Economics of NFT’s

NFT’s burst into the public’s awareness in the last few years; however, they have been prevalent for close to a decade. They have created much speculation around its growth, which led many to be confused as if it is something one should buy as the public has continued to see people make tens of thousands of dollars in minutes or become a millionaire overnight. Many people lack awareness around many of the variables in this complex equation, such as the blockchain, how NFTs work, what makes an NFT valuable, and why they are not like any other economic market?

One crucial key point that must be addressed is how is it that NFTs can function and exist within all of our markets? The answer to this question is the blockchain. It is a decentralized ledger of transactions across a peer-to-peer or trader to trader network. To simplify it, it is a record of transactions that have been recorded in a way that is impossible to hack, cheat, or trick. The blockchain can record all transactions acts to illustrate ownership of these tokens. If I were to purchase something through this decentralized network, I would exchange some form of a cryptocurrency, typically in the form of Ethereum, bitcoin, or some other coin, for something I want that someone else has. For this Example, that will be a piece of pixel art.
I would exchange some amount that the art is valued at, and I would gain ownership over that piece in exchange. The common question is, if it is digital art, how can there be ownership? If one wanted to obtain the image, couldn’t they take a screenshot of it, and then they would have the photograph forever. This statement is untrue. Based on the blockchain, it shows all the transactions, including the transfer of that art piece to you, showing you are the only one with the authentic piece giving you ownership over that piece. A typical example used is how even though someone has a fake Mona Lisa that is identical in size and details to the original, it doesn’t mean they can pass it on and sell it as the Mona Lisa.

When broken down, an NFT is a non Fungible Token. In layman’s terms, whatever is being sold or traded, there are only one of that things. In economics, Fungible means something that can be easily exchanged. For Example, the car you own is not fungible; there might be different models like it, in the same year; however, they might not have the same spilled drink in your passenger’s seat or CD set in your stereo systems, making your care the only one that has ever existed of that type owned by you. It is a hundred percent unique. However, the gas within your car is fungible, as it could easily be traded out with no issue. Non Fungible Tokens can be anything from experience to a piece of art, a song, or a digital clip sold online. It is essentially gaining digital propriety over something that we as humans have never been able to own until now.

Many look to gain propriety over digital assets and find many different items that have no significance to them but are blowing up in size and value, such as these digital art projects like crypto punks or board apes. So how does one know what an NFT will be valued at and what is its growth pattern? The problem is the majority of all trading is speculation and intuition. As someone who will want to invest or look at NFTs as an investment, it is just speculating on whether or not a project will succeed, get hot or gain notoriety. Although there are factors such as looking at the community’s creators and the plan surrounding a project, it is essentially gambling to see if a project can turn out the way you anticipate. What makes it valuable is genuinely based on what consumers latch onto. Since there is only a limited amount of each project completed, it creates a scarcity effect where the demand becomes more significant.

This factor is further accentuated by a unique feature that makes this NFT marketplace fascinating. This factor is how one can do something called burning NFTs. When tokens are stored on the blockchain, it essentially removes the ticket from circulating or archiving it to eliminate the surplus and inventory of an NFT drop. These shorts supply raising demand benefiting content creators and artists. However, to incentivize consumers and NFT buyers, creators will release “upgrades” or incentives to replace the archived NFT. This creates an automated market that controls its supply and demand in a decentralized network.

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