Sorry in advance, this became a much longer piece than I envisioned.
TL;DR some nft gud, some nft bad.
Here we go.
In 2021, the world went nuts for NFTs, and at the end of the year, Secret Network went nuts for Secret NFTs. That's NFT as art and community projects utilizing this wonderful technology. Not pure utility technology that could solve issues around validation of ownership of real-world assets, or verify origin and integrity of goods. Those use cases will mature in due time. Here I will be talking about NFTs in the aspects of community, belonging, utility, and other drivers of value.
If you are unfamiliar with NFTs, and Secret NFTs in particular, watch the video further down to get the general concept of what it is. I won't go into details around what a Secret NFT is. Instead, I'll outline a couple of elements that can be considered main drivers for values in NFTs.
The purpose of this is to share some insights as to what I've learned and what I think applies when looking at, and trying to valuate NFTs. Most people probably scoff at the prospect of actually applying any sort of fundamental analysis for NFTs. But please, hear me out. I am sure you'll walk away with a greater understanding when it comes to NFTs, even if you are not into it. And to those of you who are into NFTs, I hope this is article is helpful when you venture into the world of NFTs.
List of main drivers for value in NFTs:
Far from all NFTs do have intrinsic value though (because many projects are shit).
A standard critique of NFTs (and cryptos) is that they don't have intrinsic value. What is intrinsic value? It is a measure of what an asset is worth.
Typically, you should be able to arrive at a value for an asset through the means of measuring, or calculating, different aspects of what makes up an asset. This can be achieved by rigorous fundamental analysis (ala Philip Fisher), complex (objective) mathematical models, and other types of financial models - or a mixture of them all.
The goal of this process is to, or at least try to, identify the underlying value of an asset. To get to know its value and then relate that value to its actual price. If the price of an asset is lower than its projected value, it's time to buy. And vice versa.
Now, with this list of NFT value drivers I have written below, I'd argue that it is possible to get a sense of intrinsic value in NFTs. It is very much guesswork (just like most analysis and forecasting is), but I do think that NFTs can have intrinsic value. Far from all NFTs do have intrinsic value though (because many projects are shit).
Regardless of intrinsic value or not, NFTs just like artwork and collectibles does not necessarily need to have intrinsic value. NFTs simply requires that someone else is willing to exchange another item/s of value for it.
It simply requires that someone else is willing to exchange another item/s of value for it.
Before we get into the main value drivers I just wanted to add a few words around NFT art. There are tons of NFT projects out there which is solely about the art itself. These projects does not necessarily have value drivers as the ones I've outlined in this article. NFT art rather follow the same dynamics as physical art. Art can do a lot of things, it is a necessary form of expression and meaning. Throughout history, art has influenced culture, politics, and even the economy. NFT art is a powerful digital extension of physical art. What is valuable in the context of regular "art" all comes down to the eye of the beholder. Just like I mentioned in the previous section: It simply requires that someone else is willing to exchange another item/s of value for it.
It is almost an innate behaviour, arguably hardwired in our genes.
A great NFT community present a great joint value proposition for the following reasons.
Belonging has always been integral to human society, from antiquity to present day. This extends to the internet and communities online today. People express themselves every day through pieces of clothing; logos of brands, symbols, sports teams or artists.
I know a crypto influencer on Twitter that regularly mentions that he is wearing clothes from his favourite blockchain projects as he tweets about them. Meanwhile, he is ridiculing the idea of NFTs. Without knowing it, he is already engaging in exactly the same community mechanics based on belonging as someone using a particular NFT as their profile picture on Twitter. It is just a different medium. All part of being part of a community and have a sense of belonging.
One could argue that since the dawn of civilization, groups of people have used visuals to signal membership to a tribe (community). It is almost an innate behaviour, arguably hardwired in our genes. This is why I placed community and belonging as the first value driver of an NFT.
Naturally, the stronger a community is, the better. I saw some people complaining about the supply of some projects, that a low supply put a limit on the community. While that is true to some extent, quantity is not the denominator of value in a community. I'd argue that a tight-knit, engaged community of 50 people (or less) can have a tremendous impact when working towards a shared goal, much greater than a project of 10,000 people (or more) that are not engaging and working towards a shared goal. It all comes down to how engaged the community is and what each community member brings to the rest of the community. And, in turn, what that community brings to the outside world.
It is kind of like network effects, where each member/user provide value (hooks) to other members/users. Of course, usually with a cap, as opposed to a network which can be a limitless number of members/users that can scale non-linearly, and exponentially. However, exponential growth has been seen in many NFTs, where the reach of the community (based on capped supply) goes far beyond its apparent limit. Look at wildly successful NFT projects, Bored Ape Yacht Club for example (sure, an extreme example, but it proves the point). BAYC is so popular and influential that there is value engaging with BAYC even for those that do not own a BAYC NFT. The community is many times larger than the total supply of NFTs.
NFTs is a powerful extension of human behaviour, where Anons, Redacted Rabbits, or Ample Agents are collectively striving to build a powerful community by aligning behind common goals that benefit each member and the community at large. That is what community and belonging is all about.
With NFTs there is, of course, a value attached, which is what I am writing about in this article. A strong community drives value becomes it is fun to belong to that community, the more purpose, the better. Belonging is, after all, about purpose. Strong communities typically send a lot of signals, most of which translates into appreciation of monetary value of the NFT/s related to the community. People buying a particular NFT enjoy the membership, the community, they can flex their PFP and raise their status online. The guy hating on NFTs in his crypto-branded hoodie is doing the same thing in a different, inferior way - get onboard, but be selective of what you buy.
When utility is provided in an NFT project, coupled with a strong community, then you have two powerful agents that can make a lot of noise.
Utility, most often used as a buzzword for shallow projects that in reality does not have any real utility. Thankfully there are enough great NFTs out there with real utility that makes up for the shallow projects.
When utility is provided in an NFT project, coupled with a strong community, then you have two powerful agents that can make a lot of noise.
Some examples of NFT utility that can drive value in a project.
The most powerful utility in an NFT project is a DAO (Decentralized Autonomous Organization) that provides governance for shared interests and decisions within the community. In a DAO connected to an NFT, owning an NFT gives the privilege of participating in the governance. This governance could be related to community initiatives, roadmap decisions, software development, or financial decisions. To extract all the value out of an NFT DAO, a treasury should be tied to it, which provides a community fund. The treasury can be powered by proceeds from the mint or sales in secondary market, ideally from both. With such an NFT DAO, the project can continue to grow in ways that would not be possible without the governance from community and the funds available to the community (and project). Providing powerful transformative potential for an NFT overtime.
This effectively creates a collectively owned investment pool that is free to do with as the community governs. It could be used to sweep the floor of its own secondary market to bring up the overall value of the collection. Or invest in software development to develop features related to the NFT which the community can utilize to interact with/through.
An NFT project can help secure its blockchain network by setting up a validator node. A validator is an important function that help verify transactions happening in the blockchain. This can be set up both in PoW (Proof of Work) and PoS (Proof of Stake) networks. For Secret NFTs and Secret Network it is a PoS system where validators help secure the network. The kicker with PoS validators is that they receive rewards from the network based on the total stake locked in the validator.
For example, a Secret NFT project sets up a validator node, holders of the particular NFT, and non-holders can stake $SCRT with the validator. These users that stake receive an %APY (Annual Percentage Yield) that yields them more $SCRT. The validator itself is also rewarded, where a percentage of the rewards can be earmarked for the NFT DAO. This will generate more funds for the treasury.
More utility and even game theory can be applied to staking and validators.
Secret metadata is what makes Secret NFTs stand out from other "regular" NFTs. The NFTs in Secret Network uses the SNIP-721 standard. This standard is based on the original ERC-721 standard from Ethereum Network. The SNIP-721 kept all the good characteristics as ERC, while adding privacy in accordance with Secret Network and all dApps in this blockchain.
The privacy aspects presented in Secret NFTs make for unique use cases, mainly around:
I have written extensively about Secret NFTs on this page.
In terms of Secret Metadata as a value driver, the NFT project should utilize it in a meaningful way. There are already good example of such, for example, Ample Agents LLC NFT embedding secret missions in the metadata along with a dApp subscription for Alter. Information that is only viewable by the owner of the NFT. Projects that do not utilize the Secret Metadata show a level of weakness, or low effort, given that the possibilities for interesting use cases is limited only by imagination. We have most likely only scratched the surface of what Secret NFTs can do for the over NFT space.
NFTs on their own can be used for governance as explained earlier. Alongside just the NFTs, governance tokens could also be used. A native governance token that is required to participate in governance, where different weights could be applied in the governance process. Can be used to distribute power in relation to size of hodlings alongside just the NFTs. This opens the door for new use cases besides "just" the NFTs. After all, a regular token (fungible) is a different asset class, subject to different value drivers than that of NFT value drivers (non-fungible).
An NFT collection can be evolutionary, with next-gen collection/s based on the original collection. Popular approaches include breeding, mutations, spawning, pets/companions - only imagination puts a limit to what approach can be used. What is important is that the original collection plays its utility part for future generations. The secret metadata I mentioned earlier opens up for some unique possibilities around next-gen and evolutionary NFTs.
For example, Redacted Rabbits NFTs has Secret DNA embedded in the metadata. Exactly what this entails is still unknown, but what is hinted at is mutations. It will be interesting to see how that plays out.
Another mysterious Secret NFT is The Secret Order of Mystic Skulls, an evolutionary NFT utilizing game theory. Essentially, all NFTs are minted "naked" with some base attributes. A unique mechanism then allows users to "attune" their NFT to reveal traits gradually (that are hidden by default). The owner of a Secret Skull can choose to fully reveal all traits, or just a couple of traits.
A lot of projects half-ass this concept and effectively reduce the value of the original collection. This is a big no-no from the perspective of what makes an NFT valuable. If it is clear that they project don't really know what they are doing, or forgetting to secure the integrity of the original collection, then it's a hard pass. In such cases, paradoxically, the so-called utility makes the NFT useless.
Airdrops is nothing new to blockchain, especially Cosmos Network and Secret Network has made a reputation for itself by being frivolous. Stake at Osmosis and get airdrops regularly. Well, airdrops does not stop with cryptos. Airdrops is a utility that NFT projects can utilize as well.
Often airdrops are done in relation to next-gen NFTs. It could be that a mutation agent is airdropped to hodlers who then can proceed to mutate their NFT. It could be a breeding mechanism where two NFTs needs to be held in the same wallet, which then received an airdrop as part of the breeding process.
Another common case is that new NFT projects seek out well-established projects and asks to collaborate. Where the new projects airdrops a certain amount of its NFTs among the hodlers in the well-established project.
Airdrops is also commonly used to drive community engagement, it could be a game, or a bounty program where hodlers needs to participate or execute different tasks. After the game or bounty program is finished, airdrops are distributed among successful participants. The reward could be in the form of NFTs or cryptos.
I could go on about utility:
That is about as exclusive it can get for a Secret NFT, relative to Secret Network's size and reach.
Exclusivity in the way I view it is not the same as rarity and scarcity, even though they are all related. Exclusivity as a value driver of NFTs in this list is Jimmy Fallon, Shaquille O'Neal, Post Malone, Stephen Curry, Mark Cuban, Eminem, and Future buying Bored Ape Yacht Club (BAYC) NFTs. This drives tremendous value, as the exclusivity and status of owning a BAYC goes up.
Now, chances are slim that these guys are going to ape into any Secret NFTs (anytime soon), or many other NFTs for that matter. They probably handpick what brings status and is recognized everywhere already. But exclusivity is still a thing, for every project, every network, only that it is relative.
What is exclusive in Secret Network? The most exclusive is Anons NFT. Exclusivity is arguably the biggest value driver for Anons in secondary markets right now. Sure, there is no Jimmy Fallon or Shaq sporting Anons. But there are plenty of key figures from Secret Network that is part of Anons and use their NFT as a PFP in every online platform they are in. That is about as exclusive it can get for a Secret NFT, relative to Secret Network's size and reach.
On the flipside, the least "rare" NFTs can become incredibly valuable too.
As a non-fungible token, every NFT is naturally rare by being 1:1, but that is something every NFT has in common. When it comes to rarity in NFTs, what counts are rare attributes. Usually rarity charts are available for every NFT collection after mint is completed. As a general rule of thumb, the more rare an NFT is, the more valuable. Usually very rare NFTs are a combination of rare traits or special NFTs that may have unique backgrounds or attributes.
What often emerges in communities is demand for certain rare traits. It could be that 30 NFTs out of a 1,337 collection has a Halo over their head. And for one reason or another, the halo become especially sought after. It could be that very active or prominent community members use PFPs with Halos. Or, some community make an effort to create a sub-community within the community based on a certain trait.
On the flipside, the least "rare" NFTs can become incredibly valuable too. Often the least rare NFTs lack attributes. This often makes for clean artwork and nice PFPs as there is not a lot of distraction from different attributes. Many people are unware about low rarity as a value driver. Such NFTs are often referred to as "naked". It is usually a good a investment to pick up the lowest rarity ranks if they are sitting at the floor, given that they are "naked" and look clean, so to speak.
I'd still argue that it is better for the overall value, and community to delist if there is no intention to sell.
Scarcity in terms of availability in secondary market typically drives up floor price, and ultimately the value of the whole NFT collection.
I've had this discussion in Discord two times, never gotten much agreement, unfortunately. I might be wrong lol, but here we go again.
Essentially, if a small % of all NFTs is available on the secondary market, that kind of scarcity will drive up the price. It also signals for other value drivers such as a strong community that do not want to part with their NFT. Effectively it signals exclusivity as there must be beneficial to hold that NFT instead of selling it.
Why I think it is unfortunate that very few sees scarcity in this context as a value driver, is because the same people think it is a good idea that there are many high priced rabbits on the marketplace. Say the floor is valued at $500, the average sale is $1,500, and the largest sales are $3,000. Any NFTs priced at astronomical numbers beyond $3,000 are not looking to sell, at the same time they dillute the supply. It is not uncommon that 25-30%+ of total available supply has a pricing that does not intend to sell. If that supply is instead removed, the increase in scarcity drives up value for the reasons mentioned.
A case can be argued that, unreasonably high priced NFTs (not intended to sell) is good because it shows off the collection, especially the more desirable NFTs. However, that case is weak imo. The primary purpose of a marketplace is buying and selling. Sure, some people may be interested to check out the most rare and valuable NFTs. But the primary flow of doing this is to filter the whole collection, visit a gallery, or consult a rarity list.
So, I'd still argue that it is better for the overall value, and community to delist if there is no intention to sell. Open to change my mind about this, but you would have to bring a strong case as to why listing without intetion to sell is better than keeping overall supply low.
You need to pay attention to relative liquidity.
Good liquidity is a premium, a luxury, or even a privlege that relates to the blockchain network as much as the NFT in itself.
The talk about high gas fees over in the Ethereum Network will never stop, despite how expensive it is, or gets. ETH NFTs will likely remain as the most valuable network despite complaints. This has mainly to do with liquidity. Investors in NFTs prefer to invest in NFT assets that have high trading volumes because liquidity lowers the risk of getting stuck with NFTs you don't want. The overall popularity of Ethereum Network keeps the demand high, which results in good liquidity.
Secret Network, however great it is, regardless of the promises it holds (and will deliver), does not have good liquidity right now. For Secret NFTs in particular, the demand is limited. Secret NFTs became a thing in December 2021, less than a month ago (not counting early projects like Anons NFT, Redacted Club NFT and Secret Punks NFTs that minted during October and November). Good things, good things that are made to last, does not become successful over a night. It takes time to build great things (Gradatim Ferociter). I believe that more liquidity will come to Secret NFTs during 2022. The success of Cosmos Network, IBG gang, Secret Network, will all come trickling down to Secret NFTs throughout the year.
Until then, you need to pay attention to relative liquidity in specific Secret NFTs. For example, the most liquid, high value Secret NFT over the past weeks has been Redacted Club. Pay attention to the movements of NFTs while keeping in mind most of the aspects mentioned on this page. Low liquidity is not necessarily bad if it relates to scarcity or that 95% of the people are priced out. There will naturally be more liquidity in a great project with a higher supply and a floor at 100 $SCRT, compared to a great project with low supply and a floor at 1,000 $SCRT.
There are more to this, of course, but I consider these the broad strokes of value. The so-called "main" drivers for value in NFTs. If all these are in place, the stars are aligned, so to speak. However, this doesn't mean that projects just fulfilling two or three are not valuable. Each NFT should be judged individually on its own merits and scope.
If you think I've missed something. Please reach out to me in DM and we'll update this to reflect more value drivers, as long as we can agree that they can be considered "main" value drivers for NFTs.