Non-fungible tokens (NFTs) have undoubtedly been the hottest topic in the cryptocurrency space this year. While the market is growing rapidly, these assets remain an enigma for many that are not involved, or only casually involved, in the blockchain economy.
As such, MRP would like to present an in-depth breakdown of what NFTs are, how they are created, priced, exchanged, and how tokenization could transform the future of digital transactions.
Topics covered include: NFT valuation and marketplace dynamics, Ethereum (ETH), EIP-1559 and Gas Fees, Decentralized Finance and Apps (DeFi, Dapps), the WAX blockchain and low-cost NFTs
Related ETF & Assets: Amplify Transformational Data Sharing ETF (BLOK), Ethereum (ETH), WAX (WAXP)
Non-fungible tokens (NFTs) have been making big headlines over the last two months and for many not as well versed in crypto-speak, it can all seem very confusing or even nonsensical.
However, there is a case to be made that NFTs may be the next generation of blockchain technology, enabling a future where purchase and ownership of almost any asset can be autonomously validated, recorded, and reviewed with the use of a digital ledger.
NFT markets had their biggest month ever in February, processing more than $340 million in trading volume according to Dapp Radar’s February 2021 Industry Report. As Decrypt notes, that is more than all of the NFT volume in 2020 combined.
This month is likely to see significantly more volume, considering Google searches for “NFT” recently hit an all-time high, and the number of weekly users on digital-collectible platforms exceeded 450,000 last week, according to data from The Block.
With that in mind, it seems to be the perfect time to dive into exactly how the NFT marketplace works.
What is an NFT? How Are They Valued?
In the simplest terms, NFTs represent the tokenization of asset ownership on the blockchain. Think of purchasing an original work of art as an example. When a collector buys a piece of artwork, they sign a contract that transfers ownership and then receive a certificate of authenticity to prove that they own the original work, even if there may be unofficial copies out there. NFTs function in a similar way, creating a digital token in the blockchain that cannot be duplicated or copied (hence “non-fungible”), and will track the entire ownership history/selling price of the underlying files(s) on its own.
Any prospective buyer of an NFT asset will be able to see exactly when it was minted, when it was purchased, when it was sold, at what price, and by whom. Therefore, not only is the entire process of generating official ownership decentralized, but all transaction history is also transparent, smoothing out the valuation process.
When an NFT is minted, owners of the asset have the ability to mint more than one “edition” of the piece, just like trading cards. So, theoretically, the originator of an NFT could mint 50 editions (or 500, 5,000, 50,000, and so on) of a piece of art, a video, etc., but following the law of supply and demand, prices for that NFT will likely be lower since it’s less rare than something that is minted “1 of 1” (only one edition exists). It is also worth noting that collectibles usually derive value from a lower “mint number”; for example, a mint number 1 of 50 will generally be more valuable than a mint number 10 of 50.
Editions of most NFTs are also able to be “burned” or digitally destroyed. Burning an asset could be useful if you own multiple editions of an artwork and you want to increase the value of the NFT. Again, following the rules of supply and demand, an asset that has only 49 existing editions is going to be more scarce and marginally more valuable than the same asset with 50 editions.
Earlier this month, a blockchain company, Injective Protocol, took “burning” very literally and demonstrated this process in real life. After buying a piece of Banksy artwork and digitizing it as an NFT, they set the physical copy ablaze on a livestream. In a real-world demonstration of NFT pricing dynamics, the value of the NFT did, in fact, increase since it was the only owned edition of the artwork left. The piece, bought by Injective Protocol for $100,000 was then sold as an NFT for 228.69 ETH, or roughly $380,000 at the time.
While that sounds like a lot of information to collect, an efficient NFT ecosystem is already being built out to streamline the availability of information on the blockchain. Platforms like OpenSea.io allow NFT investors to see all available transaction history, number of editions, listings, and bids of a certain asset…
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