Non-fungible tokens – NFTs for short – do not go well over the tongue, but they are currently selling quite well. That somewhat strange and controversial digital asset is on the rise. Earlier this year, some NFT auctions raised millions of dollars. DW was also involved in the sale. It did not make very high waves. This makes the question even more urgent: What determines the success of an NFT?
In the name of art?
Let’s take a step back: NFTs can be used to prove ownership of digital files. These can be works of art, accessories in video games or even virtual property. The fact that the corresponding files are originals is entered in the blockchain. This is why NFTs are mostly traded in cryptocurrencies, and that is why NFTs also use a lot of power.
Investment bank JPMorgan Chase estimates that the global NFT market is worth € 6.3 billion. The Economists’ NFT experiment raised the equivalent of $ 420,000 for the October issue of the magazine. The Economist had auctioned off the front page of a cryptocurrency issue. It shows a drawing from the children’s book “Alice in Wonderland” with the heading “Down the rabbit hole”. Buyer @ 9x9x9 told The Economist that it was the stock that made him buy it.
Taste, investment or manipulation?
But the reasons why people pay large sums 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
The NFT banner Sundaresan, which also invested in the technology, was then suspected of having driven up prices with the purchase. He denied it. It was about supporting the artist and showcasing the technology.
For other buyers, scarcity is a key argument. “The buyer knows how many copies will be made and has blockchain proof of ownership,” US billionaire NFT collector Mark Cuban told Business Insider.
What the data says
Researchers at the state-owned Alan Turing Institute (ATI) in England wanted to know what the data say 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: NFT’s visual characteristics, an NFT’s past and related sales, and the social network of buyers and sellers.
Using a machine learning model, the researchers examined a data set of 4.7 million NFTs exchanged by more than 500,000 buyers and sellers. The result? Previous sales of related NFTs were the most important of these three factors, accounting for more than 50 percent of the price differences.
For example, past sales of NFTs from the so-called “Cryptopunks” collection would bode well for future sales of NFTs from the same collection.
Stable sales: The crypto punks are constantly enjoying demand
Visual features were the second most important aspect, accounting for 20 percent of the price. The popularity of retailers in social networks was ten percent.
Future plans include exploring other factors, including the platform on which the NFTs are sold, and artist activity on social media.
A touch of the classical art market
Scarcity, social networks and often the content of the artwork also determine the value of an object in the traditional art market. But NFTs have some 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 percent from secondary sales,” he told DW. “Every time a work is resold, a portion of the profits go back to the artist. This is truly the first in the art world and can be a great opportunity for artists.”
This is possible because all future sales of NFTs are recorded on the blockchain, enabling artists to receive their share automatically.
A jpeg of a stone
Anyone who has already made a lot of money with an NFT will benefit from these factors. But what about the many works that barely bring anything in?
“Every day there are 10,000 new pieces for sale,” says Martino. “It’s not 10,000 new buyers every day to continue this incredible production.”
For the NFT market to stabilize, it needs to attract more public attention in order to attract traditional investors. In addition, there is only limited knowledge about cryptocurrencies. According to experts, it will probably take years before enough people are aware of it. In the meantime, there may still be a few surprises.
“If we assume that enthusiasm for NFTs today is very similar to enthusiasm for cryptocurrencies when it started, then we can also expect a greater correction,” says Baronchelli from the University of London. The effects of a correction on a non-fungible asset are different from, for example, on a exchangeable asset such as Bitcoin, which can be exchanged at will.
“If I have bitcoin and it drops 40 percent, I still have 60 percent,” Baronchelli said. “Now, if I have a JPEG of a rock, what happens to the value of that JPEG? We do not know, because there is nothing comparable.”
The article is adapted from English.