NFTs: A new market with an unsurpassable value proposition

by Jung Arum, a Business PM of LINE Blockchain and LINK

The monthly turnover of NFTs (non-fungible tokens) increased more than five times in just one month this summer, rising from USD302 million in July to USD1.7 billion in August (source: nonfungible.com), and then surpassing USD2 billion soon. But how do we create value in digital transformation and what brings value to it?

NFT is an irreplaceable token stored as a unit of data on a digital ledger (blockchain), unique and therefore not interchangeable. Its identity is proven by the fact that ownership is recorded on the blockchain and transparently disclosed. NFTs began to emerge in 2017 when Dapper Labs’ CryptoKitty game items became commonplace. Four years on, NFTs have grown to include NBA Top Shot (for pro basketball highlights), Cryptopunk (for pixel characters), Art Blocks (for digital art), The Sandbox (for real estate in the Metaverse), and even an NFT for the ownership of the very first Tweet, positioning NFTs as real assets with a diversity of purposes. But, in general, these NFTs can be categorized as collectibles and consumables.

Collectible NFTs are tokens designed to be collected and owned — think of rare things artwork, celebrity goods, and commemorative items. There are no clear criteria for valuation and the sky’s the limit for trade prices. Beeples’ Everyday: The First 5,000 Days, where one man made $69 million from a single NFT, is a good example of how the right NFT can become extraordinarily valuable. Why did this artwork become so ridiculously expensive? The key is its emotional resonance. By “emotions”, we mean more than just broad appeal or people’s tastes. Rather, one should ask whether the emotional appeal of the NFT matches well with the underlying technology, what can be proven through ownership (value, property size, professional knowledge, social status, etc.), and for the ownership history. When all these factors align, the emotional appeal of the item leads to increased demand, which further increases its value, creating a feedback loops that leads to greater emotional resonance.

The current NFT market, however, is still young, and many users trade their assets hoping for a dramatic price increase, or just because they’re curious about this market. Speculation accounts for a portion of the NFT market value. Therefore, it is necessary for users to learn and adapt to the market, and all the parties concerned need to review the long-term value of the asset flow even when the market is fully stabilized. Back to the point, it will become more critical to determine which type of content can elicit great emotional reactions from people. If the NFT market tends to form and disintegrate the consensus of the community in a short period of time due to the lack of business continuity for the reasons mentioned above, NFTs with strong social influence and royalties, such as NBA Top Shot and celebrities, will most likely be traded at exorbitant prices while maintaining their high value.

Consumable NFTs are valued by which service/partner they are integrated with and what benefits can be obtained by consuming them. Such NFTs may have any type of usability, including game items, social services badges, rights to download limited edition music, discount coupons, stake sharing and more. The value of consumable NFTs is affected by the business status of the integrated service/partner or the number of users. Therefore, the range of value fluctuations tends to be roughly fixed when the available benefits are very limited.

However, there is an exception, and that’s the Metaverse. Users of the representative Metaverse service, Roblox, dramatically increased by more than 85% in 2020 alone, recording 42 million DAUs in early 2021 amid the COVID-19 outbreak. This in turn has greatly expanded the range of people’s daily activities in the digital world. Blockchain projects, such as The Sandbox and Decentraland, sell “land” in the Metaverse as NFTs. Users communicate, make goods, or engage in economic activities through sales, but in the virtual world. Assets required and/or acquired in such processes are cashed at crypto-asset exchanges and NFT markets leading to a flow in which virtual assets can be linked to real-world capital. When you own any digitally private space (Metaverse), and economic activity is conducted by the increase in traffic, the efficiency and potential value of NFT can never be foreseen. However, there are no specific restrictions on spatial expansion in the digital world, and it is thought that the value of related NFTs will be heavily affected by factors like supply adjustment for the formation of a sound economic zone and the subject that determines it.

NFT values are determined for all those reasons stated above, but they all are premised on liquidity. Liquidity must be guaranteed to handle the risk of trading NFTs at high prices, which enhances its value. A transparent and solid trading environment must be ensured to reduce the risk of market fluctuations and to secure more contributors by increasing user accessibility or usability, as well as to reduce the risk of business and transaction disruptions caused by regulatory issues.

LINE Blockchain has announced plans to expand NFT-related services through its 2021 Business Plans, and is working on content development, third-party service integration, and stable liquidity for a better NFT market strategy. By beta-launching the NFT Market on BITMAX Wallet service in Japan and cooperating with Yahoo Auction, LINE Blockchain is laying the foundation to lower entry barriers for NFTs and to provide a reliable trading environment. They are also discussing the ways to connect NFT businesses with global partners inside and outside to promote active transactions and to create NFT value. In the near future, LINE intends to further expand the blockchain ecosystems by introducing various NFT-integrated services.

Source: The Korea Economic Daily(Hankyung) Koala Newsletter 

Read Original: https://www.hankyung.com/economy/article/202109118443i