Beyond Subjective Value: Connecting NFT Premiums With Real World Asset Value
By Eric Kapfhammer, COO and Head of Capital atPolyient
This year’s market eruption in non-fungible tokens (NFTs) marks the recognition of a new way of doing business for digital artists, sports icons, and creators alike. For those pioneering new ways to transact and ascribe ownership, NFTs also provided a new method of discovering value across several industries, particularly in the gaming, the arts, and entertainment worlds.
While artists and sports icons have used NFTs to connect with millions of fans, who can now bid openly for their favorite collectibles or highlights, accessibility to gaming assets will prove to be the most radical disruption. This is exemplified by the $10.3 million backing Big Time Studios received from multiple investors in its mission to create the computer games that will allow players to buy and sell NFT-based virtual items. You can expect to see similar initiatives to become more common.
With all the excitement, there remains one sticking point linked to the NFT ecosystem: how do NFT users authenticate true value for NFTs beyond collectibles into day-to-day economic activity? In many ways, the NFT ecosystem is at a crossroads that points to greater adoption as demonstrated by Ebay’s move to approve NFT sales on its platform. Will the industry move beyond collective items into more traditional avenues like real estate and commercial assets, or will it deepen its makeup of the gaming industry and collectible space?
Either way, to move beyond the current phase of adoption, NFTs should benefit from a more formal appraisal system that takes account of market and transactional data. Recent attempts to sell real estate using NFTs have fallen flat, due to a disconnect between the NFT premium and the actual asset value. A formal ratings or appraisal system could help connect the two by enhancing liquidity.
Subjective price discovery alone does not stand the test
Buyers of NFTs are currently deriving value exclusively through subjective price discovery methods. Open auctions form the basis of the transactional NFT marketplace, assessing value through liquidity extraction methods such as price pump and signaling by owners, which is an inefficient method to ascribe value.
News headlines and social media memes have also played their part in setting the market tone for NFTs. Yet, these channels provide a skewed concept of value by focusing on the biggest
NFT sales by the most prominent sellers. Although Beeple’s $69 million NFT digital art work sale, which went on auction at Christie’s, took the market by storm, it directed focus away from newcomers and new innovations in the space. In relying purely on subjective valuation methods, new market entrants into NFTs face the prospect of unrealistic market expectations. Such a development could end up sidelining NFT creators and create a growing disconnection between sellers and the wider market.
A verifiable and authenticated rating system could serve to attract broader use cases for NFTs, by extrapolating data points across buyer behavior and market activity. Such a method would benefit NFT market activity in sectors that involve not just one buyer or seller, but multiple parties, including property, financial markets, and even corporate finance, such as aviation transactions. So far the vast majority of NFT sales involve one buyer and one seller, but what happens when there are multiple parties? Using a recognized NFT value platform could provide the certainty required for blockchain to successfully break into these industries.
NFT ratings will unearth new possibilities
Instead, there is a better system for new developers and creators entering the NFT space: one that offers a fully decentralized model in valuing and rating NFTs. A decentralized market data of NFTs would make it easier for creators to manage their asset sales accordingly, while helping new entrants more easily navigate the marketplace. The overall objective of a decentralized ratings system for NFTs would allow market participants to understand where they fit into the overall market framework.
Luckily, there is growing recognition among some of the biggest voices in NFTs at the moment who are working hard to ensure increased credibility and visibility across the NFT marketplace. NBA Brooklyn Nets star, Spencer Dinwiddie, touched on the point in a recent media interview. Dinwiddie argued that an NFT being sold as a unique and scarce item should be just that. A system that prevents the possibility of NFTs being relabelled or repacked a day later should be discounted. NFTs that cross this bridge would be filtered through a decentralized NFT ratings platform, thereby informing bidders of the level of its uniqueness.
The need for a more encompassing NFT valuation system was evident when Shane Dulgeroff put his house in Thousand Oaks, California up for sale as an NFT on the OpenSea auction platform. The auction presented a novel opportunity for NFTs to tap new buyers and gain momentum in new industries, but instead ended up with zero bidders. As touched upon above, the sale reflected a disconnect between the NFT premium and the real world asset value. But all is not lost — NFT sales can successfully branch out into mainstream transactions by leveraging a marketplace for rating and appraising NFTs, attracting more bidders and building confidence in NFT valuations.
Removing the arbitrary NFT price premium
An NFT appraisal system that pulls together market data from sales and bids would help solidify the NFT price discovery process, ensuring new buyers and bidders have a price range to work with. Based on a decentralized node oracle approach across a full range of metrics, such as reviews, pricing, and market engagement, market participants would be in a position to form a clearer picture of how to assess demand and derive value. Such a system would avoid the “NFT premium” problem and ensure great confidence and transparency in the NFT price discovery process.
Just as a bond trader accesses a Bloomberg terminal to gather live price information of an upcoming U.S. Treasury auction, bidders of NFTs will similarly be able to tap price and wider market data to inform their market position. But unlike the bond trader, who will have to rely on a centralized data system, the NFT bidder will benefit from a decentralized marketplace that ensures enhanced transparency, accessibility and visibility.
Currently, the NFT marketplace and even legacy financial markets are too reliant on the auction process in deriving value and price discovery. For example, data on how NFTs are used outside the transaction process could help inform a more holistic appreciation of NFTs, from that of a pure pricing auction model.
The benefits of a decentralized ratings marketplace run by node oracles could extrapolate value from multiple data points outside the auction process, including wider engagement and demand trends. Ultimately, such a model will help empower the creators and game studios to feed their data into one open access marketplace, and would greatly aid all individuals involved in the appraisal method of NFTs.
Asset classes that provide new forms of value creation and transactional activity are a rarity. But when they do arise they have the power to unleash new forms of doing business, and even change our perception of entire industries. NFTs have done just that. The market momentum behind NFTs is palpable. As NFTs enter the next stage of mass adoption, a decentralized ratings system will add transparency and credibility to the marketplace. Valuing NFTs will lend the tools and resources needed for newcomers and creators to thrive. A functioning appraisal system of NFTs could even aid the next real estate sale in somewhere like Thousand Oaks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.