How to assess the value of NFTs

Original Title: How to value NFTs, Author: William M. Peaster, Translation: DAOSquare.

Dear Bankless readers,

There is no denying that the NFT space has entered a new market cycle.

Beeple sold his collection for $69 million at Christie's auction.

An Alien CryptoPunk sold for $7.2 million.

Fewocious broke the sales record on Super Rare.

And all of this happened just last week. Well done.

You might be asking, "How do NFTs get these valuations?"

That's a great question. Unlike DeFi tokens, NFTs (currently) do not have on-chain cash flows. There are no price-to-earnings ratios or DCF models to reference.

But you can keep an eye on certain things to see what subjective and objective characteristics can make one NFT more valuable than another. (We discussed this with Andrew Steinwold yesterday).

Today, William is ready to introduce us to seven characteristics of NFT value.

• - - - - - RSA

Guest Contributor: William M. Peaster, Chief Author of Bankless's NFT publication Metaversal.

How to Evaluate NFTs

More and more people are learning about and collecting NFTs. But is there a way to accurately assess the value of these unique digital assets so that you can build and manage an NFT collection like a professional?

Our strategy can help you answer this question. We will outline a range of different NFT valuation methods and how to use them.

Let's get started.

• Objective: Learn how to assess the value of NFTs

• Skill Level: Simple / Moderate

• Time: 10 minutes - 1 hour

• Return on Investment: If you can apply this valuation skill in the buying/selling process of NFTs, the return on investment can be quite substantial.

Methods for Valuing NFTs

Evaluating NFTs can be approached from both subjective and objective angles.

Some might think that their ordinary CryptoPunk purchased in 2017 may not be worth much. However, collections of these basic Punks are frequently traded on NFT markets like OpenSea and Rarible. This trading effectively ensures the objective floor price (base value) of the NFT.

This fluctuating minimum price can objectively tell us how much a specific set of NFTs is currently worth at least.

For example, the minimum price for CryptoPunks is 19 ETH, so if you list a CryptoPunk for that price, it is likely to sell quickly, as many buyers will find it quite affordable.

Source: larvalabs.com/cryptopunks

When it comes to objective valuation, you also have to consider some aspects of scarcity (like the value of axes with mysterious attributes in Axie Infinity) and those projects where the primary sale price is hard-coded.

Examples here include price curves like EulerBeats, or a common Avastar that initially sells for around 0.07 ETH, while a rare Avastar might double to 0.14 ETH, and so on.

Source: avastars.io/#

The time dimension is also key to the assessment.

In other words, what was the value of this NFT in the past? What is it worth today, and what could it be worth in a few years? How does its value change over time—does it spike, or does it fluctuate with booms and busts? Delving into these questions is a great way to better handle the valuation of any NFT.

Finally, there is an analytical dimension to assess NFTs that combines subjectivity, objectivity, and time. I mean being able to consider these other aspects simultaneously and then gradually provide a conservative, neutral, and optimistic NFT funding valuation. This provides a framework model to deal with and understand all the implications of "what if," such as what happens if the market for this asset heats up, cools down, or remains stable?

Suppose you have a founder's kit of CrypoKitties (one of the first 100 CryptoKitties), and you want to know how it will perform in the coming year.

If the NFT bull market continues in the coming months, a more aggressive analysis might suggest that the cat could easily fetch dozens of ETH. A conservative analysis might say: you can at least get the floor price for any founder cat if sold during an NFT bear market. Meanwhile, you hold onto this cat and analyze its valuation based on its various possibilities.

However, this is just a bird's-eye view of how people understand NFT valuations.

The best way to accurately assess NFTs is to weigh the fundamental, objective factors that dominate market conditions. What are its components? How is it constructed? What can it do?

Let's take a look at the most important value-adding factors among these elements.

Navigating the Seven Traits of NFT Value

1. Chain Security

The whole point of NFTs is that they are immutable and guaranteed digital assets— as long as the underlying blockchain infrastructure remains immutable and guaranteed!

In this regard, Ethereum is largely the dominant NFT network, thanks to being the most secure smart contract platform currently in operation, and this advantage is likely to continue for the foreseeable future.

In other words, over time, the chain on which NFTs are created helps to underpin and guarantee their value. This is why NFTs created on Ethereum are currently more valuable than those created elsewhere. They are simply more secure.

Key questions regarding chain security include:

• Is the main chain secure?

• Is its power sufficiently decentralized?

2. On-Chain Persistence

NFTs that are fully created on-chain, like Avastars, Aavegotchis, and Art Blocks drops, rely solely on their respective Ethereum smart contracts for existence. This means they will exist as long as Ethereum exists, which could be a long time.

On the other hand, some NFT projects choose to rely on external off-chain providers like AWS for convenience and flexibility. This actually introduces a dimension of trust, so you must ensure that the project can continue to exist and keep its servers running.

Otherwise, you might end up with a blank NFT in a few years.

Accordingly, the more on-chain an NFT is, the greater its original self-evident value— it can prove itself at any time.

Key questions regarding on-chain persistence include:

• Where was the NFT created?

• Is this NFT fully on-chain (meaning it will persist into the future)?

3. Minting Time

The value of NFTs also depends on their minting time. For example, NFTs began to really heat up in 2020/2021, so NFTs minted before this era have already started to become digital artifacts, the earliest items of cultural change.

However, everything about NFTs is still in its early stages, and I believe this factor has not yet been fully realized. Ultimately, any NFT minted before 2030 could hold special significance.

Meanwhile, early NFT financing projects have already achieved impressive valuations (like CryptoPunks). Many collectors believe these NFTs should date back to before 2017, the prehistoric era.

So, like wine, always keep the minting time in mind!

Key questions regarding minting time include:

• When was the NFT created?

• Does this NFT have historical significance?

4. Creator and Community

If someone with no followers and who has never released an NFT on OpenSea publishes one and does not promote it, will it sell? Of course not if nothing else is done!

This is why an NFT published by a major artist or creator will give it value. It is imbued with the magic of the issuer's digital fingerprint— like a signature.

Importantly, community involvement creates demand.

Naturally, the more popular the creator and the larger the community, the more valuable their NFTs— this relationship essentially applies to any market.

Key questions regarding creator and community include:

• Does the creator have followers on social media like Twitter and Instagram?

• Do they frequently engage with their followers?

• Do you think the creator will continue to develop their brand in the future?

5. Scarcity

In the NFT ecosystem, we have seen developers release NFTs in single or multiple versions, such as 1 out of 10, 1 out of 50, 1 out of 100, and so on.

Clearly, issuing a single version is very rare, as they are fundamentally more valuable than those diluted by multiple versions. However, this does not mean that multiple versions are worthless— we have seen some priced in the thousands!

Platforms like SuperRare only support 1/1 versions, so if you are purchasing rare single NFTs, you can ensure that only one true work of the artist is in circulation!

Key questions regarding version scarcity include:

• How many pieces were minted?

• Will the artist uphold their social contract and not create more of such works?

6. Release Velocity

Did the creator produce 1,000 individual NFTs over a year, or just 12?

What I mean is that understanding the production speed of an NFT is key to grasping its value.

A project offering an unlimited number at 0.01 usually won't be as attractive as buying from an artist who promises to mint only 25 NFTs. Of course, outstanding artists who release only a few selected pieces each year often command higher prices than those of equally skilled artists who release multiple works weekly.

However, there are unique occasions, like when Beeple sold his entire collection— 5,000 pieces created daily over 13 years— for nearly $70 million. It took him over a decade to build such value.

Key questions regarding release velocity include:

• How quickly does the artist mint new works (daily, weekly, monthly, yearly, etc.)?

• How many pieces have been minted as NFTs?

7. Richness (e.g., audio)

We are starting to see more visual NFTs accompanied by audio. This dynamic feature provides users with a richer artistic experience than ordinary NFTs. Who doesn't enjoy watching an NFT while listening to music, happily looping it over and over?

With this in mind, audio can enhance the sensory added value of NFTs— especially if the audio is created in collaboration with mainstream artists.

Therefore, expect to see visual-audio fusion become a new art form through NFTs.

Key questions regarding audio include:

• Does the NFT include audio?

• Who created the audio for the song?

Special Section: Scarcity of Specific Projects

Some NFT projects, like CryptoPunks and Axie Infinity, have their NFTs centered around various forms of scarcity. For CryptoPunks, alien and ape punks are among the most valuable compared to standard punks. Similarly, Mystic Axies are also among the rarest (and often most valuable) Axies on the market.

The more scarce the characteristics of an NFT, the more likely it is to achieve substantial profits in the NFT market.

So, if you've ever seen a large NFT transaction and felt confused, dig deeper into its potential characteristics— their rarity might help you better understand why such a transaction occurred!

Conclusion

When it comes to valuing NFTs, there are no necessarily right or wrong standards. Although if you try to do so, there are certainly many variables to consider.

The best approach is to take a holistic view and understand the strengths and weaknesses of the project in the above aspects before diving in.

For example, the NFT ecosystem has just re-launched the MoonCats project, which was released after CryptoPunks but disappeared after 2017. Now, hundreds of people have minted MoonCats and are trying to assess their value on OpenSea.

The Truth?

We are still figuring out how to accurately assess NFTs, and of course, there is no correct answer at the moment. Our assessments of them will also change in 1 year, 3 years, or 10 years.

But the fundamental principles of assessment remain: Is this NFT on-chain? Is it receiving attention? Does the artist have their own community? Does it have unique characteristics?

These are the basic questions you need to ask yourself when purchasing NFTs. Put everything you know about NFTs into practice— that's the trick.

You must evaluate NFTs from multiple angles. It's not easy, but if you can do it, you will be far ahead in the market.

Action Steps

• Explore NFTs in the market and evaluate them based on the steps outlined in this article.

• Subscribe to Metaversal for the latest information on NFTs.