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In the first quarter of 2021, non-fungible tokens (NFTs) make a record sale with remarkable growth. The digital scarcity and ownership of NFTs have increased by a whopping 25 times compared to the end of 2020 as it expands its domains into various fields. Even the hottest news reported that the National Treasure No. 70 of Korea, "Hunminjeongeum," is also produced as NFT and sold to 100 people in limited quantities.
Non-Fungible Token (NFT)?
Let's start by defining the NFT first. A non-fungible token created using blockchain technology is a digital asset with a unique identification value stored in the blockchain. Thanks to this unique identification value, counterfeiting and tampering are impossible
How to Determine the Correct Value for an NFT?
NFT value = practicality + history of ownership + digital scarcity + supply and demand + future value + liquidity premium
In general, the value of an NFT is determined by the above formula, and the weight of each component may change depending on the type of NFT-ized asset.
The practicality of NFTs is the value of how they can be used. NFTs that show high practicality on the platform being used are given a value worthy of it. And NFTs that can be used on multiple platforms will have a higher value in terms of practicality.
The value of the ownership is determined by the NFT issuer and the previous owner. NFTs with high historical value like "Hunminjeongeum" mentioned before, if the author of this article were to make and sell them, their value would be very low. However, if the Kansong Art Museum (Kansong Art and Culture Foundation) holds the ownership of the "Hunminjeongeum" issues, issues an NFT, we will recognize the actual value of the NFT. Another example will be when a celebrity like Elon Musk buys and resells these NFTs, their value of the NFTs will also increase
We can define digital scarcity into three different categories: absolute scarcity, relative scarcity, and availability.
Absolute scarcity refers to the total supply of NFTs being issued. "Hunminjeongeum" NFT is being sold only to 100 people. Relative scarcity refers to the relative supply in the collection of NFTs being issued. If only one of the "Hunminjeongeum" NFTs were different, the relative rarity of the other one would be very high. And based on this absolute and relative scarcity, we measure the availability of an NFT (how much it can sell at a given time).
Supply & Demand:
The aforementioned digital scarcity can also be applied to the supply and demand of NFTs, but so far, the platform used by the NFT and its fandom are dictating it. Therefore, in the case of NFT sellers, it is necessary to pay attention to fandom building through the active use of SNS.
The future value of NFTs comes from valuation changes and future cash flows. If several factors revalue a particular NFT, it can achieve high future value. Future cash flow refers to the interest or royalties earned by the original owner of the NFT. In addition, if an NFT that applies the functions of DeFi is traded due to the development of technology, the future value of the NFT is an essential factor in evaluating the NFT, considering it will be able to realize the profit obtained through the NFT.
Liquidity premium refers to the time and cost required to convert NFTs into cash. NFTs with high liquidity are recognized for their value and can be traded at a higher price.
NFTs & Copyright:
There are no clear legal regulations regarding NFTs yet. This means that NFT itself cannot regulate that everyone must protect the creator's copyright, even if uniqueness is guaranteed. It is also difficult to prevent the first seller from selling the same NFT work on different blockchains. Since it is possible to create and sell NFTs without consulting with the original author of the actual work, it is difficult to protect against copyright infringement for now.
Several technologies based on blockchain have been introduced, but NFT is very close to reality and practical among them. Since it is still in its infancy, there may be bubbles, but if continuous development and market maturity go hand in hand, it is a field with a very bright future.
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