Crypto is great for two things: losing money and provoking thoughts. So, after a long, hard week of getting rugged in the shitcoin mines, I found myself trying to justify my losses by asking myself, "What really is value?" Why do some things become valuable and then fade, while others have lasting power? Why have NFTs and crypto remained valuable for so long?

When discussing value as opposed to dollar price, it's important to remember that value is subjective and fluctuates. It's true that some things have a "base value," like water and food. These are some of the most intrinsically valuable things on the planet, yet they aren't really pricey in USD terms. Why? Well, there's a lot of them (for now), so it's a supply and demand issue. But there are some things, like digital collectibles, that have a theoretically infinite supply. Yet, they still command a price much higher than basics like food or water, so it can't JUST be about supply.

Now, I'm aware this is basically the entire field of economics and there are fancy pricing models, but I will argue that some of the factors involved don't lend themselves well to hard math. So, what are these factors?

Well in short I think these factors are :

1.Scarcity

2. Social proof/ validation/ authority

3. exchangeability

4.Portability

5.Usefulness

but lets break each down one by one to really expand on this.

1. Scarcity

So first on the list is GOOD OL scarcity, now she’s a well known factor, but I think its really not the whole picture, but I don’t think something can be truly “ valuable “ if its super accessible. So lets break this down more.

Scarcity, as it turns out, is a pretty big deal in the world of economics. It's the principle that underpins the concept of supply and demand – the core tenet of market economics. The scarcer a resource is, the more people are generally willing to give up money or resources to get it. But in a world where we can copy and paste digital information ad infinitum, how does scarcity work?

Enter the blockchain and the concept of non-fungible tokens (NFTs). With these technologies, we can create digital assets that are both unique and verifiable. Suddenly, a digital file isn't just another copy – it's a one-of-a-kind asset. The uniqueness of these assets creates scarcity. And at this point I get the complaints, that it isnt really owning the item, its just owning a link to a jpg. of the thing that stored on a centralized server, but this really doesn’t matter and ill explain why later.

Consider CryptoPunk or a Beeple art piece. There might be countless screenshots of these pieces floating around the internet, but there's only one "real" CryptoPunk #7804 or Beeple's "Everydays: The First 5000 Days." These assets are tied to a specific token on the blockchain, verifiable and owned by one person or entity at a time. This scarcity is what drives their value.

However, it's not just about being rare. The scarcity must be desirable. There's only one of my grocery list from last week, but I doubt it's going to fetch a high price on OpenSea. And that's where the next factor comes into play: social proof.

It's also important to note that scarcity in crypto isn't just about NFTs. Consider Bitcoin. There will only ever be 21 million Bitcoin. That's it. This scarcity is coded into the very fabric of its blockchain. As more people have become interested in owning a piece of the pie, the value of Bitcoin has dramatically increased over the years. This is scarcity in action.

In the end, scarcity in the world of crypto is a fascinating mix of technology and human psychology. It's about crafting something unique in a world of copies, and making people want that unique thing. It's about standing out in the crowd, and making the crowd care that you stand out. It's about finding the balance between being one in a million and being one of a million. It's about navigating the fine line between rarity and desirability. And in the constantly evolving world of crypto, it's a line that's always shifting.

2. Social Proof/Validation/Authority

Social proof, also known as informational social influence, is a psychological and social phenomenon where people assume the actions of others in an attempt to reflect correct behavior for a given situation. In the world of crypto, where value is often derived from consensus and belief, social proof plays an instrumental role.

Consider the hype around certain cryptocurrencies or NFTs. When a renowned figure in the crypto community or a celebrity endorses a specific token, project, or piece of digital art, their followers and fans often rush to get a piece of the action. This is social proof in action. These figures act as validators, their endorsement serving as a signal to others that this asset is worth something.

For instance, when Elon Musk tweets about Dogecoin, the price tends to shoot up. Similarly, when a famous artist drops an NFT, it can sell for astronomical prices. These high-profile figures lend authority and credibility to these assets, driving up their perceived value.


In the context of cryptocurrencies, it's useful to draw parallels between the technological and social aspects of validation. It would drive me crazy when some celebrity would endorse something and( like Michael Jordan endorsing underwear), and it would cause the product to sell out. It would make me so mad, I kept thinking, HOW DUMB ARE THESE PEOPLE?! but then I realized it they are just using these social “validators” to derive value since they cant do it themselves do to their minds being dulled by the corporate machine.

Insta-Buy


So just as Ethereum's blockchain relies on validators to verify and secure transactions, social systems have key nodes or influencers who validate the worth of social and cultural transactions. In Ethereum, validators are chosen to participate in the network's consensus mechanism and are tasked with verifying transactions and adding them to the blockchain. In the realm of social influence, validators could be influential figures, cultural trendsetters, or thought leaders who validate or endorse certain behaviors, trends, or assets, giving them social credibility and value.

These social validators play a crucial role in determining what is considered valuable or desirable within a community or society. Their endorsements act as a signal to others about what is worth attention, admiration, or investment. For instance, when an influential figure in the crypto community or a celebrity endorses a particular cryptocurrency, NFT, or blockchain project, it gives that project a form of social validation. Their endorsement acts as a signal to others that this project or asset is worth something, which can significantly influence its perceived value and desirability.

However, unlike validators in a blockchain network, who are bound by protocols and algorithms, social validators are influenced by a wide range of factors, including personal gain, societal trends, financial incentives, and more. This can make the process of social validation more unpredictable and malicious.

Moreover, the influence of social validators is not always positive. They can contribute to speculative bubbles, misinformation, and market manipulation. Therefore, while their endorsements can add value, they should be just one of many factors considered when assessing the worth of a crypto asset.

On a community level, this can also be seen in the form of "tribes" within the crypto space. Whether it's the "Link Marines" supporting Chainlink, the "XRP Army" backing Ripple, or the enthusiastic communities around various DeFi projects or NFT collections, these groups provide social proof that these assets have value.

Moreover, such social dynamics are not exclusive to crypto but are a fundamental part of human behavior. We tend to value things more when we see others valuing them. It's why lines outside a nightclub can make it seem more desirable or why limited edition items become must-haves.

However, this factor can also contribute to volatility and speculative behavior in the crypto market. The value derived from social proof can be fickle and change rapidly, leading to sudden price surges and crashes. It's a double-edged sword, adding both excitement and risk to the crypto space.

So, while mathematical models and economic theories can explain a lot about how markets function, the role of social proof in crypto reminds us that at the end of the day, markets are made up of people. And people are profoundly influenced by what others around them are doing. The crypto market, with its wild price swings and passionate communities, serves as a stark reminder of this fact. It's not just about code and algorithms; it's about human behavior. It's about belief, hype, fear, and greed. It's about the stories we tell each other and the narratives we choose to believe.

3. Exchangeability and Liquidity.

In the world of crypto and finance at large, exchangeability and liquidity often go hand in hand. Let's talk about liquidity first. It's a term you'll frequently hear thrown around in the finance and crypto world, and it's incredibly important when it comes to understanding the value of an asset.

In the simplest terms, liquidity refers to the ease with which an asset can be bought or sold without affecting the asset's price. Cash, for example, is considered to be extremely liquid because it can be readily exchanged for goods, services, or other assets. A house, on the other hand, is considered to be less liquid because it can take a considerable amount of time to sell and convert into cash without significantly lowering the price to speed up the sale.

In the realm of cryptocurrencies, liquidity means the same thing. A cryptocurrency is considered liquid if you can readily trade it for cash or other assets without its price being significantly affected. Cryptocurrencies like Bitcoin and Ethereum are considered highly liquid due to their widespread adoption, large market capitalizations, and presence on many exchange platforms.

This leads us to exchangeability. If a crypto asset is listed on numerous exchanges and has robust trading volume, it is easily exchangeable and therefore has high liquidity. The ease of exchanging an asset is crucial for its utility as a medium of exchange – one of the primary functions of money.

Now, let's tie this into NFTs and real-world assets. The power of blockchain technology has opened up new avenues for tokenizing real-world assets like art, real estate, and even intellectual property rights into NFTs. By tokenizing these assets, they can be bought, sold, and traded on global markets, vastly increasing their liquidity.

Consider a classic car or a rare watch. Traditionally, selling such items would involve a small, localized market of potential buyers. But by tokenizing the car or watch as an NFT, the seller can tap into a global market of potential buyers on NFT marketplaces. This means more liquidity because the potential pool of buyers is significantly larger.

Moreover, these tokenized assets can be fractionally owned, further increasing their liquidity. Instead of having to buy an entire property or a piece of art, buyers can purchase a fraction of the tokenized asset. This makes these traditionally illiquid assets more accessible and easier to buy and sell.

An addendum on value :

A common criticism of NFTs, especially in relation to tokenizing real-world assets, is that you're not really owning the item itself. Instead, you're owning a digital representation, often a link to an image or video file stored on a centralized server. This has led some to question the real value of NFTs and whether they're truly a revolutionary development.

But here's the thing: the value of an asset ANY asset – be it an NFT, a Bond, a dollar bill, or a bar of gold – ultimately comes down to a shared agreement that it has value. A dollar bill is, after all, just a piece of paper, and its value largely derives from the fact that everyone agrees it's worth a dollar. What's crucial is not the physical form it takes, but rather the stability of its representation and the collective belief in its value.

So while an NFT may only link to a JPEG or MP4 file, what it really represents is ownership, rarity, and the possibility of exchange. As long as people are willing to trade for it and as long as it remains a stable representation of whatever it's supposed to represent, it holds value. This is similar to how fiat money works. A dollar has value because it's a stable representation of a unit of value that people are willing to accept in exchange for goods and services.

In this sense, the value of an NFT is less about the digital file it links to and more about the intangible qualities it represents: authenticity, ownership, uniqueness, and the social and economic factors that give it value in the eyes of its beholders. Like any form of currency or valuable asset, it's a shared fiction that becomes reality through our collective belief in it. And as long as that belief holds, so too does the value of the NFT.

4. Portability

Portability is a crucial aspect of any form of currency or valuable commodity. The more easily an asset can be moved, stored, or transferred, the more practical and useful it becomes, and therefore, the more value it holds. It's one of the reasons why gold, despite being a precious and valuable metal, was eventually supplaced by paper money and digital transactions for day-to-day commerce. A brick of gold is undeniably valuable, but try buying a cup of coffee with it.
( Sorry Boomers its not happening).

In the world of cryptocurrencies, portability takes on a whole new dimension. Cryptocurrencies and digital assets, by their very nature, are extraordinarily portable. They exist on decentralized networks that are accessible from anywhere in the world. As long as you have the private keys to a crypto wallet, you can access your assets from any device, in any location, at any time.

Consider Bitcoin( the boomer-$BTC, not $BITCOIN), often referred to as 'digital gold'. It shares many of gold's characteristics - it's scarce, it's not tied to any single government, and it can be used as a store of value. However, unlike gold, Bitcoin is easily divisible, transferable, and transportable. You could cross international borders with billions in Bitcoin stored on a hardware wallet the size of a thumb drive or even just remembered as a seed phrase in your mind.

This portability is part of what gives crypto assets their value and utility. It enables global remittances, frictionless digital commerce, and the ability to maintain control of your wealth in a way that's not possible with physical or even traditional digital assets.

5. Usefulness.

In the real world, the value of an item is intimately tied to its usefulness or utility. Everyday items like tools, food, and water each carry a value because of the specific needs they fulfill or the functions they perform.

Let's start with tools, for instance, a hammer. The value of a hammer derives from its function as a device that can drive nails into surfaces. It's a simple tool, but its utility is clear - without a hammer, many construction or repair tasks would become significantly more challenging. The hammer's usefulness, therefore, is what gives it value.

Moving onto food and water, these items cater to our most basic and fundamental human needs - nourishment and hydration. The value of food and water comes from their ability to sustain life. Without them, survival is simply impossible. So their value is intrinsically tied to their essential role in maintaining life.

The value of any asset or commodity is closely tied to its utility or usefulness. This is as true for crypto assets as it is for anything else. Any asset or thing that offers more utility to its owner is likely to be more valuable than one that doesn't(Duh.)

For example, Ethereum, the second-largest cryptocurrency by market cap after Bitcoin, is valuable not just because it's scarce, portable, and exchangeable, but also because it's useful. It's the native currency of the Ethereum network, which allows for the creation of smart contracts and decentralized applications. Ethereum is required to execute these contracts and applications, which gives it a fundamental utility value.

Similarly, many DeFi tokens offer utility in the form of governance rights or staking benefits. Holders of these tokens can have a say in the future development of the platform or earn rewards for securing the network. This utility can add value to these tokens.

Even NFTs, which might at first glance appear to have little utility, can offer value in various ways. They can represent ownership of digital art, virtual real estate, or in-game items, and might offer the owner prestige, social status, or certain rights and privileges in a digital community.

The key point is this: the more ways a crypto asset can be used, the more value it can potentially hold. As the crypto ecosystem continues to evolve and mature, we're likely to see more and more innovative uses for these digital assets, and that could significantly impact their value in the future.

So in summary, the scarcer a resource is, the more valuable it tends to be. This principle holds for any commodity or asset. Items that are unique or limited in supply often carry more value due to their rarity.

Influential figures or entities can validate or endorse certain products or trends, which can significantly influence their perceived value and desirability. This is seen in various social and cultural contexts, where trendsetters can sway public opinion and shape market trends.

Exchangeability and Liquidity: These refer to how easily an asset can be traded or converted into another asset. Assets with high liquidity and exchangeability generally hold more value. The ability to tap into global markets can greatly increase an asset's liquidity and therefore its value.

Portability: The easier an asset can be moved, stored, or transferred, the more practical and useful it is, which enhances its value. Highly portable assets offer a degree of flexibility and convenience that can add to their appeal and utility.

Usefulness: The value of any asset is closely tied to its utility or usefulness. Assets that can fulfill specific functions or meet certain needs often hold more value. The more ways an asset can be used, the more value it can potentially hold. Immutable records, for instance, provide a reliable and secure source of information, which can enhance the utility and value of certain assets.

I hope you use this information to build better NFT projects and if you ever want help just hit me up on Twitter @ProfessorSkely.