Analysis of the NFT market and attempts to discern long-term value are often based on a static snapshot of current criteria such as uniqueness, scarcity and liquidity. This is a flawed approach - the category is in its infancy and defining what makes an NFT "valuable" will continue to change over time.
Determining true worth will be more difficult once external factors such as demand, utility, psychology and market trends are considered.
The long-term value of an NFT is based simply on the ability to use it within its intended purpose or for trade/exchange with other individuals/entities. NFTs are not currently recognized as financial assets, therefore full market valuations cannot be applied to NFTs or crypto assets at large. The lack of traditional valuation metrics impedes the ability to compare NFTs and create comparable portfolios for investment purposes.
In order to achieve long-term value, NFTs must be considered from the perspective of their impact on society at large - for many NFTs it's difficult to justify their existence when viewed through a non-tech elite lens.
NFTs can fail to achieve long-term value, but still have utility based on price points determined by market factors predicated on their use case.
The current NFT market will split into 4 purpose-based categories, representing the beginning of the Tokenization of Everything:
NFTs as securities
NFTs as art
NFTs as games-based assets
NFTs as tokenized digital music
1. NFTs as securities/utilities
Many of the tokens in the current market are utility tokens used inside a particular DApp or protocol, and these will change dramatically in the future pending regulatory decisions in various markets. In this category, organizations will need to ensure that all conditions for issuance conform to regulatory requirements established by financial authorities, which we can only hope will be relaxed by providing more exemptions.
The ongoing launch of decentralized exchanges will also drive this category, as more NFTs can be issued on top of Ethereum, Fantom and other public chains that support smart contracts.
The utility token model isn't going anywhere, but it will continue to evolve as DApps are replaced by protocols that have their own economy. The creation of tokenized economy protocols will allow for the success of equity tokens and other types of security tokens, but they will bring with them a transformation and a shift away from NFTs as any kind of collectible.
For NFTs in this category to gain long-term value, they will need to be able to be used for their intended purpose (such as trading/transferring ownership), or be accepted by other entities (companies, individuals) in exchange for goods and services.
2. NFTs as art
As an asset class, blockchain-based art is still very much in its infancy despite the growing interest shown by many in the art community. There are a growing number of applications that allow users to purchase blockchain-based art, and most of these have not yet opened up their marketplaces to the public through simplified onboarding or access. The market potential is huge, but the market will morph.
In NFTs, the rarer and older artwork is, the more it can be considered as a modern masterpiece worth investing in. Most of the earliest pieces will likely still be valuable even if they are not displayed or used for other reasons. Just as a Picasso painting might seem to have value in and of itself, so too do genuinely scarce NFTs. Pieces from 2017-2021 may represent
The main attraction of blockchain-based art is the ability to verify its authenticity and provenance, which allows collectors to rest easy knowing that altered copies will be easily detected. But growing subcultures of artistic styles and aesthetics that draw on blockchain-based concepts and visuals will achieve value extrinsic from scarcity. This will not be a problem for the majority of art on the blockchain, as the value of artwork is generally derived from aesthetics and style - which cannot be replicated digitally with ease.
NFTs as art will shift their value to smaller collections - sub 1,000 pieces - because it's practically impossible to label an entire art collection as "rare"; the value of a large collection will be diluted as more large-piece collections come to the market and create a false perception of oversupply.
3. NFTs as games-based assets
This is where NFTs are currently at their most exciting because the market for game assets is huge and has already raised hundreds of millions of dollars through in-app purchases and marketplaces. Most gamers are also early adopters who like to experiment with new technologies, which creates a conducive environment for launching NFTs.
Additionally, games are currently the primary beneficiaries of blockchain technology, especially for non-fungible tokens that can be used in both decentralized and centralized online games. NFTs will be part of a gamer's arsenal to compete with other players against the backdrop of ERC721 tokens.
The tokenization of in-game items will eventually be regarded as an industry standard, allowing players to own their unique digital inventories while playing online games. When the game is over, they can sell or trade their items for other kinds of tokens that represent widely tradable value (such as Ether).
This will be the most popular (and potentially most valuable) class of non-fungible tokens because they are essentially financial instruments designed for a high-value audience, that allow users to transact without the need for third-party brokers or other intermediaries.
NFTs will play a major role in the game industry because they allow users to trade virtual, collectible items in a decentralised manner without having to depend on the developer or publisher of the game.
4. NFTs as tokenized music
Artists and record labels have already started to tokenize their music, allowing fans to own a piece of an artist's work.
NFTs as a music industry mechanism has the potential to upend power structures and give creative liberty and ownership back to creators, which is something I'm quite excited about. As gamified collectibles become an increasingly important component of musical history, musicians will find fresh ideas to explore, share and monetize their music.
NFTs as the base layer of the music industry provide fair, transparent access to musicians and their works through blockchain technology. For example, artists can release new tracks on blockchain platforms that allow them to distribute digital assets to fans who are immediately encouraged to buy the new release.
NFTs will be increasingly used as a means of sharing music through incentives, pushing artists back towards the top of the value chain. This will have a knock-on effect empowering other music industry stakeholders, such as fans and critics.
Analyzing NFTs outside these categories, analysing them through one single category, or even marginalizing their potential impact by treating them as a vague and indefinable vertical, is to look at them the wrong way, either through ignorance or lack of vision.
Non-fungible tokens are not simply another cryptocurrency. They represent a new asset class with wide-ranging applications, which will disrupt multiple industries simultaneously and create new opportunities for innovation across various activities.
NFTs are already being used for things like live event ticketing, merchandise, fan club membership and more - representing the Tokenization of Everything - and the list is only going to grow over time. Each of the categories that they impact and alter will become a new and exciting space for investors, makers, designers, artists, and entrepreneurs to explore.
NFTs will continue to evolve and take shape as the demand for decentralized goods and services continues to increase. NFT's potential is endless, and its functional implementation will change the way we interact with the world around us forever.