Today I wanted to talk about the simple economics of launching an NFT. I believe it’s important to understand the basic principles in order to understand the potential applications.
An NFT, or non-fungible token, is a digital asset that represents ownership of a unique item or asset. NFTs are stored on a blockchain, which allows them to be bought, sold, and traded like other cryptocurrencies. However, unlike other cryptocurrencies, which are interchangeable, each NFT is unique and cannot be replaced by another identical token. This makes them valuable for collectors and can be used to represent ownership of digital art, music, videos, and other forms of media.
There are a few key aspects of NFTs which I wanted to talk about:
- Selling an NFT
- Collect Royalties
- Airdrops
Selling an NFT
Selling an NFT is the most simple way to collect money, and also the most simple to understand.
In the example above, let’s say a company launches a collection of 10,000 NFTs. If the NFT costs 0.075 ETH each to mint* ($100 at the time of writing), and let’s assume the collection sells out, the company would see an immediate influx of:
10,000 * 0.075 ETH = 750 ETH (or $1million)
Through the use of Smart Contracts, if a consumer was to mint an NFT directly, or in simple terms buy the NFT, the NFT would be published onto the blockchain and transferred to the consumers wallet.
*Mint = Publishing the NFT onto the blockchain
Note: Many NFT collections fail to mint the full collection. Let’s assume there is little consumer interest and only 10% of the NFT collection was “minted” (aka bought by the consumer and published onto the blockchain), in the example above, only 1,000 NFT’s will be published onto the blockchain. This would generate 75 ETH ($100,000).
Collect Royalties
Collecting Royalties is one of the most important aspects of monetising an NFT as it creates the incentive to keep demand high.
When launching an NFT, the original creator is able to select the creator fee (or royalty) which is collected at every sale on the secondary market.
The secondary market for NFTs is a rapidly growing and competitive market. There are a variety of companies offering unique services: Opensea, Limewire, Coinbase, Crypto.com, Rarible, Magic Eden.
Trading an NFT is based on a Smart Contract and is peer to peer. As the transaction is P2P, the marketplace is only involved in connecting the buyer and seller (and taking a small % for the service).
To think about: Royalties provide the possibility for Artists, Musicians and Creators to receive fair payment for content they create.
Using the example above, let’s assume the NFT (which was originally purchased for $100), has the following stats:
- Average resell price = $1,000
- Number of trades = 50,000
- Royalty Percentage = 10%
Total Profit = $5 Million.
If you remember, the initial sale of this NFT generated $1 million. This highlights the value of the secondary market and the importance of keeping the demand high.
Royalties can create a future revenue stream from the project which can add valuable resources back into the project.
Airdrops
An NFT Airdrop is a way to distribute freshly minted NFTs to multiple wallets at once.
There are a few reasons why a company may airdrop an NFT token:
- Marketing Tactic
- Increase User Base
- Reward Community
An airdrop can be a great marketing tactic to distribute free NFTs to a group of users, often as a way to promote a new NFT project or to build a new community of users around the project.
Airdrops can be used to attract attention to an NFT project, and can also serve as a way to reward and engage with users. In this example, let’s assume the NFT project above (which increased from $100 to $1,000) currently has 5,000 unique holders. A project may announce that they are planning an Airdrop to all holders of the original NFT with their new project (I.e they will distribute a free NFT to all wallets which are currently holding the original NFT).
Consumers may want to obtain the original NFT in order to receive the Airdrop, this would result in increased trading volume, and therefore more royalties.
Time up.
There are a variety of additional ways to monetise NFTs. I will address these, and provide some real examples, another time :)
Thank you!
Some additional notes:
Typically, consumers are limited to the number of NFT’s they are able to mint (per crypto wallet).
Unique owners help an NFT project as it builds a community and reduces the risk of having a small number of holders manipulate the price.
Ideally a project would have all unique holders, this would mean 10,000 consumers actively engaged in a project and have the potential to spread the project and raise awareness. However, this is hard to achieve for a number of reasons.
Bored Ape Yacht Club and Crypto Punks have set the standard for items to ownership ratio at ~ 2:1. This means that, on average, each owner owns two of the NFT project.
To evaluate a project, ideally the ratio of owners to items should be less that 5:1. Look at the example below to see good vs bad.
