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Academy Industry Analysis Article
GameFi NFT Ethereum Blockchain Metaverse

NFTs and value — which nonfungible tokens will stand the test of time?

2021.10.05 Rick Delaney

An in-depth look into the recent NFT mania, asking what gives a project the highest chance to achieve long-term success

Without a doubt, one of the biggest trends in the cryptocurrency industry throughout 2021 has been nonfungible tokens. Prices of blockchain-based collectibles, artwork, GameFi assets and other virtual items have gone through the roof — leaving many on the sidelines scratching their heads. In this OKEx Insights in-depth examination, we look closely at the NFT phenomenon and the value propositions of the most successful collections. 

We begin by asking what gives an NFT value in the first place. As is common across all assets, scarcity is an important factor. Yet, almost every NFT is limited in supply — and this alone does not elevate a collection's average price. Elite-tier NFTs appear to have a few things in common. Historical significance — often brought about by the innovation they bring to the industry — is important, as is utility. 

Turning our attention to the blockchains themselves, we question what it is about certain networks that make their NFTs more sought-after than others. Does decentralization play as big a role as one might expect? Do those other factors mentioned contribute more to a project's potential future demand? 

What gives an NFT value?

At the heart of the NFT value proposition is scarcity. If a limited-supply asset is in high demand, its price will rise. We've seen this time and again across all assets — including those in the cryptocurrency market. 

Clearly, there is more overall demand for XRP than YFI, since it has a total market capitalization of around $45 billion versus YFI's $1.09 billion. Yet, XRP's circulating supply of almost 50 billion coins makes it much more abundant than YFI, of which there are just under 36,000 tokens. This is reflected in the price of XRP and YFI — the former remaining below $1.00 and the latter trading above $30,000, as of the time of this writing.       

Yet, scarcity alone is not enough to imbue an asset with value; demand is a crucial factor too. An amateur artist may struggle to find a buyer for a single-edition piece, even at a comparatively low price. By contrast, a critically acclaimed creator may comfortably sell out a series of prints for thousands of dollars apiece. 

Evidently, provenance contributes to a work of art's value. We see this in the NFT sector as well. Established synth-pop musician Grimes made her NFT debut in February 2021, in collaboration with her brother Mac Boucher. Her sale generated around $5.8 million. It consisted of one-of-a-kind works and pieces with thousands of duplicates. Unsurprisingly, the unique pieces fetched more at auction, with the highest sale being the one-of-one "Death of Old." Meanwhile, the more abundant pieces, titled "Earth" and "Mars," sold for $7,500 apiece — considerably more than even single-edition pieces by lesser-known creators.

The price of innovation

Innovation typically commands a premium too. In the traditional art market, the earliest pieces within distinct artistic movements attract the highest valuations. Speaking to Artsy.net, David Galenson, a University of Chicago economist and art-market expert, stated

"Pictures that have the greatest influence on the practice of other artists and the culture at large become canonized and sell for the highest prices."

Pablo Picasso's "Les Demoiselles d'Avignon" is widely regarded as the first Cubist painting and serves as a prime example. The large oil painting depicts the workers of a Barcelona brothel in Picasso's now-iconic abstract style and has an estimated value of around $1.2 billion. Meanwhile, his provocative anti-war statement "Guernica" — perhaps more famous outside of fine-art circles — has been valued at just $200 million. 

Pablo Picasso's "Les Demoiselles d'Avignon." introduced the world to Cubism and its $1.2 billion estimated valuation reflects this. Source: MoMA.org 

Likewise, innovation appears to be a significant factor driving prices in the NFT sector. Perhaps the earliest example of an NFT is a piece called "Quantum." Kevin McCoy and Anil Dash created the simple octagonal animation and minted it to the Namecoin blockchain in May 2014. The New York-based auction house Sotheby's featured the piece alongside other early examples of artistry and creativity on the blockchain in a sale titled "Natively Digital: A Curated NFT Sale" in June 2021. It sold for $1.47 million.     

Speaking to the Economic Times, Max Moore, the vice president of contemporary art at Sotheby's, explained the piece's value proposition: 

"In 10 years looking back, if in fact these are to grow, this piece can represent and symbolize the start of something that is quite revolutionary and very impactful."

Works by other early innovators and trendsetters in the sector are also among the highest-priced NFTs today. Examples include Larva Labs' CryptoPunks and Autoglyphs, the minter-influenced Art Blocks collections and, more recently, the barebones-invitation-to-create that is Loot (for Adventurers). Each project introduced something new to the industry — and the prices of the most sought-after collections reflect this. 

OKEx Insights explored the innovation kicked off by CryptoPunks' pixelated portraits in a recent piece dedicated to profile-picture NFTs. Despite not being Larva Labs' intention, CryptoPunk ownership grants holders an online identity, community membership, social clout and can even provide assurances when brokering NFT deals between pseudonymous individuals. The project is also historically significant in that it helped define the ERC-721 standard that has become the dominant form that NFTs take today — and many subsequent collections are based on the CryptoPunks' blueprint. 

Thanks to their historical significance and popularity in the cryptocurrency industry, the rarest CryptoPunks routinely sell for more than $1 million. The highest-ever sale was part of the Sotheby's Natively Digital auction, which saw the mask-wearing alien punk #7523 fetch almost $12 million. 

Meanwhile, Autoglyphs and Art Blocks are more-typical artistic works, but innovative in that they use the blockchain itself. Although visually quite different, both generate their imagery via smart contracts. Autoglyphs claims to be the first blockchain-generated art project on Ethereum and dates back to April 2019. The largest sale to date was Autoglyph #463, which sold on Sept. 1, 2021, for 460 ETH — or around $1.6 million. 

Autoglyph #463 is the most expensive sale from the innovative Autoglyph collection to date. Source: OpenSea

Taking a similar — but arguably more visually appealing — approach is Art Blocks. The Ethereum-based generative art platform was created by Houston-based digital artist Erick Calderon, aka Snowfro, and invites digital artists to program their own scripts to produce pieces unique to the minter. What sets the project apart from contemporaries is that each time a buyer mints an Art Blocks piece from an artist's collection, a random and unique seed is generated that determines the resulting artwork's form. 

The first Art Blocks series was called Chromie Squiggle. The artist featured was Snowfro, the project's founder. Of this collection, the highest sale to date was Chromie Squiggle #4697 — which sold on Sept. 26, 2021, for 945 ETH, or around $2.9 million. 

Yet, the highest-priced Art Blocks sale to date is not a Chromie Squiggle. That accolade belongs to the Ringers collection — in particular, Ringers #109, which sold in early October 2021 for 2,100 ETH, or almost $7 million. Ringers' creator is Canadian digital artist and member of the Art Blocks curation board Dmitri Cherniak. 

Ringers #109 is part of the innovative and highly-priced Art Blocks project. Source: OpenSea

Another NFT project worthy of mention alongside other innovators in the sector is Loot (for Adventurers). Creator Dom Hofmann — @dhof on Twitter — quietly released the collection in late August 2021. With just a screenshot of a list of eight randomized fantasy items with names like "divine robe of power" and a link to an Ethereum smart contract, Hofmann presented an opportunity for anyone interested in community building to get creative. 

Launched without a website, Twitter account or Discord server, Loot was free to mint via the contract itself. The lack of imagery, roadmap and central team inspired a wave of creativity inside the Ethereum community. Individuals quickly mobilized — setting up communication channels and launching derivatives of varying quality. 

The real innovation with Loot is its synergy with the open-source nature of cryptocurrency. The community was not drawn by what its developer promised to build but by what they themselves were inspired to create. With all metadata being on-chain, the project is infinitely composable. It is essentially an open invitation to anyone who wants to be involved with a community game-building initiative. Artists can design the "linen shoes of protection" or the "long sword of enlightenment," writers can contribute to the surrounding lore, and developers can build the collection and its select derivatives into new or existing games. Testament to the price innovation typically carries, at barely a month old, Loot has seen more than 66,000 ETH in trading volume, and the highest sale for a single "Bag" was 250 ETH — around $950,000, based on the ETH price at the time. 

Dom's cryptic Tweet kicked off the recent Loot (for Adventurers) mania. Source: Twitter

Useful NFTs

While those historically significant innovators and trendsetters in the NFT sector tend to attract the highest price tags, not all projects need to break new ground for their communities to find value in their associated assets. The rapidly expanding GameFi sector, for example, brings utility to nonfungible tokens and functionality not found in the virtual goods that went before them.

The concept of trading in-game items is nothing new. Early text-based multi-user dungeon-style virtual worlds and the massively multiplayer online role-playing games they inspired were the first to see the emergence of in-game economies. Today, there certainly exist many examples of scarce, one-of-a-kind in-game items selling for hundreds of thousands of dollars. However, more abundant and useful items still have real-world — albeit more modest — prices based on the value players find in them. 

On PlayerAuctions.com, for example, there are many World of Warcraft items priced at less than $50. Buying some Aethereal Meat is unlikely to win you clout from fellow players. However, it can be used in recipes that beef up your character for some time. Given the clear gameplay advantage, people are willing to pay real money for such items. 

The problem with most in-game items is that the players never really own them. Since all content for traditional online games is hosted on centralized servers, and those controlling them are keen on protecting their own intellectual property rights, interoperability is limited. You might possess a Wolf-Fanged Fist, but under World of Warcraft's current centralized implementation, it is only useful within the game itself. Should Blizzard Entertainment cease support for the game, the item will no longer exist. 

Related to this is the concept of "nerfing" items. Some items are deemed too powerful by game developers and give their holders an arguably unfair advantage during gameplay. As such, gaming companies may decide to lower an item's attributes and, thus, reduce its utility. This is all well and good in terms of ensuring the game is well-balanced. However, it is hardly fair to those that might have paid handsomely for an item on a secondary market specifically because of its power.  

Gaming NFTs, on the other hand, exist independent of the games and metaverse spaces for which they were designed. As such, they are potentially interoperable with any other blockchain-based game. Stored in cryptocurrency wallets, NFT in-game items cannot be confiscated by a game developer, nor can they be nerfed to reduce their gameplay impact. 

With far greater permanence and utility outside the games themselves, the rarest NFT items for the most popular games may soon surpass the prices of their legacy counterparts. We have already seen significant GameFi asset sales. For example, several items, characters and territory from blockchain games have sold for more than $100,000. 

Again, a primary driver of such prices is the scarcity of these assets. Yet, the gameplay advantages they extend to their owners also give virtual goods value. At the time of writing, you can pick up the three Axies required to get started in the play-to-earn title for around $350 on its secondary marketplace. While not particularly scarce or powerful, their utility comes from the fact that you cannot play the game and generate passive income from it without a team of at least three Axies.

Other NFT projects provide access to online communities from which individuals may find value. An example is the CyberKongz collection. CyberKongz and related projects are not particularly innovative in either their art style or their use of blockchain technology. Still, they do extend various perks to their holders, which have encouraged their average price to skyrocket.    

Holders of either original CyberKongz or the more recently launched Baby CyberKongz can access a private Discord server called Wall Street Kongz. The server is quickly earning a reputation as the place where experienced NFT traders discuss emerging projects, and is considered a source of what the industry deems to be high-level trading tips that often result in substantial profits, aka "alpha." 

Genesis CyberKongz NFTs also generate passive income in the form of BANANA tokens. The tokens have various uses within the ecosystem, including breeding Baby CyberKongz. Such utility creates demand for BANANA, which trades at around $44, as of the time of this writing. Meanwhile, the price floor for an original Genesis Kong on OpenSea is around 95 ETH — or about $285,000 — and several have sold for more than this figure. 

Josh Ong, a partner at Causeway Strategies and proud owner of a Bored Ape Yacht Club NFT, believes that the projects most likely to retain their value into the future are either historically relevant or provide growing utility for their holders. He told OKEx Insights: 

"Projects that I expect to retain value in the long-term are either historically significant (Cryptopunks, Autoglyphs, Art Blocks Curated) or have solid, committed teams that will keep adding value for their collectors (BAYC, Cool Cats, Tom Sachs Rocket Factory)." 

Is the blockchain itself important?

Conventional wisdom suggests that, if an NFT is to have long-term value, it will need to continue to exist long into the future. Therefore, it should be minted on the most enduring blockchain. However, this is not always the case. 

Taking the example of "Quantum," arguably the first-ever NFT, some might remember that it was originally minted to the Namecoin blockchain. Owing to Namecoin's design, the piece was effectively burned from the blockchain after 36,000 blocks. Although Namecoin still exists, "Quantum" was recreated on the Ethereum blockchain using the ERC-721 standard for Sotheby's sale. 

For self-proclaimed NFT archeologist and podcaster Adam McBride, Ethereum was chosen because of its superior network effects. Essentially, a sale is more likely to attract a higher price if there are many potential buyers and sellers. Meanwhile, buyers and sellers are drawn to chains where the most sought-after projects are found. Given Ethereum's own historical significance as the first mover in the smart contract sector and the groundbreaking projects it supports, the network remains the place for the highest value NFT sales. 

McBride explained to OKEx Insights: 

"It's pretty clearly network effects in action. Sellers go where the buyers are, and buyers go where the best NFTs are. It's a virtuous circle that will be difficult for an alternative blockchain to beat."

He went on to cite the example of Rare Pepes — originally minted to Bitcoin Layer-2 network Counterparty — as a project that saw average prices soar after its NFTs were bridged to the Ethereum network via the Emblem Vault earlier this year.   

"The advent of Emblem Vault and their tech has enabled owners of Rare Pepes to bring the NFTs over from Bitcoin to Ethereum. The Pepe 'Nakamoto Card' that was trading for around 30 ETH a couple of months ago is now north of 180 ETH on OpenSea."

Ong agrees that underlying network effects are important in driving value to a project. Acknowledging Ethereum's scalability issues, he told OKEx Insights: 

"Ethereum faces a lot of challenges right now, but it benefits from a strong network effect. Sidechains and alternates will need to show traction in order to attract more builders and collectors."

That isn't to say that non-Ethereum blockchains cannot have their own high-value NFTs. On Oct. 1, 2021, the rarest Solana Monkey Business NFT sold for more than 13,000 SOL — or around $2.1 million. While the case could be made that the project is something of an innovator on the Solana chain, consisting of 5,000 headshots with various traits of different rarities, it doesn't stray far from the proven CryptoPunks formula. As such, it seems highly unlikely that Solana Monkey Business prices will ever challenge the original Ethereum project in the NFT-avatar niche. 

When considering the price tags accompanying the most sought-after NFTs, one might bring the longevity of a collection into question. One of the main factors determining an NFT's permanence is the decentralization of the blockchain on which it is stored. Should it be easy for a single entity to control a commanding share of network validators, the chain's future largely depends on that entity's support. However, blockchain decentralization actually seems much less important than the other factors already discussed. 

In the example of Flow, the blockchain created by Dapper Labs for its smash-hit collectible product NBA Top Shot, a centralized team controls at least 50 of the 82 validating nodes. Yet, that hasn't stopped products based on Flow from attracting comparatively huge sales. The most expensive "Legendary" Top Shot moment ever sold is a Lebron James dunk that is part of the 2020 NBA Finals series. The buyer paid around $230,000 at the end of August 2021. While the price is significantly less than the almost $12 million recording-breaking CryptoPunk sale, there are 79 exact copies of it. 

Lack of sales and the illiquidity of markets may limit speedy NFT price discovery. Yet, at even half of the top sale price, the total value of all 79 identical moments would be more than $9 million. Given such figures and the clear centralization of the Flow chain, it is difficult to make a case for decentralization weighing too heavily into an NFT's perceived value.

NFT winners and losers

As with most groundbreaking technologies, the nonfungible token sector has attracted thousands of opportunists hoping to take advantage of the current frothy market conditions. While the market typically rushes to mint just about any new project, it seems all but certain that many will eventually fade into insignificance. 

Presuming the technology continues to find adoption, a genuine piece of blockchain history — such as "Quantum," an Art Blocks NFT or a CryptoPunk — is likely to retain, and potentially increase, in value. 

However, many of the projects minted daily are essentially copies of an established formula. By the thousandth profile picture drop, there is little new ground that a 10,000 edition blockchain collectible can break. In these cases, any future value will come from the strength of the community forged and the perks membership extends. 

Projects like Bored Ape Yacht Club and CyberKongz currently provide members appealing opportunities — and their prices today reflect this. However, largely lacking in the innovation department, prices would surely fall should large portions of the community leave or membership bonuses dry up. 

That isn't to say that future NFT innovation isn't possible. Recently launched projects, such as Loot (for Adventurers), show how creative developers can ignite a community's passion and the value that this can create. However, spotting innovation before others is crucial for those hoping to enjoy the largest gains from the NFT boom. Often being radically different from anything that went before it, true innovation passes many people by. When CryptoPunks launched, many were still skeptical about the very concept of digital art on the blockchain. Fast-forward four years and the market has proved doubters wrong time and time again. 

Similarly, there is nothing to say that you can't make significant profits from trading NFTs. The exuberance of the market can quickly push prices skyward, presenting many opportunities to make money. The ICO mania of 2017 made shrewd investors incredibly wealthy — but many more people lost out by holding their bags for too long. Most token prices never reclaimed their early-2018 all-time highs, but the most innovative have become among the most valuable decentralized applications in the cryptocurrency ecosystem. 

NFTs are similar in that not every project will continue to appreciate into the future. However, unlike tokens, NFTs are incredibly illiquid. If the market turns against a project and no buyers remain, the chance of selling one of its NFTs drops to zero almost instantly. Thus, spending big money on an NFT that lacks utility or historical significance is a very risky endeavor. When the music stops, those holding projects that simply attempt to cash in on the craze may do so forever.   


OKEx Insights presents market analyses, in-depth features and curated news from crypto professionals.

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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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