scorecardresearchNFTs: Conceptually they have pervaded our surroundings for ages

NFTs: Conceptually they have pervaded our surroundings for ages

Updated: 01 Jun 2022, 04:54 PM IST
TL;DR.
Let us take a layman’s journey to understand NFTs and its valuation rationale.
NFTs: Conceptually they have pervaded our surroundings for ages

NFTs: Conceptually they have pervaded our surroundings for ages

“Non-Fungible-Token” can be a mouthful of jargon which only helps to create a sense of digital specialty and therefore alienating the common concept which NFTs really are. Simply put, we grew up with NFTs, without naming them so.

Think of your Soccer cards collection for which you grew up as a chewing gum addict, or the stamp scrap book which was patiently constructed desecrating the numerous envelopes sent through pen-pal connects throughout the world, your grandma’s jewellery box and the collection of jewelleries, your sister’s comics books collection only to be replaced by the Nancy Drews.

The edition of the 1947, 15th August Times of India newspaper which your grandfather has framed in his study – the artwork your father has spent a fortune to acquire and now adorns your living room wall.

More digitally, the Lamborghini skin you earned in your Turbo Racing game after spending the laboriously collected coins earned by hours spent playing the game. The flat you just purchased is also something unique that only belongs to you. All these can be considered as Non-Fungible Assets which have something personally unique attached to it.

It is but human nature to get attached to tangible things. However, it also depends on your individual choice if you have a personal justification to get attached to that particular tangible thing or not.

For example, my friend has an old plastic chess set which he wouldn’t exchange with my marble chess set ever. Why would he deny such a lucrative offer? His logic is that he won that chess set in a tournament as a kid, it may be a cheap one to acquire, but its value isn’t determined by its price – but by the achievement associated with that particular set.

Juxtaposed to this, I personally know of many friends who have won such chessboards in subsequent competitions, but have not preserved them so passionately. If we have to analyse this behaviour, we must say that certain people attach certain value to certain things which are unique and aren't demonstrated generally.

Therefore, valuing such things is extremely subjective and often non-conclusive. Such is with the case of NFT collectibles. The digital collectibles represent unique assets which represent that particular asset in the digital records. Secured with cryptographic protocols, the issue of proving its uniqueness or ownership is definitely resolved. But, that does not guarantee the covetousness demonstrated towards certain non-fungible tangible assets by the market at large.

So, definitely, the technology cannot be a value parameter for valuation of such objects beyond a particular limit, despite having its superiority over the alternate means of custodianship and record-keeping available. Thus, we must accept that the valuation of these are hugely subjective and dependent on factors like how many people desire it, what are they willing to give-up in order to own that thing etc. and, like art collectibles, it is best realised at an auction place.

The digital assets which NFT represents comes with digital auction marketplaces to facilitate such “price-discovery” events. The aftermarket valuations are also sort of low liquid offer and counter-offer platforms where individual negotiations, preparedness to part with a certain sum as exchange and the relative desperation for liquidating that assets come into play while making such exchange value decisions. Trying to put it in a valuation framework is as impossible as trying to put a framework to art collectible valuation.

However, the concept of NFTs can be extended to other markets apart from collectibles- for example, real estate. Once the underlying has a monetizable asset, the valuation of such tokens becomes simpler. These monetizable assets like real estate or limited issue bonds and debentures will have the same valuation parameters as the underlying asset and its resultant cash flows and a discounted cash flow model can be implemented to work out the current valuation. A premium can be added to account for the technological superiority. Finally, the supply and demand for these would be crucial to determine the final exchange or ‘discovered’ price of the asset.

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Ajoy Pathak is a Blockchain Evangelist with CryptoWire, a first port of call for entry into blockchain and cryptocurrencies. CryptoWire seeks to empower participants of the crypto universe with its super app and its research, training and information platforms like Crypto University, CryptoTV and CryptoWire.

Article
Just as any other digital assets including photos and videos, NFTs refer to digital files stored on a blockchain.
First Published: 01 Jun 2022, 03:29 PM IST