What is the value of NFTs?

2021-11-25

When it comes to NFTs, there isn't any uniform definition, that encapsulates all use cases.

In the most basic form, NFTs are identifiers that uniquely provide chain of custody and proof of ownership.

They are based on smart contracts: a technology allowing for immutable, predefined and pre-ruled contracts that are executed automatically.

While NFTs are the most popular use case of this technology, they aren't the only one.

NFT stands for non-fungible token, meaning that no two tokens are alike. They are unique, like no two paintings (not prints) are ever alike.

Another use case of smart contracts is to create tokens that are fungible, basically creating a new currency, that the creator controls.

Both of these use cases are powerful building blocks to create all kinds of new ideas.

It is the decision of the creator what to attach to that token.

So far, there have been quite a few interesting ideas that utilize these building blocks.

The most popular use case is attaching a piece of digital art to the token and letting the unique transactionability of the blockchain technology create a liquid market for that art piece.

This provides a few benefits for the artists: they can natively use the power of the internet to build and promote a community around their art projects. They can also define an immutable exchange-commission that will be paid to the artist whenever the piece is being sold.

Another popular use of the smart contract building blocks is to create a governance process around your community, fans or project.

You create a pool of fungible tokens, each of them getting a vote for decisions, a share in revenue, access to special events and locations and distribute them among your community members, your fans or your shareholders.

You are even free to create different classes, roles, electoral processes, complex decision processes and agreements into the ownership token.

This doesn't greatly differ from regular shareholders in corporations, however again, blockchains create liquid markets for the tokens, smart contracts offer prohibiting certain changes of ownership, allow charging exchange commissions, loss of voting rights on exchange, as well as vesting and cliff provisions, that are all executed automatically and are immutable, thus have guaranteed enforcement.

These are known as social or governance tokens.

Each of these applications provide unique opportunities for acquisition, ownership and investment.

In any way, the user needs to see either immediately-realized or future value.

In case of art based NFTs the value proposition is clear, the user either acquires the piece for virtue signalling or for appreciation purposes (or both).

The value is derived by the brand power of the piece and its artist.

This is not a new concept. Brand value is a function of perceived value by the user's peers and society in general.

If the brand continues to exceed expectations, its value appreciates. The current fans will spread the word, and it will become more popular.

Ownership of such an asset will provide the owner with the value of showing it off, as well as exposure to its appreciative upside (although also exposure to its depreciation).

In case of social tokens the decision is the same, a user might acquire a social token to be part of a community by having access to its special benefits (like membership-only events), to have exposure to the community's brand value and thus the tokens value appreciating or to acquire a share of the voting rights or a share of promised profits.

In each case, a prospective investor must estimate the value of the benefits of the assets.

While these two use cases are interesting, they only offer marginal improvements over conventional tools.

It gets really intriguing when you start combining the two options into one offer.

An artist can offer owners of their art access to special events.

A membership group can issue its members a public profile badge to represent themselves.

Artists can offer their fans a share in their upcoming projects, to finance their advance in exchange for a profit sharing agreement, while allowing the investors to show the public they are participating.

A sports organization can offer its fans exposure to its brand equity while offering voting rights for the opponent of future friendly matches, while the NFTs act tickets for the game.

The possibilities are endless.

It is likely that most users will only participate casually in these offerings. They will be influenced by the value of virtue signalling, and the offer of more participation in their favourite artist, creator, sports team and membership club.

If you want to invest in such a token, you must first start by estimating the value of the benefits of each token that it is providing for its users.

How much are they willing to pay for access to special events, special editions of singles and voting rights.

This is mostly a function of brand value. How famous is the brand, artist or club, how liked is it by the public and its fans.

For the next step, you need to account for brand appreciation. This is mostly a function of marketing skills and product marketed fit.

Product market fit is a metric that describes how well the token, product or brand is serving its fans. Are they really excited about what they are building and creating?

Brand value increases when people talk about it. They learn about the brand from advertising, created content, influencers and their peers.

Marketing skill influences the former factors. In all cases it true that the greater the product market fit, the more exciting (not hypeable) the product or token is, the higher the conversion rate will be.

Advertising and influencers will convert better, and people are much more likely to tell their peers about the project.

Given this foundation, you can estimate the expected brand appreciation of the token or project.

The better the marketing skills and the better the token serves its users, the steeper the exponential growth curve will be.

While it is impossible to accurately value a token or project, since its value is entirely created in the eyes of every beholder, the framework above will help you rank tokens and projects against each other.

If the token has greater benefits, more utility and due to better marketing skills of the team likely a generous future ahead, you can increase its expected value appreciation compared to other tokens.