Non-fungible tokens (NFTs) burst onto the scene earlier this year when some of them started to rake in millions of dollars in auctions. A confusing and controversial new digital asset is on the rise. DW’s own experience selling an NFT has made less noise. Which made us all the more curious: why are some so expensive?
Patrons of the arts?
First, a reminder: NFTs prove ownership of digital files. They can represent digital works of art but can also be associated with video game accessories, collectibles, etc. Anything that can be stored as data on a blockchain can be an NFT. NFT transactions are publicly recorded on a blockchain and often purchased with cryptocurrencies.
Investment bank JPMorgan Chase recently valued the global NFT market at $ 7 billion (6.3 billion euros).
In October, an experience of The Economist raised $ 420,000 when the weekly news magazine auctioned off an NFT from one of their cover pages. An issue on decentralized finance, cover depicts cryptocurrencies alongside images from children’s book Alice’s Adventures in Wonderland. Buyer @ 9x9x9 says The Economist it was the proper title – “Down the Rabbit Hole” – that compelled them to purchase the cover data file.
But buyers of incredibly expensive NFTs point out a whole host of reasons why you have to spend a lot of money on the rights to a data file that anyone else can view or copy. Cryptocurrency entrepreneur Vignesh Sundaresan spent $ 69 million on an NFT earlier this year. The NFT enthusiast, who invested in the technology, denied trying to push prices up. He said he wanted to support the artist and showcase the technology.
For other buyers, it’s a matter of scarcity. “The buyer knows how many will be made and has proof of ownership of the blockchain,” US billionaire and NFT collector Mark Cuban told the online news portal. Business intern.
What the data says
Researchers at the Alan Turing Institute (ATI) wanted to know what the data said about this phenomenon.
“What we have observed is that there is this gigantic heterogeneity in the success of NFTs,” Andrea Baronchelli, associate professor of mathematics at the University of London and head of the symbolic economy theme, told DW. from ATI. “Some – very few – are doing very well, a group is doing decently, and the majority are worthless.”
Earlier this year, ATI’s team of experts conducted a study that examined the role of certain factors in the price of DTVs. They looked at three things: the visual characteristics of the NFT, the related past NFT sales, and the buyer’s and seller’s social network.
The researchers used a machine learning model to examine a dataset of 4.7 million NFTs traded by more than 500,000 buyers and sellers. The result? The previous sales of related TVNs were the most important of these three factors, accounting for over 50% of the price change.
For example, past sales of NFT from the CryptoPunks collection, a large set of 10,000 tokens representing pixel images of punks, would be a good indicator of future sales of tokens from the same collection.
The visual characteristics were the second most important aspect. The inclusion of this data increased the performance of the machine learning model by up to 20%. Data showing the popularity of traders increased performance by 10%.
Combined, they concluded that these three factors can explain up to 70% of NFT price variability. They plan to look at other factors in the future, including the platform on which the NFT is sold and the creator’s social media activity.
An old market redesigned
In the digital artwork NFT market, one can recognize something of the traditional art market, where scarcity, social networks and, often to a lesser extent, the content of the artwork help determine the value of an object. But NFTs have some characteristics that set them apart from their real-world counterparts, said Mauro Martino, director of the Visual Artificial Intelligence Lab at IBM Research and co-author of the ATI study.
“A very big difference between the art market and NFTs is that artists take 10-20% of secondary sales,” he told DW. “So every time the piece sells again, some of the sale will always go to the artist. It’s really a novelty in the idea of art and can be a game-changer for artists.”
This is possible because future NFT sales are recorded on the blockchain, which allows artists to receive their cut automatically.
A jpeg of a rock
This is good news for anyone whose NFT has made money. But what about the majority who are not worth much?
“There are 10,000 new pieces every day ready to go… I don’t know where,” Martino said. “There aren’t 10,000 new buyers every day to support this incredible production.”
Stability of the NFT market would require more public attention to attract traditional investors, as well as greater convenience with cryptocurrencies, experts said. This development is probably still years away and surprises could arise in the meantime.
“If we notice that the enthusiasm for NFTs today is very similar to the enthusiasm for cryptocurrencies at the very beginning, then we can expect a major correction,” said Baronchelli. This would have unclear implications for this non-fungible asset.
“If I have bitcoin and it goes down 40%, I still have 60%,” he said. “If I have a JPEG of a rock? What happens to the value of that JPEG? We don’t know, because there is nothing like it.”
Edited by: Hardy Graupner