NFTs: A hot new market with significant potential

What is an NFT? How will the public accept the concept and understanding the meaning? What value does it hold and why is it so valuable these days? And, how will this field develop in the future?

The transaction volume of NFTs (non-fungible tokens) exceeded US$10.67 billion in the third quarter of 2021 alone, which was 165 times higher than

the same period a year earlier. The accumulated market capitalization of NFTs, such as ETH and NBA Topshot, has surpassed US$14 billion.

⎮ What Are the Defining Characteristics of NFTs?

NFTs can be broadly categorized into two types: collectibles and consumables. Collectible NFTs are tokens designed to be collected and owned — think of rare items like artwork, celebrity goods, entertainment content, Twitter/domains, and commemorative items. Consumable NFTs, on the other hand, are more about things like game items, social service badges, the right to download limited edition music, stake sharing and more. In other words, these are NFTs that contain usability and that achieve their value by which service/partner they are integrated with and what benefits can be obtained by consuming them.

However, even simple NFTs without usability can hold a high value at higher prices. Why is that?

⎮ How NFTs Create Value

The value of an NFT is influenced by quantitative and qualitative factors. For the quantitative, we believe that usability, rarity, and liquidity are the main factors that create value. It is generally believed that usability is the core value when determining the approximate range of benefits obtained by holding NFTs. In addition to usability, the rarity of many NFTs adds to their value. Because NFTs tend to be issued in limited quantities — or sometimes even one-of-a-kind — they gain extra cache among collectors, so even a small increase in demand can send values soaring. Lastly, NFTs must be premised on liquidity just like existing cryptocurrencies. Liquidity must be guaranteed so that people are willing to take on the risk of holding NFTs at a high price, which increases the value of NFTs.

Therefore, we can say the value of NFTs is quite straightforward. If someone asks how you can determine value according to rarity or liquidity, you can say that it is possible in a blockchain because information about transactions, searches, interaction dates and more are open to all. It’s a transparent approach to data that we think is quite valuable to the public, and we hope more platforms will employ it moving forward.

The core factor affecting qualitative value is “emotional resonance.” By “emotions”, we mean more than just broad appeal or people’s tastes. Rather, one should ask whether the emotional appeal of the NFT matches well with the underlying technology, what can be proven through ownership (value, property size, professional knowledge, social status, etc.), and for the ownership history. When all these factors align, the emotional appeal of the item leads to increased demand, which further increases its value, creating a feedback loop that leads to greater emotional resonance.

To put it simply, quantitative factors form the basic value in the market, but qualitative factors create added value.

⎮ Types of NFTs Getting the Most Attention

◼︎ PFP (Profile Picture) NFTs

By using NFTs as profile pictures, users can build stronger online communities and even show off their social status or financial power. Users can create a new persona within their ecosystem/community, among people who collect the same items and share the same interests, and add interesting elements like a background story. The community-building aspect of PFP NFTs is a major reason this technology is gaining so much attention, and many major online platforms are exploring this trend. For example, Twitter is reportedly exploring allowing users to upload NFTs for their profile pictures and integrate them with their digital wallets, join teams, and conduct campaigns/events that increase the sense of belonging and loyalty.

◼︎ P2E (Pay 2 Earn)-Related NFTs

P2E, or “Pay 2 Earn”, NFTs refer to games that allow users to earn cryptocurrency for playing them. P2E NFTs allow those users to cash out their earnings acquired in such games, an economic model that has proved especially popular in less developed countries, such as those in Southeast Asia. Perhaps the best example is with the Vietnamese online game Axie Infinity, which has a scholarship system where one can play without purchasing an expensive Axie (character), but by renting the assets of other players and sharing the profits among contributors.

◼︎ Interactive NFTs

While NFTs have uniqueness, they are also unalterable, and once issued they cannot be changed. But that’s beginning to change with the rise of Interactive NFTs, a type of NFT that can be changed and interacted with. With Interactive NFTs, naming, breeding or adding characteristics is becoming possible, which can be implemented based on smart contracts.

◼︎ Fractional NFTs

Unlike existing assets, such as BTC and ETH, NFTs are difficult to split, making it difficult to purchase NFTs once their price has grown too much. One alternative is Fractional NFTs, which refers to dividing up an NFT into smaller units — like how fungible tokens can be divided into smaller ERC-20 tokens — with profits and losses divided accordingly. However, NFTs are not yet classified as virtual assets according to FATF guidelines, so it will be necessary to wait a little longer to see what the regulatory authorities say about dividing ownership and distributing profits in this way.

⎮ Existing NFT Barriers

The first barrier is usability, as NFTs are still familiar only to blockchain experts. The entire process, from creating a decentralized wallet to purchasing a final NFT, is complicated, and having to pay double or triple in the process can be quite inconvenient, especially for the general public. Secondly, the regulations related to NFTs are unclear. There are different standards for whether NFTs should be interpreted as virtual assets, and it is also true that they are not protected by regulations designed for virtual assets. Therefore, there is a possibility that NFTs could be used as a means of money laundering, and users might not be protected from damages occurred in the process. Finally, there are user rights and IP copyright issues. In the current open markets, various contents are being copied indiscriminately, and this could become a problem in the future, as the responsibilities and rights of NFT owners may be unclear. In short, this is a complicated and uncertain market, a place that cannot be easily entered by your typical user.

⎮ What LINE Blockchain does

LINE Blockchain is also developing a platform focused on social account creation and private key storage, payment flows similar to commerce, and high accessibility. We operate a platform offering country-specific regulatory review and FATF guidelines, as well as content distribution through onboarding with certified partners. We provide an integrated platform with such services as token issuance and storage, NFTs, virtual assets, and collaborations with IP creators. Our goal is to become a gateway where companies can interact more closely with the public, and the general public can more easily enter the blockchain ecosystem, utilize and engage with NFTs, and share the value created from their blockchain operations. LINE Blockchain beta launched its NFT service, with NFTs issued in collaboration with renowned, global brands like LINE FRIENDS, Katori Shingo and Million Arthur. NFTs were granted to over 240,000 users and a GMV of about US$1.1 million was reached during the beta period. By connecting NFT businesses with global partners inside and outside to promote active transactions and to create NFT value, LINE intends to further expand the blockchain ecosystems and introduce various NFT-integrated services.