What factors need to be considered for NFT valuation?

The non-fungible token (NFT) market is surging, and more and more people are creating, buying, selling, and exchanging NFTs. There are many challenges in this new market, one of the biggest being the valuation of NFTs.

The valuation of NFTs is a big unknown. There is no case for how NFTs should be valued, and its closest analog, valuing works of art, is rather vague. NFTs need a new method of valuation, and a better means of managing the digital assets associated with NFTs in order to maintain that value.

fair market valuation
Fair market value refers to the price at which the NFT will be resold by buyers and sellers without any forced purchase or sale and with a reasonable understanding of the relevant facts. This value may include digital images associated with NFTs, smart contracts based on NFTs, and rights to display and reproduction by real-world subjects of images based on contractual obligations between sellers and buyers.

Fair market value relies heavily on the concept of the "most relevant market" - the market in which the item is most often sold to the public. While auctions may be considered the "most relevant market" in some cases, the specific nature of each NFT, and the market in which it resides (e.g. OpenSea), will be used to determine the "most relevant market".

It's like how works of art are valued. Prints just published last year are unlikely to hit the auction market. The same is true for NFTs that are unique and not yet auctioned. So, in this case, the "most relevant market" is the NFT's asking price.

Factors to Consider in NFT Valuation
chain security

It is important for buyers that the underlying blockchain remains secure. Ethereum is currently the most secure smart contract platform that can boost the value of NFTs over time.

On-chain or off-chain metadata

Due to the storage limitations of the Ethereum blockchain, on-chain is defined as incorporating metadata directly into the smart contracts representing tokens, while off-chain means hosting metadata separately.

On-chain metadata makes NFTs more valuable, in part because metadata is incorporated into tokens, allowing NFTs to exist forever; and, in part, because on-chain tokens must meet certain Ethereum standards, giving them a liquidity premium and make transactions easier.

When determining whether an NFT is on-chain or off-chain, the key issue is where the NFT is hosted, i.e. using a digital asset management system (DAMS).

NFT creation time

Because NFTs are so new, NFTs created before 2020 may be considered “digital artefacts” of greater value.

creators and community

The wider marketization and recognition of celebrity artists will affect the value of their NFTs, and certain NFT creators in the sports industry have realized this and have partnered with well-known artists to create one-of-a-kind NFTs. These NFTs are uniquely attractive to buyers because they are unique and distinct from the physical types that can be purchased.

Scarcity and authenticity

Some NFT platforms such as SuperRare only support a unique, single version of digital artwork. Some marketplaces also segment their NFT offerings by scarcity, for example, the NBA's Top Shot classifies its NFTs into "common," "rare," "legendary," and "ultimate" tiers. Those listed in the higher grades hold a higher value than their "normal" grade counterparts.

Authenticity and scarcity go hand in hand – for example, Florence’s Uffizi Gallery created an NFT for a Botticelli work they own, which is more valuable than an NFT created from a tourist’s iPhone picture. However, verifying the authenticity of sellers on the Internet and managing intellectual property related to NFTs remains difficult without access to DAMS.