Written by: 0xPrismatic, Delphi Digital Researcher

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Aggregation of Art Blocks, Source: Sotheby's

2021 marks the rise of NFTs - what a year it has been! In just one year, we've seen an explosion of artistic creativity, technological innovation, and capital inflows into the space.

I'm excited to see many developers, innovators, and artists experimenting with this technology as a new medium for their creations. Every project that utilizes NFTs in interesting new ways makes me shudder.

A key factor contributing to this hypergrowth is the financialization of global culture made possible by NFTs. Culture is the embodiment of our everyday life. NFT has a relatively low threshold for ordinary people to participate, unlike DeFi that requires minimum technical and financial knowledge. Buying an axis to play a card battle game similar to Pokemon is 100 times more intuitive than buying and depositing USDC into a Curve pool to create governance tokens.

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NFT craze

In the past few months, we have witnessed a lot of speculation, and some NFT prices have increased by 10 to 100 times and plummeted by 90% in a few weeks.

The reasons for the huge fluctuations in NFT prices and the difficulty in valuing them are:

1) The liquidity of NFT is relatively poor. Transactions that occur at the margin change the floor price very quickly.

2) It is in constant price discovery due to limited price history.

3) Many intrinsic values ​​(such as culture) of NFT are intangible and difficult to quantify.

4) There is no consistent valuation framework.

5) NFTs are highly narrative driven. (The most important point, I will expand in detail later)

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Donald Trump Non-Fungible Ape, a rare ape worth 0.7E

In hindsight, I should have expected this, because the market is kept entirely on speculation: it has no historical value, anonymous artists who just joined Twitter, small community, zero utility, mediocre art. It tries, and fails, to create narratives in any of the 5 NFT domains I'll outline shortly.

However, the prices of other NFTs have soared to dizzying heights. A CryptoPunk purchased for just $35 in 2017 could be worth as much as $9.5 million today.

Check out Board Ape Yacht Club, Fidenzas, XCOPY, mystic axes and more. What makes them so valuable now, and how should we spot these NFT value opportunities early?

No wonder we're all asking 'wen next fidenza'?

Why are NFTs different?

I'm fascinated by NFTs because they inherently represent a unique layer of complexity that fungible tokens don't. This layer includes both the intangible (e.g. culture) and the tangible, making it an interesting intellectual exercise.

At the highest level, NFTs exist and share the same base layer, the blockchain infrastructure, as all other crypto applications, with Ethereum being the most commonly used blockchain. This includes Lisk and L2 solutions specific to NFT applications, such as Flow and Immutable X.

The next layer—the platform layer—provides financial services for NFTs: think exchanges, liquidity provision, lending, decentralization, etc. These are platforms because they typically serve multiple different tokens rather than a single token.

Unlike fungible tokens, NFTs are another layer where a separate "app" is packaged into the token itself. The NFT standard (usually ERC-721) enables tokens to be linked to on-chain or off-chain assets through their metadata, while preserving the provenance, immutability, and network security of the blockchain.

Let me simplify with a Web2 analogy:

(First level) The underlying blockchain = Internet + mobile phone.

For example: TCP/IP, iPhone. widely and publicly available

(Level 2) Application/Infrastructure = Internet Platform.

Example: Apple's App Store

(Level 3) NFT = Personal Mobile App.

Example: Facebook app

The platform is very powerful and captures enormous value through its network effects and broad market reach. Good platforms take a lot of time to build, grow, and hit hypergrowth on the adoption curve. A single app usually represents the layer with the highest level of variety, innovation, and creative input—because it's now fairly easy for anyone with an idea to create and launch a (basic) mobile app. The web3 equivalent here is NFT.

To illustrate this further, let's consider Aave (the platform) and CryptoPunks (NFT):

1 The value of AAVE is closely related to the success of the entire Aave application/protocol: the total value locked mainly includes different LP tokens, generated revenue, user growth.

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A Simple Ontological Framework for NFTs

So I started to explore a framework for thinking about NFT:

1) How do you identify NFTs with narratives that are likely to go viral?

2) How do you determine if an NFT is undervalued or overvalued?

The purpose of this is not to quantify the specific fair value of NFTs - NFTs do not have a discounted cash flow model. Instead, I developed a dynamic framework for NFT project creators and NFT investors to make better decisions.

I dissected deeply what gives NFTs value and distilled them into 5 main areas. This is different from the typical taxonomy of NFTs we are all familiar with: collectibles, generative art, virtual lands, games, etc. The reason is that there is often a large overlap between these categories. These 5 domains apply to all NFTs, although their relative importance varies from project to project.

NFTs have cultural and aesthetic advantages over their alternative counterparts. On a scale from the invisible to the tangible, the 5 domains are:

1. Culture (intangible)

1) This is the most interesting part of NFT and the hardest part to value.

2) Culture is broad and includes the shared experiences, perceptions and beliefs of a society.

3) Cultural elements include but are not limited to:

Brand Value

historical meaning

Mimic Desires: We desire other people's desires because we imitate their desires

Resilient Values: Am I seen as demonstrating wealth, culture, and class?

2. Aesthetics (intangible)

1) Refers to the aesthetic appeal of NFT-related media (e.g. artwork, music)

2) Do you like it? How many other people, especially fashionistas, like it?

3) Does ownership show that you have a good eye for beauty?

3. Community (tangible-intangible)

1) Refers to the sum of existing owners of NFT collections

2) As with most things in Web3, community is everything.

3) What are the demographics, psychographics, wealth and vision of the owner? Are they more likely to be diamond hands or paper hands? Are they loud and rude, or quiet and sophisticated?

4) Measurable metrics: Is the community growing, stagnant, or declining? How many contributors are there?

4. Practical (tangible)

1) Refers to benefits derived directly from owning NFTs, such as private membership groups, early access to mints, token farming, physical goods

2) Major components of games and Metaverse NFTs: eg Axies, Sandbox Land, Star Atlas spaceships, Ember sword badges. These can also generate income when playing money games.

3) NFTfi (NFT + DeFi) is very interesting.

5. Assets (tangible)

1) Refers to digital or real-world assets that NFT owners are entitled to own in addition to the NFT itself

2) For example: project treasury, other NFT, intellectual property, real estate

in short,

in short,NFT = Culture + Aesthetics + Community + Assets + Utility

(NFT = Culture + Aesthetics + Community + Assets + Utility，CACAU)

example:

example:

A creative generative artist whose gift is an algorithm to create the wonderful artwork the world needs should also consider:

How s/he can engage with collectors and build a positive community without completely disappearing "work for my art"

How he/she increases the utility of owning artwork through membership, early access to new works, etc.

notes

notes

Several factors related to blockchain are not captured in this framework, but may contribute to the narrative and value of NFTs:

1. The basic chain of NFT

Ethereum is currently the network of choice for NFTs, especially high-value NFTs. This is partly due to security guarantees on the web.

NFTs on chains other than Ethereum or on L2 Rollup (e.g. Polygon, Solana, Avax, Arbitrum) are heavily discounted in today’s market, although that may not be the case in the future.

2. Persistence of basic data

Arweave > IFPS >Centralized website

3. (Gen Art) On-Chain vs Off-Chain

Artwork stored entirely on-chain appears to have advantages over those stored in an off-chain location. Block space is very expensive, making on-chain storage generally impractical.

For example Autoglyphs as the oldest on-chain generative art project.

4. Derivatives and Originals

Successful projects will be cloned and forked multiple times, this is the law of encryption. As we have seen many times, the price of derivatives can rise sharply in the short term due to speculation, but in the long run, the value usually returns to its original level.

Summarize

Summarize

Why bother with this? Shouldn't NFTs be simple: buy as long as I like it? Yes, this works too.

I put this framework together to help me better understand and systematically identify factors that can drive NFT value. And avoid FOMO on projects that are narratively weak or ad-hoc. I hope it works for you too.

I think for NFTs to become mainstream as a truly investable asset, we need to start thinking and speaking the same language as people in the traditional investing world. A framework for non-crypto natives to understand and demystify cryptographic techniques and concepts.

An approach similar to "value investing" is:

1) In the context of NFT, what is culture?

2) How do we identify substantive cultural narratives that need attention?

3) Can we assign value to different components of culture?

4) How does an artist (original artist, photographer, musician, etc.) price his/her work?

5) CryptoPunks vs Bored Apes: A case study.