Non-fungible tokens – NFTs for short – don’t go down well on the tongue, but they’re currently selling quite well. The somewhat odd and controversial digital asset is on the rise. Earlier this year, some NFT auctions brought in millions of dollars. DW also participated in the sale. He didn’t make particularly high waves. This makes the question all the more urgent: what determines the success of an NFT?
In the name of art?
Backtracking a bit: NFTs can be used to prove ownership of digital files. These can be works of art, video game accessories or even virtual real estate. The fact that the corresponding files are originals is registered in the blockchain. This is why NFTs are mostly traded in cryptocurrency and this is why NFTs also consume a lot of electricity.
Investment bank JPMorgan Chase estimates that the global NFT market is worth the equivalent of €6.3 billion. The Economist’s NFT experiment raised the equivalent of $420,000 for the news magazine in October. The Economist had auctioned the cover of an issue on cryptocurrencies. It shows a drawing from the children’s book “Alice in Wonderland” with the title “Down the Rabbit Hole”. Buyer @9x9x9 told The Economist it was the stock that made him buy it.
Taste, investment or manipulation?
But the reasons why people pay large sums of money for the rights to a digital file vary. Crypto entrepreneur Vignesh Sundaresan spent $69 million on an NFT by artist Beeple earlier this year. This is the highest amount ever paid for a digital artwork with an NFT stamp.
DW NFT Auction
NFT fan Sundaresan, who has also invested in the technology, was then suspected of driving up prices with the purchase. He denied that it was to support the artist and show off the technology.
For other buyers, rarity is a key argument. “The buyer knows how many copies will be made and has proof of ownership of the blockchain,” US billionaire Mark Cuban, an NFT collector, told Business Insider.
What the data says
Researchers from the public Alan Turing Institute (ATI) in England wanted to know what the data says about this phenomenon. “We found that the success of NFTs is very heterogeneous,” Andrea Baronchelli, associate professor of mathematics at the University of London and blockchain researcher at the Alan Turing Institute, told DW. “Some – very few – are very successful, a few sell well and the majority are worthless.”
In a study this year, ATI’s team of experts examined the role of three factors in NFT pricing: the visual characteristics of the NFT, the past and associated sales of an NFT, and the social network of the buyers and sellers.
Using a machine learning model, the researchers looked at a dataset of 4.7 million NFTs traded by more than 500,000 buyers and sellers. The result? Past sales of related NFTs were the most important of these three factors, accounting for more than 50% of price discrepancies.
For example, previous sales of NFTs from the so-called “Cryptopunks” collection would bode well for future sales of NFTs from the same collection.
Steady Sales: Cryptopunks Enjoy Steady Demand
Visual features were the second most important aspect, accounting for 20% of the price. The popularity of dealers in social networks accounted for ten percent.
Plans for the future include examining other factors, including the platform on which NFTs are sold and artists’ social media activity.
A touch of the classic art market
The rarity, social networks and often the content of the artwork also determine the value of an object in the traditional art market. But NFTs have certain characteristics that set them apart from their real-world counterparts, says Mauro Martino, director of the Visual Artificial Intelligence Lab at IBM Research and co-author of the ATI study.
“A big difference between the art market and NFTs is that artists take 10-20% of secondary sales,” he told DW. “Each time a work is resold, part of the profits go to the artist. This is truly a first in the art world and it can be a great opportunity for artists.”
This is possible because all future NFT sales are recorded on the blockchain, allowing artists to receive their share automatically.
A jpeg of a rock
Anyone who has ever made a lot of money with an NFT will benefit from these factors. But what about the many works that earn next to nothing?
“Every day there are 10,000 new pieces for sale,” says Martino. “It’s not 10,000 new buyers every day to keep this incredible production going.”
For the NFT market to stabilize, it would need to attract more public attention to attract traditional investors. In addition, knowledge about cryptocurrencies is limited. According to experts, it will probably be years before enough people know about it. In the meantime, there could still be a few surprises.
“If we assume that the enthusiasm for NFTs today is very similar to the enthusiasm for cryptocurrencies when it started, then we can also expect a larger correction,” says Baronchelli of the University. from London. The effects of a correction on a non-fungible asset are different from those, for example, on a fungible asset like Bitcoin, which can be traded at will.
“If I have bitcoin and it drops 40%, I still have 60%,” Baronchelli said. “Now if I have a JPEG of a rock, what happens to the value of that JPEG? We don’t know because there’s nothing comparable.”
The article has been adapted from English.