NFTs 101: The Definitive Beginner’s Guide to Understanding and Trading NFTs (Part 1)

Tyler D Warner
27 min readSep 23, 2021

Part 1 — What is an NFT and Why Are They Valuable

When I started my NFT market show “NFTs Live” in early September, a part of the mission was to help educate and onboard new users to the NFT space, and give them the tools needed to succeed. This post is the first step in that journey, as I look to roll-out more educational content to help newcomers grasp and feel more comfortable with NFTs.

Trading and investing in NFTs has provided me with financial freedom and allowed me to leave my career in Corporate America. I am very grateful for this opportunity and plan to give back to this space as much as I can, and hopefully help others to share and have as much fun in the NFT world as I do.

“NFTs 101” will be a 3-part post, and you can see the full outline below. I’m providing this outline so readers can jump around and focus on the content that matters most to them.

I also have plans already for “NFTs 201” which will be more focused on project evaluation and data analysis, but let’s cover the basics first.

Let’s jump in!

What is an NFT?

An NFT is a non-fungible token. But to understand what that means, let’s start by defining fungible and non-fungible assets.

A fungible asset is one that can be easily exchanged because it is interchangeable with all of the others of its type and has a known value. The easiest example here is a $1 dollar bill — all dollar bills are interchangeable and universally accepted, despite differences in things like serial number of the bill, and thus all have the same value.

A non-fungible asset is one that is not perfectly interchangeable and may not have an immediately known value. One example would be with cars — two cars may have the same make and model, and even the same mileage, but they could still be priced differently in the market based on how it runs, if it’s got minor repair needs, etc. Thus you can’t easily exchange those 2 cars — they are non-fungible.

My 1st car was a 1995 Honda Passport — it was definitely non-fungible

Another great example is art. Artwork, even from the same artist, are not interchangeable as different pieces hold different value to the market (based on order of creation, aesthetics, etc.), and thus are non-fungible assets.

A non-fungible token is a digital version of a non-fungible asset, tokenized on the blockchain. The blockchain allows for characteristics and data that defines each token to be stored forever in the “public database” that is the blockchain. No two tokens are exactly the same, and while some may be much more similar than others, as a broad grouping they are not interchangeable and thus non-fungible.

Revisiting artwork as an asset class, digital art that is created and stored on the blockchain, and thus tokenized, is one of the most common examples of non-fungible tokens and easiest to understand. Digital versions of things that previously only existed physically (digital sports cards is another common example of NFTs).

I find it easier to understand what NFTs are (beyond their definition) by understanding the different types and looking at real examples.

What are the different types of NFTs?

In our current NFT market in September of 2021, I believe there are 6 primary categories of NFTs, or at least this is my framework for thinking about them: avatars/profile pictures, art, sports, games, digital real estate, and utility. I’ll elaborate on each below, with a deeper focus on those that I’m admittedly more familiar with.

Avatars or Profile Picture Project NFTs (PFPs)

Balaji Srinvivasan (@balajis on twitter) is a leading new world thinker and a great follow, and I remember him predicting in either late 2020/early 2021 that people on the internet would start using digital avatars and would start to identify more and more with a pseudonymous personality online that is tied to that digital avatar.

Well his prediction has played out in near record time, as most of the early NFT adopters on twitter leverage digital avatars as their profile pictures. Using the chirpty.com website, you can generate a quick visual of your primary circles of interaction on twitter. Taking a quick glimpse of mine, very few are using actual pictures of themselves, and most have some kind of cartoon avatar.

My twitter community rings as of September 2021 — mostly avatars

This trend started with CryptoPunks owners, essentially making their CryptoPunk their online profile photo as a means of signaling early adoption and belief in NFTs, the underlying tech, or even simply as a status symbol. That status symbol use case has become more popular as the entry price for a CryptoPunk has surged to over $300k in recent days.

So what are CryptoPunks exactly? The primary tagline from the Larva Labs website (the team behind CryptoPunks) is “10,000 unique collectible characters with proof of ownership stored on the Ethereum blockchain.” The Larva Labs team created this set of 10,000 with a series of types and attributes, all of which have different rarity. The rarest being the Alien CryptoPunks, which comprise only 9 of the 10k set.

The rarity is important, as it’s one of the primary features of the CryptoPunks project that drives market value. You can see all the Punks types and attributes at this link: https://www.larvalabs.com/cryptopunks/attributes but a quick screen grab below. As you can tell, the more exclusive a set is, typically the higher the price is or higher the “floor” is (floor is a common term in NFTs that is used to describe the cheapest entry point for an NFT or specific type of NFT). The Alien Punk floor is 35k ETH currently, and the floor for the rarest attribute “Beanie” is 800 ETH as only 44 punks exist that wear Beanies.

But if you look closely at the attributes and floor price, it doesn’t simply decrease in value based on supply. For instance, there are more Pilot Helmets than Chokers, yet Pilots are more expensive. This is because the market has put a premium on that specific feature, and this form of bias is fairly common in the NFT market as well.

The most well known example of this is with the Hoodie CryptoPunks. These gained a cult following in the CryptoPunks community, due to their “comfy-ness” as well as their general aesthetic, allusion to “tech” culture, etc. As you can see in the shot below, they are a massive price outlier when compared to the attribute types above and below them with similar volume sizes.

At the time of this writing (September 2021), the cheapest CryptoPunk is 100 ETH or $300,000 USD+. This value is very much tied to Punks being the original PFP project, having been founded in 2017 (and given out for free by the way). And they have certainly set the stage for what we’re seeing in the NFT market in 2021.

Profile picture projects are everywhere, and generally follow the CryptoPunks dynamic — projects have a set supply (usually 10k but we’ve seen some lower supplies lately), along with a series of types and attributes that differentiate the set. Some of the biggest name PFP projects that have come out in 2021 and have found cult followings include Bored Ape Yacht Club, Gutter Cat Gang, Cool Cats, Sup Ducks and Pudgy Penguins. And it is very common for the owners of these projects’ NFTs to use their favorites as their online avatar or profile picture (on Twitter and Discord).

The formulas we’ve seen play out the most is that each project is based around a certain animal type, with a certain “vibe” (gutter cats are more “rough and tumble”, while cool cats and pudgy penguins are more “cute”). They each have a combination of types, traits and attributes, whose combinations create the full set (anywhere 3k to 10k+).

The rarity of those combinations is typically what differentiates their value within a set, along with aesthetics.

When comparing projects, there are several factors that make some more valuable and gives them staying power in today’s market. In short, I believe the primary factors to be the belief in the development team behind the project and their vision for the project (roadmap), along with the sense of “community” that owners of those project’s NFTs feel. In today’s market, it is commonly accepted that CryptoPunks are the #1 PFP project and Bored Apes are #2, and there is debate on which projects are in the next tier.

The 2nd most famous PFP project is Bored Ape Yacht Club (and the 2nd most expensive with a ~40 ETH floor)

Well, savvy folks have seen the value ($$$) in creating these types of PFP projects, and in the past few months the market has become saturated. We have seen anywhere from 5–20 new projects dropped on a daily basis, which collectively feel like a rotating merry-go-round of different animals and different traits. And it’s becoming much more difficult to succeed as a new project in this hyper-competitive market, and harder for users to identify which projects to buy into. This is not an investment advice post, so I’ll refrain from elaborating here, but I do plan to provide my system for evaluating projects in “NFTs 201”, coming soon.

We’ve covered PFP projects now — let’s transition to the next category, digital art.

Digital Art NFTs

Art has been a store of value for millennia, but in recent years, we have seen some increasingly surprising methods of art buying and selling and storage. Wealthy collectors are buying physical art and storing it in international airplane hangars. Essentially, they are viewing art as assets only, and these assets appreciate more safely (and often more cheaply due to some tax evasion techniques) in these safe zones.

The New York Times published an article back in 2016 (One of the World’s Greatest Art Collections Hides Behind This Fence (Published 2016)), exposing this practice, and it has since been highlighted in movies including “Tenet” by Christopher Nolan.

As I personally came to understand this practice, the concept of digital art and its value proposition made much more sense to me. Digital art is securely stored on the blockchain, can be easily and securely traded on marketplaces such as OpenSea, and best of all — it can be viewed and displayed by its owners and the public at all times. If wealthy art collectors are parking investments in hangars, why not park investments in digital art assets as well?

Once the concept clicked for me, I began researching digital art and have come up with a basic framework for categorizing it. I view digital art in 3 primary groupings right now — 1/1 pieces, generative art sets (like ArtBlocks), and Audiovisual art. I’m sure I’m oversimplifying it, but the system works for me and it’s easy to understand.

1/1 Art

The first two digital art marketplaces that I explored were Nifty Gateway and Superrare. Artists mint their work and post it to these marketplaces where collectors can buy them (either via direct pricing or auctions) and sell them as well.

When artists create unique pieces, they are considered “1/1” as only 1 digital version exists. Artists can also create “editions”, where they create multiple copies of the same piece to allow multiple owners to participate and collect. This is similar to the concept of prints in the physical art world.

One of the first pieces I bought was an open edition from MBSJQ on NiftyGateway. I had discovered MBSJQ’’s work on SuperRare, but I was priced out of his 1/1s at the time, as they were fetching 70+ ETH prices. Then he announced that he was doing a 5 minute open edition, where it would be unlimited buying of 4 of his pieces for 5 minutes, and at conclusion of the time the final edition set volume would be known and no more created.

These editions were $999 each and credit cards were accepted. I believe each edition sold between 300–400 in volume and thus that will be the total supply forever..

“Unconditional Love” from MBSJQ, one of my very first digital art purchases

As I began exploring the digital art world more, I found that more of the premiere artists were on SuperRare. Some artists on SuperRare that I believe are fairly universally seen as top tier blue chip artists include XCopy, Hackatao, Coldie and Seerlight. There are several other popular artists and I’m sure some debate on who is blue chip, but that’s a good starting list.

There are also several other 1/1 and edition marketplaces out there, including Foundation, Makersplace and KnownOrigin as well as other marketplaces on other blockchains.

To provide a sense of the market and valuations, the cheapest XCopy on the market right now is ~180 ETH ($530,000 USD). XCopy released “summer.jpg” a few months ago and it sold for 336 ETH to punk6529 (one of the iconic NFT collectors and og’s in the space). XCopy is known for his glitch art style, a style that has become one of the more popular and I believe identifies with “cryptoart” — a new class of art that has become popular in the age of cryptocurrency.

“summer.jpg” by XCopy

There is a growing sense that the 1/1 digital art market is incredibly undervalued right now, when compared to valuations of CryptoPunks and some of the leading generative art on ArtBlocks. The primary reason for this is that 1/1 art is very difficult to value, especially when compared to sets of 1k or 10k with known rarities, traits, aesthetics, etc. It’s much easier to determine what a top 10% rarity CryptoPunk should be worth compared to the floor, vs a 1/1 piece by an artist who may only have 10–20 pieces on the market.

Thus some of the sharp minds in the NFT market believe this is a really smart market to play in right now, but it’s also very high risk and likely the most illiquid — so certainly tread carefully in this market when trading or making investments.

Another trend we are seeing is in generative artists that typically make larger set collections making unique pieces for sites like Foundation or SuperRare — which is a nice lead into our next subcategory.

Generative Art and ArtBlocks

Generative Art has been around since the 1960s and is defined as art that is created in part or in whole by an autonomous system — essentially by a computer algorithm. Artists create the algorithm, set parameters, and iteratively test the system until they are happy with the outputs. But a really cool aspect of this style is that there can be near limitless combinations or potential output types, and no one knows what the next output or “mint” may be, even the artist.

I found generative art through the ArtBlocks platform, founded by Snowfro who is also the artist behind the very first Art Blocks project — “Chromie Squiggles”. ArtBlocks is widely considered the primary platform for generative artists right now, and the market backs that up, as its projects have seen a combined $838MM in sales in its 10 month existence.

Chromie Squiggle Mint #0 by Snowfro

ArtBlocks’ platform is divided into 3 project sets, Curated, Playground and Factory. The Curated set is for artists that undergo the most scrutiny in the application process and are very carefully selected. New projects drop here 1x per week at the most frequent pace, and there can be weeks in between drops.. Once Curated artists have completed a project, they can release additional projects which are then housed in the Playground set — essentially the “playground” for curated artists. The last set is Factory, which is for artists that undergo a less strenuous application process. These typically command lower values on the market and are dropped more frequently on the site, sometimes 3–4 new projects per week.

When artists release their projects, they announce the collection volume (50 on the low end and typically capped around 1000 although we have seen a few exceptions) and the price structure to “mint” or purchase the art. Originally, it was a flat fee to mint any project, typically around 0.1 ETH, but that has recently changed as the demand for ArtBlocks has skyrocketed. Now the price structure is a dutch auction format, starting at a very high price and reducing over time until the project sells out or comes to a final resting price. I wrote about dutch auction economics in more depth in this blog post from earlier this summer: https://bit.ly/3lM2F0k

When minting an ArtBlocks project, the user essentially generates the art for the first time, as the act of clicking mint runs the algorithm which creates the art piece — and thus the user doesn’t know what they are buying until after the mint is completed. Once a project has minted to completion, it can be bought on the secondary market on OpenSea. There are talks about ArtBlocks having its own distinct marketplace, but this has not come to fruition yet.

As I alluded to above, the demand for ArtBlocks project has surged over the past few months, and the elite projects are commanding very high prices. To give you a sense, here are the top 5 curated projects right now, their “floor” price and cost to mint at project drop:

  1. Fidenza by Tyler Hobbs — 168 ETH (mint price 0.1)
  2. Elevated Deconstruction by luxpris — 134 ETH (mint price 0.1)
  3. Ringers by Dmitri Cherniak — 120 ETH (mint price 0.1)
  4. Archetype by Kjetil Golid — 40 ETH (mint price 0.2)
  5. Subscapes by Matt DesLauriers — 39.7 ETH (mint price 0.1)
Fidenza Mint #0 by Tyler Hobbs

When looking at those entry prices, it’s easy to see that anyone who minted these projects, and has managed to hold on to them, has acquired some real equity. And collectors who were savvy enough to pick up several pieces of these projects have created generational wealth. Side note — I minted a Fidenza and bought 3 others in the first week, only to sell them fairly soon after. Lesson learned — don’t sell your ArtBlocks NFTs.

I could write an entire post on ArtBlocks, but several other good ones exist already. A few that I recommend include:

I actually stumbled upon ArtBlocks through a community tied to a different category of digital art — Audiovisual.

Audiovisual Art

I will include music-based and audio-visual NFTs as a sub-type of digital art for ease in this article, but over time this may become its own category. One of my very first NFT investments was in this class, with an NFT project called EulerBeats.

I wrote a full blog introduction to that project (https://bit.ly/2W5QC56) so I won’t recap it here, but in short, the team created an algorithm that generated 27 different combinations of audio beats and artistic visualizations, which comprised the set of 27 EulerBeats NFTs. And then prints or copies of the originals could be minted, at different prices (based on a bonding curve, read the blog for full detail if interested).

The highest value audiovisual NFT project is from 0xDEAFBEEF, who created a collection of audiovisual NFTs in different series shown below. His first project was Series 0 — “Synth Poems” and you can view/listen to mint #0 here: https://www.deafbeef.com/item/0. They are pretty mesmerizing to watch and listen to, and I’m certainly not the only one who thinks so, as these NFTs typically trade in triple digit ETH valuations.

OxDeafbeef’s series of audiovisual NFTs

This is a newer and less mature sub-type and I believe we will see a lot more to come here in the near future. There is also a lot of speculation related to how musicians and bands could sell CDs, concert tickets, etc. as NFTs and reward buyers with future perks. We have seen some of this already, but on a very small scale and I expect a lot more to come, especially as musicians see the success that some athletes have had with their NFT drops (a great segue to our next NFT type — Sports).

Sports NFTs

Sports NFTs might be the use case that makes the most sense. Physical sports cards have been around for over 100 years, and the rarest cards have seen incredible valuations recently, highlighted by a T206 Honus Wagner card going for $6.6mm in August.

In comes NBA Top Shot (from DapperLabs) in late 2020. They decide to take NBA youtube clips and turn them into “moments” or digital versions of sports cards. Each moment contains the video clip and a serial number, along with highlight stats about the specific game the clip is from, along with stats on the player. The moment page also contains the moment sales history and sales history of other serial numbers.

There are different sets of moments, including Legendary, Rare, and Common, which are differentiated by the number of player moments in each set. A Legendary set typically has less than 100 moments per player, where a Common may have 10k to 20k+.

Beyond those set types, the serial number is the primary attribute of the moment that defines its value, and the serial #1s fetch the highest amounts (jersey number serials also catch higher value in the market). And these moments are all stored on the Flow blockchain, which enables buying, trading and storage.

My 1st NBA TopShot Moment purchase — this dunk moment from Rudy Gobert

At first I was incredibly skeptical about NBA TopShot. I had the same thoughts most people did — why would I pay for this clip when I can just go watch on youtube whenever I want? What’s the value?

But then I started thinking more about the value proposition of the digital asset. Let’s go back to physical cards for a minute. Think about how difficult it is to keep and maintain physical cards. To reach top valuations, the cards have to be in ultra-mint condition. You can barely interact with them and essentially need to store them in safes. And you have to get them graded, and have to travel to card shows to find markets to sell them. It is a lot of effort and creates a barrier to entry and exit.

Digital cards remove all of those barriers and difficulty. They’re stored online, on the blockchain. There’s an active marketplace that runs 24/7 online where you can buy and sell cards. You can look at your moments as frequently as you like without worrying about ruining their value. Digital cards just make sense in our growing digital world.

The market has responded accordingly. NBA TopShot had a now infamous surge in February/March of 2021 where it skyrocketed value and before coming back to earth, but they have maintained strong user growth. Per DappRadar, they have over 445k traders who have performed over 8.8mm sales.

The TopShot team has added gamification to their platform via their tie in with MomentRanks, where players can assemble a team of 5 players active in a night’s slate of games, earn points based on both the player performance and rareness of the moment itself (i.e. legendary moments get more points than common), and compete for prizes.

There are other digital sports cards platforms out there as well. Sorare is the leading soccer digital card platform, has an owner base of over 37k users and has seen $85mm in sales volume. Sorare has also included a gaming aspect, where users can build teams using their digital cards and compete for prizes.

A glimpse of Sorare’s digital soccer cards

Draftkings has since launched their own marketplace, trying to capture their share of the digital card market. Their first drop was the Tom Brady NFT, which was highly sought after. The lowest edition set of 12 has a current entry price of $115,000. DK has since launched NFTs with several other top athletes, including Wayne Gretzky, Naomi Osaka, Simone Biles, Derek Jeter, Tony Hawk and Tiger Woods.

TB12’s NFT on Draftkings marketplace, currently the most expensive

ZedRun has seen tremendous adoption and success as well, bridging the horse racing world with NFTs. In ZedRun, users can buy digital horse NFTs, train them, take care of them, race them for prizes and breed them to gain new digital horses. Zed has seen over $100mm in sales volume this year and has 28k owners (per cryptoslam.io).

This ZedRun “Z1 Nakamoto” digital horse sold for 77 ETH in late July

While I haven’t personally participated in ZedRun, I know several members of the NBA TopShot community moved over after TopShot started seeing valuation declines, and it helped onboard the community into OpenSea and other NFTs.

It remains to be seen where the digital sports card market will go — which new marketplaces will spring up, who will take command, and if sports leagues themselves will start to become more actively involved. But it certainly seems like sports NFTs are here to stay. And we will see more and more “gamification” with these sports NFTs, similar to NBA TopShots and Sorare’s fantasy contests. Which leads us to our next category.

Game NFTs

We have yet to even talk about the NFT project with the highest overall sales volume — Axie Infinity. Axie Infinity is an NFT-based online video game which has its own in game currency, has over 1.7mm owners and has done over $2B in sales all time.

This lil Axie traded for 300 ETH this summer

Game NFTs are exactly what they sound like — NFTs that can be used in video games. One of the very first NFT projects “Cryptokitties” from 2017 would be considered a game NFT. It caught a lot of success back in 2017 before going quiet for a few years, and now reviving a bit in 2021 as there is growing interest in the oldest NFT projects.

We are seeing more and more of these game-based NFTs pop up, and they often come with built-in rabid communities. Video games were some of the earliest adopters of “tokenomics”, or the creation of an in-game currency that can be used to purchase game-related items. This concept is spilling over to NFTs rapidly and is tied into utility NFTs (covered later in this post).

I’ve seen estimates that there are ~1.5B gamers in the world — yet the most common NFT marketplace OpenSea has only 400k users. And as we think about who the future users of NFTs are, they will likely be our youngest generations — and what is that generation doing right now? Gaming. The younger generation gets tokenomics, and they’ll get NFTs quickly.

Gaming is clearly a big opportunity for NFT user growth. Projects and dev teams are taking note of this, and several are trying to incorporate games as a part of their future roadmap. The other related trend we are seeing is that these games play out in the metaverse, which leads to our next NFT group.

Digital Real Estate (or Metaverses)

One of the biggest buzz words in NFTs is “metaverse” — essentially a term for various online universes where people can play and interact. Digital real estate ties into this category, as there are already several metaverses where users can buy and sell digital “land” or portions of the metaverse.

The biggest players in this space that I have tracked are Decentraland, CryptoVoxels, Sandbox and Treeverse. Each are set up differently and have different look and feel, but the primary premise is that users can buy plots or parcels of land that enable them to “build” in that metaverse.

Even in digital real estate, the fundamental rule of “location, location, location” applies, and we’ve seen this in the CryptoVoxels market specifically. The origin and center of that metaverse is “Origin City” and parcels of land in Origin City command premiums over parcels in other cities of neighborhoods (technically “islands” in CryptoVoxels terms).

One of the coolest use cases for digital real estate is building virtual museums to display NFTs. I’ve seen some really cool virtual galleries in CryptoVoxels, and even attended a party there (a EulerBeats party back in April, it was pretty fun, had a dj and everything). There’s some definite value in this use case, as the barrier to entry to visit a virtual gallery with some of the best digital art in the world is much lower than going to visit The Louvre. And some of the best collectors in the NFT space are absolutely building collections that rival The Louvre — I’m not sure if this is widely known yet, but it is true and we’ll continue to see this play out.

Example of a digital art gallery in CryptoVoxels

The drawback or bear case for digital real estate is that it’s infinite in supply — existing projects can create new land or worlds, and there’s no barrier to entry for new projects/metaverses. But similar to the internet, major players will rise and take market share (think google, yahoo, etc.). The challenge will be in predicting who will become the major players.

I don’t personally spend much time in this market — for the drawbacks listed above and because the technology just isn’t ready yet. Digital worlds and metaverses will take off once AR/VR technology improves, and once it does, I believe these NFTs and worlds will have tremendous value. But we’re not there yet, and I think we’re too early to predict who will win the virtual land grab.

And while some primary utility of digital real estate is in building virtual galleries, we are seeing new online gallery creators providing free digital art gallery options that don’t require purchase of digital real estate — so that utility is somewhat negated.

Speaking of utility…

Utility NFTs

As I alluded to above, it has become harder and harder for new PFP projects to succeed. And this has ushered in a new buzzword in the NFT market, “utility.” I’ll define utility here as perks that an owner of an NFT is entitled to, as defined by the NFT project team. The most common perks are promises of additional NFTs, financial perks via a token of some kind, or access to exclusive clubs of some kind — but the utility options are limitless.

I think it will be easiest to explain this concept via some examples.

Two famous examples are from the 2 largest PFP projects — CryptoPunks and Bored Apes. The LarvaLabs team behind CryptoPunks announced the Meebits project in late April, which could be minted for 2.5 ETH. But the team announced that all punks owners could mint Meebits for FREE, at a 1–1 ratio for each punk they held. Essentially 2.5 ETH worth of value per punk.

The Bored Apes team followed suit in June, with their announcement of Bored Ape Kennel Club. Similarly to punks, each Ape owner would be able to mint a Bored Ape Dog NFT for free, for each ape they owned. I believe these traded as high as 1.6 ETH pre-reveal — essentially an airdrop of about $2500 USD to each ape owner.

Example of a Bored Ape Kennel Club NFT, which were given free to Bored Ape owners

These are some of the simpler examples of utility, via NFT airdrops or mintpasses (passes that enable the owner to mint an NFT in the future). Since then, we have seen more advanced and complex utility economics.

Enter Punks Comics. When I think about utility NFTs, the first big project that comes to mind for me is the Punks Comic project, started by BeanieMaxi and the Pixel Vault team. The NFT here is a digital comic book, which is a story about a series of CryptoPunks from Beanie and the Pixel Vault team’s collection. I bought 10 punks comics personally, but not because I care about comics — in fact I never even read the comic. I bought for the utility promise.

Punks Comic Issue #1

Here’s what they promised — each punk comic NFT owner could “stake” their comic and earn $PUNKS tokens which would represent fractional ownership of a vault of 16 CryptoPunks featured in the comic, as well as rights to future income streams. Or each holder could “burn” their comic and receive a “Founder’s DAO Token”, which represented fractional ownership of a vault of digital art NFTs (valued at 600 ETH+).

Then, the team went further and allowed every comic holder to buy a “mintpass” to mint a MetaHero NFT (a PFP type described above) at the bottom price of 0.08 ETH. Those mintpasses went as high as 5 ETH plus prior to MetaHero release — so significant financial utility via this NFT access.

So not only did owners of the Punks Comic NFT get the NFT itself, they also received ownership tokens (essentially stock shares) as well as the MetaHero NFTs at an extreme value to fair market price. This was extreme utility in practice.

We are now seeing tokenomics (creating tokens for NFT project owners, similar to cryptocurrency tokens) play out more and more frequently. The Cool Cats NFT project recently announced a $MILK token and the Supducks project announced a $VOLT token, which since surged to $2. The way Supducks did it was on 9/9 they airdropped 100 $VOLT tokens to each Supduck owner, and then each owner accrues 10 tokens per day for each Supduck NFT they hold. So from 9/9 to 9/30, at a $VOLT valuation of $2 per token, each Supduck NFT owner will have received $600 USD in value — in 21 days, simply for holding the NFT. Imagine someone who holds 10 Supducks — now we’re talking about $6k per month. Real passive income here.

I believe we will see more and more tokenomics in utility, but with increasing risk. The true market value of some of these new tokens is fairly subject and of course could go to 0 at any time, and several are predicting an ICO-like crash of 2017 to happen to these projects. So tread carefully, but utility is certainly something to explore and learn about in anyone’s NFT journey.

The utility of NFTs is certainly something that gives them value, but why else are NFTs valuable? I’ll cover this in my final section.

Why are NFTs Valuable?

Some of the most common feedback when I talk to friends about NFTs is the “I can’t justify paying XX $$ for a jpeg”. Or the common “Why would I buy this when I could just right-click-save it?”

And I get it, especially for those who aren’t into collectibles or art already. It’s easier to just dismiss and turn away. But clearly the market is putting value on NFTs. Let’s look at the data from OpenSea, the primary NFT marketplace.

In August, OpenSea did over $3.4B in volume and is on pace for similar results ⅔ of the way through September.

OpenSea monthly sales volume in $USD (per dune analytics)

And here’s the user growth chart.

OpenSea user growth over time (per dune analytics)

So why are NFTs valuable? The simplest answer is “because the market says so”. But let’s dive deeper.

At the highest level, I believe we have seen more and more wealth being stored in art and collectibles in recent years, as a hedge against inflation. As the US government continues massive spending and drives inflation, the wealthy have already turned to other stores of value. And we are seeing this spill into NFTs as well.

But why NFTs? I think the combination of the 4 characteristics below make NFTs valuable:

  • Provenance
  • Ease of sale / transferability
  • Community
  • Utility

Provenance — it’s very easy to see proof that any NFT is real. The entire record of its existence is publicly available on the blockchain. If you go to a new acquaintance’s house for dinner, and they tell you they have a Picasso — are you going to believe them? It could easily be a fake. But in the NFT world, this is all easily provable and public information. Anyone reading this article can easily go see which NFTs I own by viewing my wallet on OpenSea (go ahead, opensea.io/tylerd or opensea.io/tylerd_vault).

Transferability: I believe the ease of sale and transferability are huge drivers of value as well. If you have a painting at your house that you want to sell, in order to do so, you need to find an art house or auction, physically take it there, try to find a buyer, and hand it over (I understand there are other ways). But NFT marketplaces remove all of that pain — you can buy and sell 24/7 to anyone in the world, and the transfers are done seamlessly within the platforms enabled by the blockchain. It’s incredibly user friendly and easy to buy and sell NFTs.

Utility: I touched on utility earlier so I won’t rehash it, but NFTs can provide several kinds of financial utility that are realized at both point-in-time and ongoing fashions. The potential utility of an NFT is becoming perhaps the single biggest driver of its value in the market. Soon we will see brands launching NFTs and leveraging utility, where owning the NFT gives users first access to new releases for example. Imagine you love Louis Vuitton purses, and LV launches an NFT where anyone that owns it is provided exclusive access to new purse releases before the general public — this is utility you might want to pay for. We will see more and more of this as NFTs become more mainstream.

Community: NFT projects create communities. People love to be in communities — it’s fundamental human nature. And thus we put value on NFT projects with great communities. The best example here is with the Bored Ape project. They are widely known to have one of the best communities in NFTs, and several folks have paid a steep price to join that community.

And of course, maybe you just like looking at the NFT and knowing that you own it — that’s value to you. And no one can argue with that.

To answer that 2nd common question “Why would I buy the NFT when I can just right-click-save it” — while this is certainly possible, I don’t think many people would proudly frame and display digital art in their home that they don’t actually own. Similarly with digital avatars on social media platforms like Twitter — if someone is using a PFP they don’t own, they risk the embarrassment of being called out. And soon, we will see social media platforms with NFT-verification, essentially making “right-click-save” impossible for avatars.

Conclusion:

Thus wraps up Part 1 of NFTs 101, where I’ve outlined what NFTs are, the different types and groupings, and why they’re valuable.

Stay tuned for Part 2, where I get more tactical and talk about how to actually buy and sell NFTs.

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Tyler D Warner

Web3, Crypto, NFT enthusiast. Consultant by trade. Trying to predict the future...