Scarcity (sometimes referred to as "paucity”) is a fundamental aspect of economics. It refers to the disparity between supply (limited resources) and demand (theoretically infinite wants). Society must judge how to distribute resources effectively to meet fundamental needs and further wants.
So, how is scarcity relevant to NFTs? Each NFT is unique, and there’s only one of each available. This makes them scarce, thereby increasing their value per unit of demand. In fact, specific collections of NFTs launch in limited quantities, which means their value will rise once they're all sold as there won't be any more NFTs left to purchase.
The most famous example of this is the CryptoPunks project, where there were only 10,000 unique cryptopunks. Each punk has a combination of the same types of attributes (i.e., hair, eyes, and skin color), with some of these attributes rarer than others, making some cryptopunks more expensive than others. Other NFT projects have copied this collection release with varying attributes with a limited supply method.
Another example, Axie Infinity, an online video game with NFTs, is well-known for its crypto-based in-game currency system. The game has digital pets known as Axies that players collect and mint. Each time a player buys an Axie pet, the probability of them acquiring a rarer Axie increases. These digital pets have rarer characteristics and attributes, putting them in a rarity class of their own. As a result, the price of Axie NFTs shoots up and fetches high valuations for their creators.
When you buy or sell an NFT, the blockchain records proof of your presence during the transaction. Your wallet address and the price you paid for a particular NFT will remain on the blockchain forever. Some individuals even find it appealing to be the first owner of a given NFT, so they acquire it for the "hype" and social recognition or to boast of their ownership on social media. Think of it as somebody owning a limited-edition Gucci, Supreme, or Jordan article of clothing.
The ability to track the legitimacy of NFTs via the blockchain is one of its fundamental characteristics. Each NFT's uniqueness can be shown in its metadata, ensuring nobody can ever replicate them. Since there's no way to forge a copy of an NFT, their overall value increases.
A digital artist is allowed to create two distinct pieces of NFT art that represent the same piece of physical or digital art. However, the price of both NFTs might differ. For example, the creator's first NFT could fetch a higher price than the NFT launched after.
Because every token includes verifiable information and a transaction log that helps show evidence of ownership, confirming the legitimacy of every NFT is possible. Additionally, the blockchain guarantees safety for these tokens by keeping all data secure and almost impossible to duplicate. This authenticity is especially important in areas of the world with a weak rule of law.
Composability allows creators to build different applications on top of each other. NFT collectors and creators can expand their NFTs’ utility by integrating additional digital assets with their NFTs. Doing so can improve their NFT creations and generate a narrative around a primary piece. Theoretically, creators can establish a base fee for their work, which is intrinsically linked to the entire NFT project's value.
Composability allows collectors to combine several assets into a unique NFT collection. It’s an innovative way to combine practicality and creativity in the inevitable Web3 era.
Society has always placed a high value on social symbols, and composability may prove a useful method for allocating social tokens to creators and buyers of NFTs. Adding more tokens to an NFT can raise its price and encourage prospective buyers to keep enhancing the piece for future NFT sales.
In the context of economics, a market bubble is a situation where the price of an asset has its intrinsic value by a significant amount. The economic foundations of a corporation––including its revenue, growth rate, and related criteria––are used to calculate its valuation.
Every time a new technology is introduced, market bubbles frequently follow. Many investors arrive with funds after learning about the outlandish cost of new technology or about celebrities who’ve purchased it. They purchase assets without completely comprehending them as they’re solely interested in the potential profit from reselling them. When several investors purchase NFTs only to resell them, NFT market bubbles cause the price of items to increase, which is why many freshly minted NFTs get snipped.
Snipping NFTs is the practice of purchasing NFTs that have been sold for less than they were worth because the seller was unaware of their scarcity.
Another element that enhances an NFT's value is its utility. A digital asset that offers functionality in more than one way can increase its value. The examples below provide real value to users, and it’s not difficult to see why people pay real money for them.
Let’s look at a few examples of utility NFTs to understand their value in a real-world scenario:
- Kings of Leon: American rock band Kings of Leon released their album "When You See Yourself" as an NFT series in March 2021, making them the first band to venture into the NFT space. The album was also distributed on platforms like Spotify and Apple Music in traditional formats.
- Fractal: Fractal is a gaming marketplace that issues its native Fractal NFTs. The NFTs come with benefits on the Fractal marketplace and within the community. In addition, Fractal will likely give you special powers in your favorite blockchain-based games. For example, you may be entitled to special levels if you own an NFT in one game, and view additional levels in another game, as well as get a certain percent off on the platform.
- World of Women: World of Women is a Web3 initiative that aims to encourage, uplift, and empower women while increasing their involvement in NFTs. Owners of World of Women NFTs have access to privileges such as ownership of the original or digital artwork and tickets to live events.
- GainForest: GainForest brands its NFT as a "sustainable smart contract." The global nonprofit organization aims to employ blockchain technology to help protect rainforests. GainForest donors will receive NFTs representing genuine forest areas, measuring the forest's health, and producing governance tokens.
So, why are some so expensive?
To summarize, NFTs get their value from various factors like:
- Social recognition
- Market bubbles
However, users need to be wary of scams in the world of crypto, especially in the NFT space. Ultimately, as with all assets, an NFT’s price is simply what somebody else will pay for it.
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