Essential questions about NFTs

Is NFT a scam or another big thing? Would it be a breakthrough like an mRNA vaccine, or would it rot as ICOs? Would the NFT market replace traditional ones, or would it pop like a bubble?

by Alec Vishmidt Technology

The answer is… Nobody knows for sure. But there are some signals we can observe right now. Let us start with the basics of what we know. First, the NFTs market exists, and people buy and sell NFTs. The largest deal was made on December 4, 2021, when an anonymous digital creator PAK sold NFT Artwork 'The Merge' for $91.8M, and trading volume crossed $23B in 2021.

What is not an NFT?

NFT does not live in a vacuum. NFT is just a record in a digital ledger. It is not a file or something you could effectively "save" or detach from a ledger. This means if something happens with a ledger, the same happens with an NFT issued within it.
NFT is not a property right by default. Property rights are defined by governments, not by a blockchain network, and NFTs stay in a grey area right now. So there are no rules to enforce your right, and there is no one to help you get your stolen NFT back.
NFT is not copyright either. There are just no laws protecting the copyright, and "minting" the NFT doesn't create any obligations or restrictions.
NFT is not unique by nature. Yes, it is a non-fungible token, meaning it can't be swapped with another one seamlessly. But nothing prevents an artist from issuing two NFTs and attaching the same piece of artwork, except their goodwill.
NFT doesn't carry the digital asset. The artwork is not "embedded" in the NFT, but NFT carries a link to it. So, the artwork or any other digital asset should be hosted somewhere. Let us say you own an NFT of the first tweet. Your NFT would be valid till Twitter exists. But if it disappears eventually, your sweet multi-million link would lead to nowhere.

Why NFT is different?

In the real world, property rights are well-defined, and they are essential for daily operations. Just imagine that crazy world where nobody knows which property belongs to whom, and you see random people taking valuable stuff right from your hands.

But with the emergence of the digital world, things have changed. Now, a random person could go to your profile on a social network, copy your avatar, and use it on their own. Everything could be copied, replicated, and distributed at no cost. And now, NFTs are here to fix that and add real-world traits to digital assets.

What’s the value of an NFT?

There is a good article called Understanding the value of non-fungible tokens (NFT) posted by Hugo Chang with a good description of the main concepts. Briefly saying:

Value of an NFT = Utility + Ownership History + Future Value + Liquidity Premium

Right now, we see plenty of NFTs are issued (or “minted” in blockchain jargon) and traded, but what are the core value elements those buyers chase? That’s easier to say which elements are not the desired ones:

Utility — let’s put it bluntly, there is no utility in having an NFT now. Yeah, we hear that NFTs would be usable in cross-game items exchange, metaverse property management, etc. But not right now.
Liquidity Premium — another piece of a value that is not the main one for the majority of the market. It could never be the primary one.

So, we have two other elements left:

Ownership History — I’d like to expand this element to a “Historical” value that contains all time-related events. And yes, right now the market is not yet mature, and it feels cool to get “one of the first NFTs that mankind created”. Same thing for “one of NFTs that influencer has owned”. This piece of history could be valuable in the far future.
Future Value — this one is the most important for the majority of a market right now. New people adapt NFT and blockchain because it is hyping, and we hear stories about people doing boring things and going millionaires in several days. No doubts, most people dream the same scenario—they buy something for a penny, and eventually it costs millions. Unfortunately, that’s the unhealthy and risky value element, and we can see what happens if it is the only value component. Look at ICOs, their rapid rise, and fall. What’s the value of those coins now?

We can observe the same tendencies today. But there are several important differences as well that make the NFT market less scammy and more of a value.

Is the NFT market a scam?

I truly believe that the NFT market has a great potential in bringing value via utility and as a historical asset. You can tokenize and own images, predictions, memories, and myriads of other digital assets. But any market should have a reliable infrastructure. Something that would guarantee that an asset would not vanish in time, something that would ensure its uniqueness, something that would allow a person to own from a legal perspective.

NFT market resides on global trust. Is it a reliable basis? Seems like so. Think about the multi-billion art market or diamonds market. They exist for centuries, while the actual value of those real-world assets is debatable. If aliens contact humankind, would they exchange the "Salvator Mundi" painting by Leonardo da Vinci for $450M-worth of resources? I don't think so, as it is just a piece of walnut and oil on it in aliens' sensory organs. But why do people treat it as a worthy asset? Because this piece of walnut and oil was touched by Leonardo himself, it looks subjectively good, and it is one of a kind.

The same approach could be applied to an NFT. The potential is huge, but with constraints of the digital world we live in.

What’s the market price of an NFT?

All existing pricing models were defined by leading economists when there was no digital world around. Not all of them are applicable to the digital world, and we need to re-define them once again.

The best-looking model is the easiest and it is still applicable—the price of something is defined by the agreement found by a seller and buyer. That’s the amount of money that buyer is willing to spend, and the seller is willing to get in a return for an asset. And it is mostly subjective in the case of an NFT.

So, there is no way to define the price? Of course, there are some tricks. The easiest method here is to set a price comparable to similar assets. The similarity could go from other NFTs present on a market, or from real-world examples. Let us say, a well-known painter sells their artworks for $10k on average. This could mean that an NFT of an artwork minted by this painter could be worth $10k as well.

The most influential factors for pricing are the market demand, the author's prestige, the history behind the asset, and its popularity. That is why an NFT owned by Elon Musk would cost a lot, same as the first NFT sold on Sotheby's, and all hyped NFTs like CryptoPunks collection.

So, what would make the NFT market bloom?

Legal coverage. Markets highly depend on stability and trust. And unfortunately, humankind hasn't invented anything better than a government that protects ownership rights. We need to work on legislation, define terms, and take digital assets from a foggy area to a fully legal space. After that, large institutions would treat NFTs markets as something worth caring about.

Cooling down the NFT fever. High future value and enormous returns on investments are distinctive features of financial pyramids. And that is something we should mutually avoid to keep the market healthy. Indeed, high ROI increases the adoption rate, but it also attracts scammers, tricksters, and other unreliable persons, thus raising fraud levels and decreasing the trust. The only thing each of us could do here is spread the knowledge about NFTs and explain all the challenges on the market.

Real NFT implications. You might argue that NFT has utility right away, but I doubt it. As a society, we need to try implementing the idea of a digital token across our knowledge and business domains and see what happens. NFTs should work in logistics, certifications, artists reward programs, but this is just a beginning of a journey.

The simplicity of use. All those blockchain-related issues that I described four years ago are still applicable in 2022. Things got easier with Opensea, Metamask, but it is still tedious for an artist to issue and manage NFTs, and collectors to enjoy their possessions. Reliable storage. We need to push it hard and create a reliable infrastructure of digital assets storage. Think about Wikipedia or any other community-driven place, self-funded and free from corporate influence. And we have smart contracts power to fund and maintain it automatically.