3 factors that affect the scarcity of crypto

When you buy an NFT, such as the very popular BAYC (boring ape) and Moonbirds (moonbirds), you have actually defaulted that the number of these Crypto assets has been limited to a value range (such as 10,000), they cannot be forged.

Is this artificially created scarcity 100% reliable?

1650538147215241We know that the scarcity of NFT is achieved through blockchain and smart contract technology, so in essence, its scarcity assumption will depend on the security of the underlying blockchain and smart contracts. In addition, NFT The scarcity is also affected by the issuer.

Therefore, in this article, we try to have a brief discussion of these factors that affect scarcity.

Influencing Factor 1: Security of Smart Contracts

In theory, NFTs deployed through smart contracts may also have over-issue vulnerabilities similar to tokens (Note: Historically, even Bitcoin has had over-issue vulnerabilities), and in reality, there have been examples of over-issued NFTs. In the NFT example of “We are What We Eat”, the 250 NFTs provided by the project party in the first stage were eventually over-minted due to contract loopholes, which led to the number of NFTs displayed on the Opensea secondary market becoming 450.

1650538147218333(Picture: NFT that suffered an over-issue attack)

Different from ERC-20 homogenized tokens, the over-issued part of NFT is still easier to identify. However, in the NFT example of “We are What We Eat”, there are still some buyers who do not notice the difference. and suffered losses.

As of now, the examples of NFT over-issue attacks are still very limited, but the security of the contract still deserves our attention.

Influencer 2: Issuer’s Commitment

Due to intellectual property law or copyright law, when we buy an NFT, we do not necessarily have the ownership of the original work. In fact, most NFT issuers will still retain the copyright of the original work, and what we buy, only A print that can be considered a unique work signed by the creator.

That is to say, in theory, as long as the issuer is willing, they can repeatedly issue the same NFT works on different platforms (or even the same platform). Of course, this behavior is destroying the scarcity of NFTs and causing NFT holders. At the same time of economic loss, it will also bring irreparable damage to the reputation of the issuer itself.

Up to now, such repeated issuance has only occurred in some small NFT experiments, and has not yet appeared in NFT projects with great economic value.

Nonetheless, the current scarcity of NFTs will largely depend on the issuer’s commitment.

In addition, the issuer can also dilute scarcity in disguise by issuing NFT derivatives, and using different issuance methods will also have a completely different impact on NFT holders.

For example, if the issuer airdrops new NFT derivatives to the original NFT holders, the positive impact of airdrop empowerment will outweigh the negative impact of diluted scarcity.

1650538147218206(Photo: Bored Ape Yacht Club and Mutant Ape Yacht Club)

At this point, Yuga Labs’ approach is worth learning from. Although they are constantly issuing new NFTs, such as Mutant Ape Yacht Club, Bored Ape Kennel Club, etc., they are all in the case of empowering the original NFT holders. Implementation.

But if the issuer just sells NFT for profit, the dilution of NFT scarcity will have a very negative impact on the original NFT holder.

Influencing factor 3: The security of the underlying blockchain

Regarding the factors that affect the scarcity of NFTs, the last point that comes to my mind is the security of the underlying blockchain, because the blockchain will involve issues such as forks, database loss or corruption.

Of course, the fork mentioned here refers to the most serious chain split, that is, a hard fork that produces a consensus problem. In this case, two forked chains that share historical data will be generated ( Note: Historically, the Bitcoin network split into BTC and BCH due to hard forks, while Ethereum split into ETH and ETC due to hard forks).

When the underlying blockchain is forked, NFT holders will have 2 NFTs that look the same. At this time, they will face a very difficult problem: which version of NFT is the real one ,valuable?

1650538147218200Although we have not encountered such an example yet, if we refer to ETH and ETC, then the soul of the underlying chain (such as Vitalik and others) will guide the community to turn to one of these chains, thereby affecting the corresponding NFT and other Crypto assets. value.

The next question is, why do the same holders, and NFTs that appear to be the same, lead to vastly different values?

Obviously, the difference lies in the security of the underlying blockchain. A blockchain with a good development team and community support will receive more computing and financial support.

Regarding the security of the blockchain, one is the consensus algorithm mechanism adopted (such as PoW, PoS, DPoS and PoA, etc.), and the other is the economic volume of the project (such as the computing power of the PoW chain and the token market value of the PoS chain, etc.) ), from this point of view, the value of the same NFT issued on the Ethereum chain with the PoW consensus mechanism is greater than that issued on the side chain with the DPoS and PoA consensus mechanisms. In other words, the scarcity of the Ethereum public chain is greater than that of other public chains, and NFTs will also inherit the scarcity of the underlying blockchain.

This also explains why high-value NFTs often choose to issue on the Ethereum blockchain.

For NFTs issued on private chains or consortium chains, their scarcity guarantee is the worst, because these databases are very easy to be tampered with, and they are also prone to security problems such as database corruption.

Summarize

There is a gap between the actual scarcity of the NFTs we purchased and the degree described by the issuer, which may change the scarcity due to contract loopholes, issuers (intentional or unintentional) additional issuance, forks and other factors, and therefore , to identify the factors that affect scarcity, which may help the investment of blockchain Crypto assets such as NFT. So what other factors do you think will affect the scarcity of NFTs?

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