Are NFTs really that scarce?

Are NFTs really scarce?

NFTs had their first big hype in 2021 and it seems like their growth can not be stopped. Most people who have heard of NFTs think that they are simply nothing more than overpriced pictures on the internet, but this technology is much more than this. They also don’t understand that NFTs are unique 1:1 tokens on a blockchain, but how scarce are NFTs really? At the end of the day, everyone can launch their own NFTs…

What is a NFT?

The word NFT is short for „Non Fungible Token“. First of all we need to clarify the term „token“. A cryptocurrency that is operating on an existing blockchain is called a „token“. A cryptocurrency that has its own Blockchain is a „coin“. Therefore, Bitcoin is a coin for example, as its Blockchain is running on its own. Then there are cryptocurrencies like Loopring for example, which operate on the Ethereum Blockchain, therefore they are tokens. If you have traded NFTs before, you would know how you pay a specific cryptocurrency for it, most likely ETH or SOL. That is because these NFTs are simply Tokens on the Ethereum or Solana Blockchain (Or other platforms), but there is a key difference between these types of tokens and regular ones.

That is where the term „Non fungible“ comes in. A token can be both fungible (exchangeable) and non-fungible (non-exchangeable). Basically, “non-exchangeable” in this regard simply means that it is a unique digital asset that cannot be exchanged one-for-one for another. Maybe you have heard of the mis-stamping/printing of coins or banknotes before. Basically, they are still normal FIAT currencies. However, due to their uniqueness thanks to their factory flaw, they are much more rarer and valuable. A collector will not value a normal $100 bill the same way as a $100 bill with factory flaws, most of the time they are truly unique. The normal bill is therefore „fungible“ as it can be replaced 1:1 by another $100 bill, the misprinted one can not. To be honest, it is kind of wrong to compare FIAT currencies to cryptocurrencies, but hopefully you understood the comparison more easily that way.

A more correct comparison would be Bitcoin: 1 Bitcoin will always equal 1 Bitcoin. There are no rarer or one of a kind Bitcoins that are more valuable. NFTs are unique assets that have been brought onto the blockchain, mostly drawings, digital art, music or video clips.

What is a Blockchain and how do blockchains allow for digital scarcity?

NFTs exist on a blockchain, but what is this exactly and how do they allow for digital scarcity?

A blockchain is a decentralized transaction history that cannot be changed. All users of a blockchain vote on the actual state of the history through various consensus mechanisms. The name serves as a visual representation for the juxtaposition of (data) blocks (in the case of Bitcoin, transaction blocks) to make the technology easier to understand. A blockchain is a database that CAN be decentralized. Many people still consider the special feature of the blockchain to be decentralization, which is undoubtedly an important component, but does not offer any special feature, as you could just as well use BitTorrent or another protocol for this. The true key factor of a blockchain is the fact that the history of the blockchain cannot be manipulated! A transaction that is 30 months old, for example, cannot be changed in any way or even revoked.

„Digital scarcity“ is the term for limiting something in a digital format. A simple example would be art: During the lifetime of a famous painter, he/she painted x paintings. But since he or she has died, new artworks will not be released anymore, making them scarce. Also, each painting has its own unique style of course. The same is happening with NFTs (these are artificially reduced), but how can people make sure they are not buying a replica? Yes, NFTs can be copied and pasted at any moment, if it’s a photo or digital file. However, that is not possible with the smart contract that is associated with the NFT. As it was already mentioned, the real value from a blockchain comes from the fact that it can not be manipulated.

Think of NFTs as artworks that come with a unique address that can not be changed. The change of owner can be checked publicly at any time pseudo-anonymously, also who „minted“ (created and launched onto the blockchain) the NFT. This is a big advantage that does not exist in the normal art trade business: You simply do not know where the artwork has been and who created it originally (Therefore making it harder to prove if it is a fake).

Everyone can right click and save an NFT. Also launching it to the blockchain, but everyone can see that it is a fake, therefore it won’t have value. Thanks to the blockchain technology, the change of ownership can not be manipulated. You will 100% know that you own the right one.

NFT scarcity is important

Scarcity creates value. Gold is scarce, therefore it is valuable. To be fair, it doesn’t work that easy: A thing only has value when many people recognize or see this value. If they believe in it and are willing to spend money for it. If this fact is given, it naturally helps the price a lot if the item is rare.

Most „value“ from cryptocurrencies or NFTs simply comes from the people believing in the project. If you’ve traded NFTs or cryptocurrencies before, you will absolutely understand this. The more hyped a project is, the more the price will go up. In the case of NFTs, because they are a single asset, prices can reach millions of dollars on the NFT market.

If people gradually disappear and are no longer interested in the project, the rarity of a digital asset is no longer of any use.