Since the middle of 2021, we have been working on non-fungible token (NFT) analytics in the blockchain space with a small data science team. Since our work has reached a certain level of maturity, I want to share some of these outputs in short blogs whenever possible. I would like to start this first article by addressing the basic concepts of NFTs, the NFT market and its analytics perspective. Since the field is still very naïve, analytical studies with NFT market data are still sharing exploratory level statistics (even these statistics were hard to find when we started). However, we can easily say that more advanced studies will be carried out on these subjects in the coming years and even a specific academic literature may be formed in this field. Because the NFT ecosystem, with its unique dynamics and “data wideness”, looks like an experimental laboratory of a new multi-disciplinary field of study where fundamental literatures such as customer analytics and behavioral economics will be blended with deep learning applications such as natural language and image processing.
What is NFT?
Since the answer of this question is now available even in the photo galleries of clickbait news websites, I do not like to answer it, but I still did not want to start without introducing the concept. Non-Fungible Token (NFT) is the generic name for several token standards (ERC-721, ERC-1155, ERC-998, etc.) represented on the blockchain. The non-fungible nature of these assets is due to their “uniqueness” features compared to standard cryptocurrencies. So, for example, the US dollar is fungible because each $1 is worth the same as another $1 (excluding coins with collectible value based on their serial number). Similarly with cryptocurrencies, Bitcoin or Ethereum tokens are fungible. On the other hand, NFTs, in general terms, are similar to the dollars with a collection value that I have just excluded in parentheses, and even though the “central banks” that issue them are the same, they are valued differently from each other due to their structural differences. Today, the main reason why NFTs are associated with artworks is this non-fungible structure.
What are NFT Standards?
So far we’ve always talked about NFTs being unique, but in practice this isn’t quite the case. Yes, the standards of NFT contracts allow each token to be unique, but in practice each NFT does not have to be unique. So if you create two identical images on the blockchain as NFTs, they won’t be unique. At this point, we can talk about two basic NFT smart contract standards according to their intended use:
- ERC-721: This standard is often used to produce truly unique NFTs with a predefined and limited supply. The vast majority of computer-generated collections use this standard. Since the supply is fixed in these collections, there will be no inflation in the collection. Once the collection is produced on the blockchain, not only the contract holder, but even Kamala Harris can not be able to change the supply of the collection.
- ERC-1155: Unique token generation is still possible in this standard, but fungible token generation is also possible. Therefore, it can be said that this is a hybrid standard. With ERC-1155, it can be ensured that the supply is unlimited. Therefore, collections with utility that offer benefits such as website membership usually use the ERC-1155 standard. The reason why these are not produced directly with the classical fungible token standard, ERC-20, is that thanks to the NFT standard, metadata of NFT (images, traits, links, etc.) can also be recorded in the block. There is no such possibility in ERC-20.
How to Measure the Value of NFTs
NFTs are often part of NFT collections of multiple tokens offered through a smart contract. In general practice, after the collection tokens are created, they are randomly sold to their first owners at a single price, through a “minting” event on the blockchain. These NFTs are then listed by their owners on popular online marketplaces such as Opensea, Rarible, LooksRare, for sale at the desired price, and a free market economy is created. Continuing with the allegory under the title “What is NFT?”, we can think of “central banks” or countries as NFT collections. Just as each country’s currency has a value relative to other countries’ currencies based on its economic strength, potential, and reliability, each NFT collection has a relative overall value compared to other collections. This value, as you can imagine, is determined depending on the potential, reliability and popularity of the people or institutions that produced the collection; or in relation with the quality, utility, and economy (eg. total supply) of the collection. We can examine the NFT collections on the market today under three main characters:
- Art collections: These are NFTs produced by real artists, often with low supply (I mean low, like 5, 10, 50). What makes these collections valuable is the same as what makes their artist valuable. The values of the tokens in a collection are also determined artistically, as in reality.
- Utility collections: This type of NFTs can be thought of as proof tokens that offer various privileges or functions to their holders. For example, a website that works with a membership system can sell the token required to enter the website to its users as NFT and can only accept users who have this token in their crypto wallet. These types of collections are used for different utilities such as membership rights to web applications, concert tickets, one-time passwords that allows downloading a paid e-book or report to the computer, etc. Naturally, the values of these tokens are determined in parallel with their utilities.
- Computer generated collections: Tokens belonging to these collections are produced by computer with random differences (traits) between coin images and with high supply (such as 8888, 10000, 20000). Computer-generated collections today have the largest market share in terms of volume. Until now, the value of these collections has often been determined by their ‘first-mover’ character and the popularity of their creators. By first-mover I mean, an indirect popularity due to the fact that some technical features are being implemented on the blockchain for the first time, such as “the first collection whose tokens can be interacted” (e.g., two NFTs can “couple” to produce a new “baby” NFT), “the first collection whose background color can change dynamically” (e.g. dark at night, light at daytime), or “the first collection completely distributed on the blockchain with all its metadata” (this is a bit more technical). Of course, since such technical applications require a deep knowledge of smart contract coding, we are talking about the popularity of Uğur Şahin, not the popularity of an Instagram influencer. But of course, there are also collections that gain value thanks to the influencers and that do not actually have any features…
Computer-generated collections are usually created by randomly adding various accessory elements onto a base illustration. For example, the “Bored Ape Yatch Club” (BAYC) collection, one of the most famous collections, with a total transaction volume of 400,000 ETH (approximately 1.2 billion dollars) in the market, is created based on a monkey illustration with 10,000 different combinations of different skin colors, mouth structures, costumes, glasses and hats. Because of this diversity, different monetary values are formed for the tokens in the same collection. The supply-demand curve in the conventional economy also works in the NFT economy, and the more rare contents in a collection become more valuable. Again, to give an example from BAYC, at the time of writing, the cheapest token of the collection is listed for 89.9 ETH, while the cheapest token of the monkeys with colorful captain hats on their heads is listed at 169 ETH. I will cover more details on this subject in my next blogs.
How Valuable Are NFTs Right Now?
By now, the number of cryptocurrency wallets holding any NFT has exceeded 3 millions. As of January 2022, more than 200,000 wallets are actively trading NFTs every week, and I can say that the market price of these NFTs is between 0.12–0.17 ETH ($360–510 at today’s price). When we look at it cumulatively, the total volume of the NFT market has reached 50 billion dollars. Today, works belonging to cult NFT collections with a coin supply of 5–20 thousand can be priced between 5–100 ETH. So we’re talking about a market that is quite large, and still continues its exponential growth curve (with the recent drop in the crypto market, this curve has broken a bit).
To be continued.
