Non-Fungible Tokens (NFTs) have taken the internet by storm in recent years. One thing is clear: in doing this, they’ve captured the imagination of artists, collectors, investors, and techies. At the same time, the huge promise and hype of NFTs has created a perfect storm for misunderstanding and misinformation. These smart contracts are the reason that many people still dismiss NFTs as “overpriced JPEGs.” They miss the amazing technology and possible value contained within them. This article aims to demystify NFT value by explaining the core technology behind digital ownership, scarcity, and utility, moving beyond the superficial perception and providing a framework for evaluating NFT projects.

Understanding the Core Technology Behind NFTs

To appreciate the true potential of NFTs, we first need to unpack the technology that makes NFTs tick. NFTs are not simply digital art or other digital files. NFTs are distinct digital tokens that demonstrate ownership of digital or physical assets, such as art pieces, online game elements, or real-world properties. Blockchain, smart contracts, and several other important technologies make it possible to create, own, and trade NFTs.

Blockchain: The Foundation of NFT Ownership

Each NFT is made possible through the blockchain technology. This decentralized and unchangeable ledger securely documents every transaction and ownership detail. A blockchain is a specific kind of digital ledger that cryptographically records and validates ownership and provenance of NFTs. Blockchains such as Ethereum, Solana, and Binance Smart Chain allow developers and creators to create and manage NFTs on their infrastructure. The blockchain provides transparency by making it easy to verify that each NFT is one-of-a-kind and who the current owner is. This transparency and security should be the bedrock upon which trust and value can be built into the NFT ecosystem.

Smart Contracts: Automating NFT Transactions

Smart contracts are self-executing agreements, the terms of which are written directly into lines of code. This makes it possible to create and sell, or trade, NFTs. These smart contracts automatically execute the terms and conditions of NFT trade. They guarantee that creators get paid via royalties, and they impose controls on availability or token supply. Smart contracts take the complexity out of how we purchase, sell, and trade NFTs. In doing so, they cut out the middlemen and dramatically reduce instances of fraud. They establish standards that act as building blocks, enabling developers to build rich, innovative features that enhance their NFT projects. This encompasses NFTs that change in real-time, NFTs that grant holders access to special content and experiences.

Metadata: Describing the NFT

Metadata also describes the NFT, this is where the name, description, and image of the NFT go. This data can then be written directly onto the blockchain or a decentralized storage platform. This additional metadata helps situate the NFT within its ecosystem and helps prospective buyers better understand its unique characteristics and potential value proposition. The blockchain cannot hold metadata directly due to storage constraints. Instead, it provides a reference to the NFT through a unique identifier. This keeps the metadata tied to the NFT while allowing anyone to view it without needing to run unnecessary code.

Decentralized Storage: Ensuring NFT Persistence

Decentralized storage solutions like InterPlanetary File System (IPFS) store the digital assets associated with NFTs, ensuring they are accessible and tamper-proof. In decentralized storage, files aren’t saved in one place like with traditional storage providers. This model reduces resilience to censorship and removes single points of failure. This is particularly important for NFTs that are linked to one-of-a-kind digital artworks or media. Furthermore, it ensures that the underlying asset is always available, no matter what happens to the original owner or platform.

Cryptographic Tokens: Securing NFT Transactions

NFTs, or non-fungible tokens, are cryptographically-secured digital tokens that serve as unique digital certificates of ownership—which make them scarce and highly tradable. Cryptography also provides assurance that no two NFTs are alike. It providently and securely allows for transfer of ownership between parties. Indeed, scarcity and security are central to how NFTs create value in the first place. Most importantly, they make it nearly impossible to counterfeit them and ensure that each token remains unique.

Moving Beyond the "Expensive JPEG" Perception

One of the NFT space’s greatest hurdles is the belief that NFTs are just stupid, costly digital pics. While it's true that some NFTs have sold for exorbitant prices, it's important to recognize that not all NFTs are created equal. An NFT’s value depends on some important considerations. These features comprise its scarcity, functionality, and creator/project quality. To move beyond the "expensive JPEG" perception, it's crucial to understand the different types of value that NFTs can offer.

Scarcity: The Foundation of Value

Scarcity underlies one of the most critical principles of economics. It affects so much more than just NFTs—though it does have a drastic impact on the value of all assets. When something is a rarity, it’s in short supply. This scarcity increases its value relative to plentiful commodities. In the NFT ecosystem, scarcity is an essential component of value. You can do that by capping the overall number of tokens that can be minted or by creating NFTs with different traits and properties.

Art critics view NFTs’ purported capacity to “guarantee scarcity” as central to their social and economic value. This limited availability increases the desirability of the NFTs, causing prices to escalate. Here’s the thing to understand — scarcity does not equal value. Just because an NFT is rare doesn’t mean it will have value. If it does not have any utility or artistic merit, then it may be worth nothing.

Many people view any scarcity introduced through NFTs as an “artificial manipulation to transfer wealth”. This view goes on to say that developers and marketers manufacture a false scarcity of NFTs. By monopolizing production, they can raise prices and reap the greatest profits. This idea isn’t without merit. We need to admit that scarcity is a fundamental driver of value in any market, not just the NFT market.

NFTs provide an unusual laboratory to reconsider previous academic theories on social value, artificial scarcity, and price. They pose an electric opportunity to create new, future-focused theories. The NFT market moves at the speed of light. It will be thrilling to see how these theories are challenged and bolstered through research.

Utility: Functionality Beyond Aesthetics

For one, some NFTs do retain their value, at least in the artistic or collectible sense. For some, their value comes from just doing something really useful. Utility is a term used to describe what an NFT can do for its owner. This could be anything from gaining access to special content, joining an active community of other members, or having a role in governance decisions. NFTs that have utility attached to them are inherently more valuable than ones that don’t, because they provide real-world benefits beyond just owning something.

Community: The Power of Collective Ownership

In fact, the community that forms around an NFT project often has a huge part in driving its value. An energized, involved community is often the best defense against detractors, bringing advocates to the fore and helping to promote the project and ensuring its success. NFTs that are living in the context of a rich community are much more valuable. People who lack social connection—who are isolated, lonely, or disconnected—have a harder time finding meaning.

Provenance: Verifying Authenticity and Ownership

Provenance, or the history of ownership and authenticity, is part of what makes NFTs valuable, after all. This is even more important for NFTs that feature digital artwork or other types of collectibles. This ensures that the token is genuine and has not been forged. Blockchain technology makes it relatively easy to track the provenance of NFTs. Each transaction is recorded on the public but immutable ledger, which protects privacy while enhancing security. This level of transparency and traceability adds value to NFTs, giving buyers peace of mind that they’re getting something original.

Evaluating NFT Projects: A Framework for Informed Decisions

With the proliferation of NFT projects in recent years, it can be challenging to distinguish between those with genuine potential and those that are simply cash grabs. To safely invest in NFTs, or use them in your business deep framework. This framework is designed to give you a better lens through which to evaluate NFT projects. This holistic framework needs to take into account everything from on-chain analytics to smart contract design to functional use cases.

On-Chain Analytics: Digging into the Data

On-chain analytics involves analyzing data recorded on the blockchain to gain insights into the activity and health of an NFT project. This might involve developing measurable criteria, like significant trading volume, number of unique holders or token distribution. With a little deep-dive, investors can find meaningful insights just by analyzing these metrics. They’ll get a sense of the demand for an NFT project, gauge community interest, and get an idea of the long-term potential.

Rarity: Assessing Scarcity and Uniqueness

Finding out how rare and difficult it is to possess a given NFT is one technique to determine its worth. A rarity score between 1-5% is still considered very good and the NFT is still considered rare. Rarity tools and platforms aid investors in analyzing how rare and unique NFTs of a collection are.

Trading Volume and Price Trends: Gauging Market Demand

Environmentalists should pay careful attention to the huge spike in trading volume in the first few days. Take a look at that in light of the recently released 2021 numbers. This can help you gauge the overall interest and demand for the NFT project and how it evolves over time.

Distribution of Tokens: Identifying Potential Risks

Set a maximum of 4 NFTs per wallet on average or less. This level indicates good distribution and supports vibrant market competition and choice. A more decentralized distribution would help protect against manipulation of the resulting market and improve the long-term viability of the project.

Collection Size: Balancing Scarcity and Community Engagement

NFT projects with a supply cap of 8–10,000 NFTs is sufficient to keep scarcity and community intact. Without an adequate collection size, it may be difficult to sustain a lively sense of community. Conversely, an excessively extensive collection can lessen the worth of each specific NFT.

Community Size: Measuring Interest

Typically, NFT projects that have a highly engaged community in the range of 20,000-100,000+ followers are the ones you should be looking into. Having an engaged, passionate community behind the project can help keep the initiative’s momentum, market the project, and make it an overall greater success.

Unlike on-chain metrics, which only take into account activities that occur on-chain, they miss huge investment moves taking place off-chain, such as on cryptocurrency exchanges, custodial payment applications and layer-two networks. For a holistic view of an NFT project, leverage on-chain analytics with other NFT evaluation methods. Together, these two approaches will give you a more complete picture of your project’s potential.

Smart Contract Design: Ensuring Security and Functionality

Ultimately, the design of the smart contract that controls an NFT project is paramount. It provides the project’s security, flexibility, durability, and long-term sustainability. A properly designed smart contract is tamperproof, programmed for efficiency and open to public inspection. Create a test bed that best fulfills the project’s use case objectives. From royalties distributed automatically to creators to enabling dynamic changes to metadata, these functionalities offer countless possibilities.

Investors should always look to dissect the smart contract code behind an NFT project. Engaging in this review protects both parties by making sure that any vulnerabilities are identified and that the project meets their expectations. Take stock of the reputation of those developers who deployed the smart contract. That one piece of knowledge can uncover their proficiency and reliability.

Functional Use Cases: Evaluating Real-World Applications

The functional use cases of an NFT project really showcase the real-world applicability of them. Beyond being unique, they highlight the value that it brings to its holders. NFTs that have clear, compelling use cases will always be worth more than those without practical utility. Some common use cases for NFTs include:

  • Access to exclusive events: NFTs can grant access to exclusive events, conferences, or meetups, such as VeeCon, Coachella, or ApeFest.
  • Voting rights: NFTs can provide voting rights in decentralized governance models, allowing holders to participate in decision-making processes.
  • Special offers and discounts: NFTs can offer special discounts, promotions, or loyalty rewards, such as exclusive material or gamification experiences.
  • Virtual experiences: NFTs can grant access to virtual worlds, games, or experiences, such as LinksDAO's golf and country club experience.
  • Membership and loyalty programs: NFTs can be used as membership or loyalty cards, offering exclusive benefits, such as UNDW3's loyalty program.

When evaluating the functional use cases of an NFT project, investors should consider the following questions:

  • Are the use cases clear and compelling?
  • Do the use cases provide tangible benefits to NFT holders?
  • Are the use cases sustainable in the long term?
  • 🚩 There's nothing special about the utility - it’s cookie-cutter stuff every NFT project offers.

Team and Community: Assessing Credibility and Engagement

As you assess any NFT project, take a closer look at the team leading it. The community that rallies around it is an equally important factor to consider. Having a well-rounded and seasoned team behind the effort will boost the credibility of the project and enhance the chances of winning. An active and dynamic community can help lend muscle, spread the word, and ultimately help the project flourish.

Team's Experience and Reputation:

  • Doxxed teams have a much higher incentive to keep their reputation unscathed.
  • ⚠️ Anonymous but have demonstrable experience or have already made successful NFT projects.
  • 🚩 Have no demonstrable experience in crypto or any other industry.

Marketing and Promotion:

  • 🚩 Are they shilling (aggressively promoting) their project in a cookie-cutter way?
  • 🚩 Are they relying solely on sponsored posts and giveaways every other day?
  • 🚩 Is the community encouraged to spam other people’s DMs?

The Convergence of DeFi and NFTs

Decentralized finance (DeFi), non-fungible tokens (NFTs) and related innovations have exploded since 2020. Their meteoric rise in popularity have attracted billions of dollars in investment, and resulted in the creation of a new breed of fundamental analysis for these assets. The intersection of DeFi and NFTs has led to new and innovative use cases, such as:

  • NFT-backed loans: NFTs can be used as collateral for loans in DeFi platforms, allowing holders to unlock liquidity without selling their assets.
  • Fractionalized NFTs: NFTs can be fractionalized into smaller, more liquid tokens, making them more accessible to a wider range of investors.
  • NFT staking: NFTs can be staked in DeFi platforms to earn rewards, such as yield farming or governance tokens.

These two use cases demonstrate the powerful intersection between DeFi and NFTs. They pose serious challenges that threaten to undermine those opportunities.

Conclusion

NFTs are more than just "expensive JPEGs." These digital tokens are one-of-a-kind. They are a digital certificate of ownership of any asset and have a large variety of possible use cases. By understanding the foundational technology behind NFTs, you’ll be able to judge NFT projects with a holistic lens. Understanding the intersection between DeFi and NFTs helps you better position yourself to thrive in this exciting and fast-moving space. As with anything else, the intrinsic value of an NFT derives from its scarcity, utility, community, and provenance. By taking these factors into account, investors can identify NFT projects that have genuine potential. Taking this approach allows them to avoid projects that are obvious money grabs. The NFT market is maturing at a rapid pace. Keep your finger on the pulse of what’s new and evolving to stay one step ahead—let’s go! Calloutcoin.com delivers in-depth analysis on NFT standards, metaverse technologies, digital identity solutions, and the latest DeFi trends, ensuring that readers stay ahead in the blockchain and crypto world.