Perspective: Valuing NFTs from the perspectives of technology, functionality, and hedonic value

Original Title: 《NFT: Technical, Functional, and Hedonic Value Multipliers》

Original Author: rohanda.eth

Compiled by: Dinzz, H.Forest Ventures

There is a saying in this circle: "Don't invest in projects you don't understand." Many people remember this saying and then miss out on NFTs. NFTs indeed have many differences from the traditional crypto market, such as their lack of liquidity, their fundamentals being aesthetic or meme culture, their roadmaps being bizarre, or they might just be a JPG. However, the author of this article establishes a basic model for NFTs from the perspectives of technical, functional, and hedonic value, illustrating the concept that NFTs can also be valued.

The pricing of NFTs (non-fungible tokens) differs from fungible tokens like BTC and ETH. The value of NFTs depends on their category, design, and, in some cases, their financial attributes and utility. As more people begin to understand NFTs, the unanswered question remains:

How do NFTs gain value?

The reality is that there is no exact scientific basis behind this, nor is there a black-and-white answer—most of the time, it is gray. However, unlike irreplaceable physical artworks like the Mona Lisa or Jackson Pollock, NFTs have some unique digitally traceable characteristics that can be objectively valued. I believe that when valuing NFTs, these characteristics or value multipliers should be taken into account. These value multipliers can be divided into:

1. Technical value: Security of the chain, degree of decentralization, and scarcity.
2. Functional value: Utility and liquidity of the NFT.
3. Hedonic value: The expectations surrounding the NFT, the creator of the NFT + community.

I. Technical Value

Security of the Chain

The significance of NFTs lies in their immutability and being guaranteed digital assets (built on the foundation of their underlying blockchain infrastructure remaining immutable and secure). Therefore, Ethereum is the dominant network for NFTs, largely due to it being the most secure smart contract platform today, and this dominance is expected to continue into the foreseeable future.

Number of NFT projects on Ethereum

In other words, minting NFTs on a reliable chain helps ensure their value, which is why NFTs minted on Ethereum are currently more valuable than those minted on other chains.

Scarcity

This is a major reason for value manifestation, similar to the total supply of fungible tokens. The rarity factor is the core element of NFTs, and the rarest NFTs in collectibles are often the most valuable in the market. The following CryptoPunks example provides a simple description of the relationship between scarcity and price, offering insights into market value and a quick formula model to validate market valuations.

Source: Cointelegraph

This does not mean that this mathematical formula is effective for CryptoPunks alone; it will also apply to other NFT projects with different characteristics and attributes. NFT creators adjust the supply of NFTs through programming to influence rarity. For example, minting 1,000 basic collectibles, with only 10 being gold-level collectibles. In other words, all other variables remain constant aside from rarity, and the price of the scarcer NFTs will be higher. This forms the basis of the valuation model for collectible NFTs based on attribute statistical rarity.

Degree of Decentralization

NFTs that are fully minted on-chain, such as Avastars, Aavegotchis, and Art Blocks drops, exist solely based on their respective Ethereum smart contracts. This means that as long as Ethereum exists, they will continue to exist, which could be for a very long time.

On the other hand, some NFT projects rely on external, off-chain providers (like Amazon) for convenience and flexibility. This introduces a trust dimension, so you must hope that the project will persist and keep its servers running. Otherwise, your NFT could become blank in a few years. Therefore, the value of NFTs being on-chain is self-evident—it proves itself and can prove itself at any time.

II. Functional Value

Utility

This may be the most open aspect of NFTs, as the utility of NFTs describes their functional and financial value:

• NFT holders have rights to functional goods, services, or assets. For example, accessing software through NFT licensing, protecting intellectual property, or delineating insurance liability.
• NFT holders have rights to future cash flows, which can be valued based on discounted cash flow models. Examples in this area include resale royalties, digital real estate, and income-generating NFTs.

For instance, a more novel concept is NFT staking or mining. This refers to staking NFTs on a protocol to earn rewards. It brings passive income to NFTs and can be seen as a combination of DeFi and NFTs.

Onessus Blockchain Systems is a blockchain gaming and NFT publisher based in the United States. Its WhenStaking platform has proven that the concept of yield NFTs is becoming increasingly popular.

Another increasingly popular form is the redeemability of NFTs. Redeemable NFTs allow holders to exchange NFTs for physical or digital goods. While not a new concept, their status is continually rising. For example, NiftyVille is further exploring redeemable NFTs, creating a cross-border entertainment platform that connects gaming and real life through this redeemable element in the game.

Liquidity

This is also a reason that attracts premium investors. Compared to "off-chain" collectibles, blockchain-based collectibles have higher liquidity value. Given the ease of sale and quantity, investors may value NFTs issued on Ethereum more. However, several other public chains are gradually taking over Ethereum's market dominance.

Public chains supporting NFTs

III. Hedonic Value

Expectations

This involves the experiences that NFTs bring to their buyers:

• Perceived socio-cultural value, such as relationships with artists, groups, events, or cultural domains. This also includes the social benefits of owning an NFT—such as access to exclusive digital communities, team identification, or gaining respect and admiration.
• Personal, emotional, or aesthetic bonds between the buyer and the NFT.
• This hedonic value can simply be the joy of hunting for rare items or completing a collection.

Creators + Community

If someone without fans or a history lists an NFT on OpenSea or Rarible without promoting it, can it sell? Sometimes yes, but it requires more legwork to gain the community's attention. This is why an NFT published by a prominent artist or creator is endowed with value. It carries the magic of the issuer's digital fingerprint, which is, of course, no different from a signature. The key to remember is that a participating community creates demand. Naturally, the more popular the creator and the larger the community, the more valuable the NFT becomes; this dynamic holds true in any market.

The community largely exists on Twitter, Discord, or Telegram. A promising NFT collectible is marked by an enthusiastic community with new members joining daily. Therefore, attention must be paid to the following points:

1. The number of users in the NFT's Discord or Telegram group.
2. The number of Twitter followers.
3. The growth of Discord/Telegram users and Twitter followers over time. If Discord is dead or Telegram is full of bots, that is a dangerous signal.
4. Whether the NFT offers any benefits, such as exclusive content or chat rooms.

Conclusion

When it comes to NFTs, don't take it lightly. We are all still exploring how to accurately evaluate them, and there is certainly no correct answer yet. Given the speed of development in this space, our current evaluations are likely to differ from those a year from now. The bottom line is that we must approach the valuation of NFTs from multiple angles. But if you can establish a model, you will be ahead of the market.

Translator's Note:

The author's viewpoints can be summarized into dimensions that an NFT needs to focus on:

• The public chain it is on
• The rarity of the NFT within the collection
• The degree of decentralization of the project
• Any special utility or service the NFT provides
• Cultural attributes
• Aesthetics
• Community enthusiasm

The author mentions, "Ethereum is the dominant network for NFTs, largely due to it being the most secure smart contract platform today, and this dominance is expected to continue into the foreseeable future," which indeed reflects the current state of NFTs, akin to the state of the L1 chain battle, where the number of NFTs from other public chains that can be named is few, but this is merely the current situation.

Currently, the most popular NFTs are mostly PFP types (profile picture types), followed by art types, and these blue-chip projects are almost all on the Ethereum chain. However, Ethereum's high GAS fees and low TPS drawbacks have led more GameFi-type NFTs to be deployed on the BSC chain, while Flow, which has good relations with sports and entertainment capital, could be a breeding ground for sports and music NFTs… Multi-chain competition development, I believe, is the way to progress.

I believe the endpoint of NFTs is not about market capitalization, but rather that NFTs, as a tool, become imperceptible yet omnipresent, imprinted in the blood of crypto.