What Makes an NFT Valuable: 4 Elements To Look Out For

photo credit : Gatty Image

Early this year, I stumbled upon an IG post with a caption that reads;

Am I the only one who doesn’t understand what NFTs are about? If you do, kindly explain in simple terms at the comment section.

Well, you can guess where I went to; the comment section. Most of the comments showed that a lots of people wanted to understand what NFTs are about.

NFTs, which stands for non-fungible tokens represent something unique and irreplaceable. However, there is confusion around terms like blockchain, crypto art, and NFTs, leaving many people at a loss.

Now, let’s first delve into the concept of non-fungibility. In economics, ‘non-fungible’ implies replaceability. For instance, when buying one amongst many orange jackets from an Amazon store for $39, you don’t specifically care which one you receive; they’re replaceable (fungible) and essentially the same. However, contrast this with a unique, sentimental orange jacket that holds immense personal value, which your grandfather gave to your dad, and your dad then passed it down to you. This jacket is non-fungible; it’s irreplaceable and holds emotional significance.

In our economy, everything falls into either the fungible or non-fungible category. A sack of rice is fungible; the Mona Lisa painting is non-fungible, making non-fungible items considerably more valuable. Now, let’s break down ‘NFT’: Non-Fungible Token. The ‘token’ here refers to a concept intertwined with the blockchain.

GIF credit :Gatty Image

Let’s simplify the blockchain without the jargon. Blockchain is a public record of transactions, digitally stored and validated by a network of computers worldwide. Imagine buying three pizza slices from a friend using a debit card.

In a conventional transaction, banks manage and validate this exchange of money. They record each transaction, updating account balances. In a crypto world, when I pay Anna six crypto coins for pizza, this transaction is publicly recorded across multiple computers. If I lack the coins, the discrepancy is flagged and rejected. Conversely, if I possess the coins, the transaction is validated, recorded, and becomes part of the public record.

The link between blockchain and cat GIFs selling for enormous amounts may seem baffling, but let’s explore it. We’ve discussed how blockchain verifies currency transactions publicly, displaying who has what. However, the concept stretches when applied to non-monetary items.

Consider a scenario where the blockchain records a Malaysian businessman trading three million dollars worth of coins for a digital certificate confirming ownership of a tweet by Jack Dorsey. The blockchain simply verifies if the businessman possesses the required amount, and then approves and documents the transaction.

This extends to various non-fungible tokens (NFTs), covering music, digital art, and NBA Top Shot moments, with some sales reaching staggering amounts. In essence, the blockchain ensures every transaction’s legitimacy without relying on a central authority, providing transparency and security.

Human psychology ties value to group validation and scarcity. As humans seek value beyond basic necessities, the concept of value shifts to psychological excitement around specific items. The art industry is a testament to this phenomenon, but now, technology enables this valuation in a non-physical way.

However, amidst the hype, a significant flip side exists. The backbone of this technology, the blockchain, relies on vast computational power. Ethereum, the blockchain hosting most NFTs, consumes a staggering 33 terawatt hours of electricity, equivalent to the power usage of an entire country like Serbia. The environmental impact is concerning, especially since this power often originates from fossil fuels, contributing to climate change.

The NFT frenzy presents a paradox — a digital realm affecting the physical world through substantial energy consumption. Despite the hype and financial speculation, this phenomenon poses real-world challenges that demand attention. Yet, there’s potential for a transformative impact.

Despite its current implications, this phase might mirror previous tech-driven hype cycles. Similar to the dot-com bubble, which eventually burst, NFTs are currently in a speculative phase, pushing boundaries on how we authenticate and validate assets. For instance, simplifying property transactions, usually laden with paperwork and intermediaries, could revolutionize by enabling smoother, verifiable transactions without centralized oversight.

1. It Is The First: If an NFT is the first either from a reputable company or individual or even a country that makes it valuable. An example is buying the first NFT of Tesla. A lot of people will want to get their first NFT because it is a credible company.

2. It Has A Real-World Benefit: An NFT with no real-world benefits isn’t worth buying. The most popular ones are being bought because people believe the owners are influential persons and will someday host events, shows, or have a dinner and invite whoever purchased their NFTs.

3. The Ownership History: Imagine if Denzel Washington sells a favorite painting of himself as an NFT? His fans will buy it because he is a known figure compared to regular people who do the same. Since the owner is a celebrity, it makes the painting a valuable asset to purchase.

4. Unique Or Rear: A valuable NFT can be an ancient sculpture of a legend or a painting of a great artist which can only be seen in museums, art galleries, or with family members. An example is Picasso’s paintings; they’re non-fungible. While anyone can make copies of his paintings, the original painting remains irreplaceable.

The number of NFTs out in the marketplace is in the millions. You would most certainly want to Select those which have strong provenance/history. One way of selecting your next NFT is by measuring your next purchase against one or all of these pillars mentioned above, helping you stand a much higher chance of picking up something that increases in value.

What are your thoughts on NFTs?