, such as VIP basketball game experiences or physical versions of the rings with custom name engravings. One NFT sold for over $800,000.
In terms of experiences, buyers of New Jersey Devils NFTs also received the opportunity to watch the 2021-22 season games in the New Jersey Devils alumni suite and watch with a legendary figure from one of the team’s championship years. The price of this NFT was $3,000. However, some purely digital NFTs on the site sold for as little as $100.28.
Destruction of works
Some creators increase the value of NFTs by destroying the original works, either through an agreement when transferring the NFT to the buyer or before the sale. Perhaps the most famous destruction event was the planned auction of a Basquiat NFT in late April. The auction sponsor, DAYstrom, claimed that the auction would include all related permanent intellectual property and copyrights, and the highest bidder could choose to destroy the physical drawings as they wished. The auction did not take place in the end, as Basquiat’s estate withdrew the NFT from OpenSea and clarified that the estate would retain the permission and rights to the painting.
Destruction may give NFTs the status of exclusive digital assets. However, once an NFT is minted on the internet, destroying the original does not prevent anyone from viewing, downloading, sharing, and copying the image, unless there are enforceable restrictions on intellectual property.
Origin Protocol recently auctioned the “Charlie Bit My Finger” video as an NFT, which was once the most viewed video on YouTube. Origin stated that it plans to remove the original video from YouTube in order to record the content on the blockchain. YouTube has not yet removed the clip, but the video’s title now includes “awaiting NFT decision.”
Contractual limitations
Instead of destroying the original work or allowing the buyer to choose its destruction, creators can always NFT physical objects and keep the objects intact. For example, art historian Ben Lewis created an NFT of Leonardo da Vinci’s “Salvator Mundi,” with slight modifications but without damaging da Vinci’s original work. This NFT is still listed on OpenSea and has not been sold yet. Similarly, as mentioned above, the Golden State Warriors became the first professional sports team to launch an NFT series, including digital replicas of the Warriors’ six NBA championship rings. The initial sale took place in early May and did not involve the destruction of the original championship rings.
Creators can add clauses to contractually limit the display of the original work. If a creator publicly displays or uses the work, the buyer may make claims of breach of contract and copyright infringement against the creator.
In conclusion
With the booming NFT market, valuations are expected to become even more chaotic.
The new market presents many challenges, with one of the biggest being the valuation of NFTs. Due to this uncertainty, planners and clients need to work hard to understand how NFTs create value.
