When I told a group of friends about it, a discussion around what the value of NFTs is and why I would pay a decent amount of money for a JPG ensued.
These are all very normal and to be anticipated questions, so I wanted to summarise a few points today.
First off, NFT stands for Non-Fungible Token.
A “token” is a unit of data stored on a blockchain. Most NFTs are created on the Ethereum blockchain, but there are also NFTs now that are created on other blockchains such as Solana or Polygon.
The moment the NFT is created and recorded on the blockchain, its ownership relationship is cemented (forever and ever). The NFT belongs to a digital wallet and only this wallet can sell or transfer the NFT. In other words, the “token” part of NFT allows a clear identification of the asset owner.
“Non-fungible” means that it’s unique and can’t interchanged with something else. For example, cryptocurrencies like Bitcoin are fungible token — you can trade one Bitcoin for another and you would still have the same value.
NFTs on the other hand are non-fungible. Each token could have a different value and it’s up to the buyer and seller to agree on that value.
Some NFTs are released as a collection which can comprise of hundreds or thousands of individual NFTs. Each of them has a unique set of traits (or artwork), which makes them non-fungible.
These types of NFTs work like digital trading cards, where NFTs with rare artwork could be deemed more valuable than NFTs with more common artwork.
There are also NFTs that are unique by design, i.e. there is literally only one piece of it. They are called “1/1"s and are usually treated like digital art pieces.
Now back to the question what makes NFTs valuable.
Here is a non-exhaustive list of reasons:
1) It could be the same rationale as buying physical art (especially for the 1/1’s). An artist produces something, you like it and buy it for the price they want. Boom. Value exchange.
People buy NFTs to be part of a community.
Sometimes this could be a real community, where people share memes, have fun and ‘vibe with each other’. Sometimes it could also be wanting to be part of an exclusive club like Bored Ape Yacht Club (BAYC), where the price for the cheapest NFT from the collection is around $209,000
at the time of writing. Yes, that’s two hundred and nine thousand dollars
and there are 5,900 holders in the collection — a pretty exclusive community to be part of!
3) People buy NFTs because they support what the art of the NFT stands for. For example, actress Reese Witherspoon is using a World of Women NFT as her profile picture and encouraging more women to get involved in web3.