Home Tech Emerging Tech Non-Fungible Token (NFT) Explained

Non-Fungible Token (NFT) Explained

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Non-fungible Tokens (NFTs), are digital tokens created and stored on a blockchain. Most cryptocurrencies are fungible tokens, where each token is the same. For example, a bitcoin is fungible therefore you can trade one bitcoin for another, and you would have the same thing. One dollar is always one dollar regardless of the serial number on the specific dollar bill. However, each NFT is unique (non-fungible) and can’t be replaced with something else.

NFTs are interesting because their uniqueness and ownership can be verified, they can be utilized across applications developed by different companies, and they can be traded easily through secondary markets. These features open up possibilities for new use cases and business models.

What makes an NFT valuable?

NFT value framework and opportunities

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

https://medium.com/@changhugo/understanding-the-value-of-non-fungible-tokens-nft-49d2713bdfc4
Utility 

Utility value is dependent on how the NFT can be used. Two major categories that have high utility value are game assets and tickets. Another dimension of utility is the ability to use the NFT in a different application. Another way to increase utility value that is easier to achieve is to form partnerships with other businesses to provide benefits to people who hold your NFT.

Ownership history 

An NFT with a high ownership history value is often created or issued by famous artists or companies with strong brands. There are two ways to increase value. The first is to co-operate with companies or individuals with a strong brand to issue NFT tokens. That naturally brings traffic and users to the ecosystem. The second way is to resell NFTs that were previously owned by people who are influential. 

Future value

The future value of an NFT is derived both from valuation changes and future cash flow. Valuation is driven by scarcity of supply and speculation. Future cash flow is the interest or royalties earned by the original owner of the NFT. For example, SuperRare allows creators of NFT artworks to receive 3% royalty every time their artworks are sold subsequently on the secondary market. NFTs are assets and can be leased and collateralized to create additional cash flow.

Liquidity premium

High liquidity translates to a higher value of NFT. ERC standard (a set of rules which define a type of token) NFTs can be traded easily on secondary markets with anyone who holds ETH (ether), which increases the number of potential buyers. Investors prefer to invest in NFT categories that have a high trading volume because liquidity lowers the risk of holding the NFTs. NFT standards that are not based on Ethereum suffer from a lack of liquidity, and the value of NFT created on those platforms is often discounted.

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