NFTs? What Exactly Makes a JPEG Valuable? | by Dave Anderson | The Capital | Jan, 2025

And as the decentralized ledger, the blockchain acts as a transparent and verifiable record of every transaction involving the NFT, ensuring that the asset is always linked to the rightful owner.

Fungibility means a specific asset can be exchanged on a one-to-one basis. For example, a dollar bill is fungible because it can be exchanged for another dollar bill without any difference in value.

In the world of Web3, a Bitcoin can be swapped for another Bitcoin — or more commonly a specific value of Bitcoin can be exchanged for an equal value of another cryptocurrency. For example, you can swap $100 in Bitcoin for $100 in Dogecoin.

NFTs are non-fungible because each one is unique and has a distinct value. Even if two NFTs are from the same collection and look similar, they are differentiated by their individual signatures, traits, and ownership histories.

While NFTs and cryptocurrencies share some similarities in their underlying technology, they each play a different role in the Web3 economy.

Purpose

• NFTs: Serve as certificates of authenticity for digital assets, proving that a specific item is unique.
• Cryptocurrency: Designed as a medium of exchange — similar to traditional currencies — for facilitating quick and secure transactions.

Trading process

• NFTs: Bought and traded on specialized marketplaces and cannot be exchanged on a one-to-one basis.
• Cryptocurrency: Traded or exchanged for other fungible tokens or currencies of equal value.

Value

• NFTs: Derive value from the artwork, rarity, utility, or collectible appeal.
• Cryptocurrency: Derive value based on market sentiment, news, and technological developments.

Uses

• NFTs: Commonly used for digital collectibles/art, as well as speculation and trading (we’ll cover other use cases in the next section).
• Cryptocurrency: Commonly used for money transfers, speculation, and trading.

Given that NFTs are a new type of asset, their exorbitant values can seem perplexing — even absurd — to many. Why would someone pay an excessive sum for a digital image? However, the same could be said for other collectibles from sports and trading cards to artwork in general.

When you explore the factors that contribute to an NFT’s value, you can start to understand what makes them enticing, or at the very least, what sets one NFT apart from another.

Rarity

Since each NFT is one-of-a-kind, rarity plays a significant role in value. Certain NFT collections are considered valuable, due to the appeal of the art, community support, hype in the market, or the creator’s reputation. Within those collections, the value of each NFT is determined by its assorted traits — specifically how rare those traits are.

Consider the Pudgy Penguin collection, as an example. This collection consists of 8,888 unique NFTs featuring cute cartoon penguins. Each penguin is distinguished by their different fur colors, eye shapes, background colors, and the accessories they wear. For instance, Pudgy Penguin #6873 is a black and white penguin with a green background and no accessories. Despite its simplicity, its combination of traits makes it one of the rarest in the collection. In contrast, Pudgy Penguin #1487 sports a green bucket hat, a robe, and a beige background. These traits make it rather common compared to the rest of the collection.

Due to its rarity, Pudgy Penguin #6873 is valued at approximately 40 WETH (more than $134k at the time of writing). Meanwhile, Pudgy Penguin #1487, being more common, is valued at around 22 WETH (about $74k). Still pricey but less so compared to the rarer NFTs in the collection.

Utility

NFTs can be more than just JPEGs on the blockchain. Many have utility, meaning they serve a functional purpose and provide actual benefits and usability.

Utility example: Exclusive access

Some NFTs come with membership to exclusive clubs and grant owners access to memorable in-person experiences (think sporting events, concerts, and VIP events). This access elevates the value of the NFT beyond mere ownership, making it a key to a club with limited seats. Each owner becomes part of a community of like-minded individuals who they can connect with both online and in the real world.

These types of NFTs are also commonly used by their owners to “flex.” They display their NFT as their profile photo on social media, along with photos/videos from the in-person events, making it a digital status symbol that shows off their lifestyle.

Utility example: Exclusive content

Similar to access to in-person experiences, some NFTs unlock exclusive content not available to the general public. For example, a particular NFT could provide the owner access to unreleased music from a favorite band, limited-edition artwork, or special products.

Kings of Leon was the first major band to jump into the NFT space, releasing their album “When You See Yourself” as an NFT in March 2021. The 6,000 NFT owners/super fans were given access to special perks like limited-edition vinyl, exclusive artwork, and front-row seats to the band’s concerts.

Utility example: Community governance

NFTs are increasingly being used to facilitate governance in community-driven Web3 projects, known more commonly as Decentralized Autonomous Organizations (DAOs). By owning specific NFTs, community members can participate in decision-making processes that shape the direction of the project.

These NFTs act as voting rights, allowing owners to put forth proposals and vote on initiatives (for example, how to allocate funds or new features to add to the project).

Many NFT collections have big communities behind them and introducing governance ensures that each owner’s voice is heard and the project moves forward in a positive direction.

Utility example: Gaming

NFTs have introduced a new layer of ownership and interactivity in the gaming world. Specific NFTs can represent unique in-game items like weapons, skins, or characters, allowing players to personalize and enhance their gameplay experiences. Unlike traditional in-game assets, NFT items are truly owned by the players, meaning they can be traded and sold.

Gaming NFTs can also take the form of digital trading cards. Players can collect, trade, and use cards in specific games, much like popular physical card games such as Pokémon or Magic: The Gathering. However, blockchain technology and the nature of NFTs make gameplay more engaging and incentivize participants to make progress. We’ll explore gaming NFTs in more detail later on.

Utility example: Virtual property

NFTs can be used to represent ownership of property in the metaverse — an immersive digital universe where users can interact with each other. If the metaverse comes to fruition (right now, it’s more of an idea/prediction), owning property in this world would be similar to owning physical real estate. NFT-based virtual properties could be used to host events, businesses, or personal projects, offering users new opportunities for social interaction and commerce.

The other examples of NFT utility we’ve explored already exist. But a truly unified metaverse has not yet become a reality, and likely won’t for several years. When (and if) it does arrive, demand for virtual property could rise, offering new opportunities for NFT investors and creators.

First mover advantage

Similar to how Bitcoin gained immense value by being the first cryptocurrency, NFTs that pioneer specific categories often hold significant value due to their first-mover status. As they gain attention and increase in value, many copycat collections pop up but usually fall drastically short of replicating the original’s success.

A notable example of this is CryptoPunks, one of the first NFT projects to ever launch. The 10,000 unique pixelated characters were initially given away for free in 2017 to anyone willing to pay the gas fee on the Ethereum blockchain.

As the NFT hype cycle took off in 2020–2021, CryptoPunks became iconic symbols of the early NFT movement. Their status as one of the first major NFT collections led to skyrocketing demand, with multiple “Punks” selling for millions of dollars. In fact, five of the top ten most expensive NFTs ever sold are CryptoPunks.

Naturally, other punk-themed collections with similar art were introduced but none came anywhere close to having the same value or significance as the original CryptoPunk collection. To this day, there is no better way to own a piece of NFT history than to possess a CryptoPunk.

Ownership history

The provenance, or ownership history, of an NFT also impacts its value, particularly when it has been owned by a celebrity or notable public figure. This added layer of historical significance can drive demand and increase value since people want to own an asset linked to a culturally relevant person.

A well-known example of this phenomenon is the NFT of the first-ever tweet. Twitter Co-Founder Jack Dorsey minted his original tweet as an NFT and sold it for $2.9 million in March 2021. The high price was due in part because the NFT was associated directly with Dorsey, a major figure in the tech world.

However, this concept isn’t limited to celebrity ownership. NFT collections that have a history of attracting high-profile individuals can also garner larger bids. In most cases, these collectors are well-known within the Web3/NFT community and perhaps have a successful investment track record. Given that the blockchain provides a transparent record of every transaction, it’s easy to connect addresses to certain individuals with the right tools and a little sleuthing.

Art is far and away the most common use case for NFTs. There are NFT collections showcasing every type of popular art, from street art style characters to more obscure abstract art.

Creating an NFT collection has become an attractive option for artists who have long struggled to promote and monetize their work through conventional means.

Ownership and authenticity

Prior to the emergence of NFTs, art could easily be copied on the internet. This reality made it difficult for artists to generate income, as anyone could replicate their work or even pass it off as their own.

Today, NFTs and the blockchain provide a verifiable record of ownership and authenticity. Artists can sell their digital work as unique pieces, ensuring that only one person can own the official version, no matter how many others right-click, save it.

Royalties and resale rights

Before NFTs, artists could only profit from their work through the initial sale. That meant if their art grew in value over time, they missed out on additional income as it changed hands.

Artists can now program royalties into their NFTs that entitle them to a percentage of the sale every time it transfers ownership. For instance, an artist could earn a 10% royalty each time their NFT is resold, enabling them to earn additional income over time. This creates a sustainable revenue stream for creators and incentivizes them to produce high-quality art and continually promote their work.

Promotion and community building

Speaking of promotion, artists have traditionally had limited methods for building a community and generating sustained interest in their work. They often had to rely on (and compensate) intermediaries like galleries to promote their art, making it difficult to directly connect with potential buyers.

NFTs have changed the art game, empowering artists to build organic demand for their work. Buyers become advocates for the NFTs they own, making them their profile photos on social media and boasting about their value or utility. Nearly every successful NFT collection has a community of raving fans behind it, bringing greater attention and increasing interest and demand.

Global accessibility

The traditional art world is an inequitable system that favors the privileged few. Artists in major global cities — often with connections to notable galleries and from affluent backgrounds — have the advantage over those who live in remote areas or developing countries. There are countless talented artists who never gained exposure simply due to where they live.

NFTs have leveled the playing field, allowing artists from all over the world to reach a global audience. NFT marketplaces provide anyone with the tools to mint and sell their NFTs, bypassing traditional gatekeepers like galleries and auction houses.

In addition to art, gaming is the other major use for NFTs that has already emerged. NFTs have not only made existing games more engaging and interactive. They’ve also paved the way for entirely new gaming models, driven by NFT ownership and featuring economic systems that incentivize gameplay and reward top players.

Ownership and authenticity

Before NFTs, in-game assets were locked within the game’s environment, offering players no real ownership or control over the items they earned or purchased. This limitation meant that gamers couldn’t sell, trade, or monetize their digital possessions outside of the game itself.

NFTs have changed this dynamic by offering gamers true ownership of their characters, weapons, skins, and other in-game assets. Players can earn valuable items through gameplay that can be bought, sold, and traded with others — with the guaranteed proof of authenticity and ownership the blockchain provides.

Play-to-earn models

NFTs have led to an entirely new model of game known as play-to-earn (P2E). P2E games enable players to earn cryptocurrency or valuable NFTs through gameplay. This innovation allows players to generate real-world income by continuously participating in the game. P2E games have been especially popular in regions with limited economic opportunities.

One of the earliest and most successful examples of this model is Axie Infinity, which gained significant popularity in the Philippines in 2021. Many players in the region devoted countless hours to breeding and battling digital creatures — simply so they could earn Smooth Love Potion (SLP), Axie Infinity’s native cryptocurrency, and valuable in-game NFTs. However, the popularity of Axie Infinity was short-lived. SLP and the game’s NFTs drastically dropped in value as the previous crypto bull market ended and gameplay stopped being a viable income source.

The reality is that Axie Infinity’s short-term success was driven only by its economic incentive for players in developing countries. They weren’t playing because it was fun, but rather because it was a means to make money.

A more altruistic (and less exploitative) example of a P2E game is STEPN, an NFT game that rewards players for physical activity like walking, jogging, or running. Players must first purchase or rent virtual sneakers in the form of NFTs to participate, and as they exercise, they earn cryptocurrency based on their movement (tracked through their phone’s GPS). Unlike Axie Infinity, STEPN’s appeal goes beyond financial incentives, encouraging healthy habits and an active lifestyle. However, it too saw a sharp decline in popularity and value due to the most recent crypto crash.

Interoperability and cross-game assets

Prior to the emergence of NFTs, in-game assets could rarely be used outside of the game they were acquired in. This restriction prevented gamers from having a unified experience across all their favorite games.

NFTs have opened up the possibility of interoperability between games, enabling players to seamlessly transfer assets like characters or items across different platforms. For example, a rare sword earned in one game could be used in another, enriching the playing experience and expanding the value of in-game achievements.

Economic opportunities for developers

The conventional gaming business model limits developers to earning revenue only from the initial sale of games and in-game purchases. As the in-game assets they created were traded or resold on secondary markets, developers missed out on capturing any additional value.

NFTs offer game developers new opportunities for ongoing revenue. Instead of relying solely on upfront sales, developers can earn royalties each time their assets transfer ownership. For example, Sky Mavis — the creator of Axie Infinity — earned a 4.25% royalty fee (which they later bumped up to 5.25%) every time their NFTs were traded. This model helped them surpass a billion dollars in revenue during Axie Infinity’s boom period.

At its peak in August 2021, the NFT market was generating approximately $250 million in daily sales. However, the sector has experienced a sharp decline in trading volume and interest since then.

This downturn has made many question whether NFTs were merely a short-lived fad fueled by a speculative frenzy, reminiscence of the Beanie Babies boom in the 1990s.

However, dismissing NFTs as a passing trend overlooks their potential to revolutionize digital ownership and creative industries. While the initial hype has subsided, the underlying technology continues to evolve. NFTs are finding more sustainable use cases, such as being used for event ticketing. We can also expect to see NFT games become more common, and possibly the emergence of digital real estate in the metaverse.

While the NFT market may have experienced a bubble, the long-term impact of NFTs on digital ownership, art, and commerce is only beginning to unfold. The next wave of NFT innovation may be more measured, but we will likely see more meaningful and enduring applications.