Key Takeaways

1. An NFT is a non-fungible token generally created using the same programming used for cryptocurrencies. In simple terms, blockchain technology is the base of these crypto assets. However, Cryptocurrency (like Bitcoin or Ethereum) and physical currency are fungible, meaning they can be exchanged or traded.

2. Non-fungible tokens are the art of the digital world, with value attached to each piece of work. NFTs have several characteristics that differentiate them from other digital assets, and their rarity is essential in determining their value. The rarer an NFT is, the more it is likely to be valuable.

3. It is essential to know that rarity alone does not determine the value of an NFT. Factors like the artwork’s quality or the artist’s popularity and the overall demand for the NFT can also play a role in determining its value.

NFT rarity refers to the uniqueness or scarcity associated with a specific non-fungible token (NFT). Each NFT is unique and has its characteristics, for example, the artist who created it, the date coined, or specific attributes of the digital asset itself.

NFT rarity can significantly affect its value; rarer NFTs are more valuable than common ones. Rarity is crucial in determining an NFT value in digital art, where collectors are willing to pay a premium for an exclusive or unique NFT.

What is an NFT or non-fungible token?

Non-fungible tokens or NFTs are digital assets representing ownership or proof of authenticity of unique items or contents, for example, a piece of digital artwork, video, music, or even tweets. Different from fungible tokens like cryptocurrencies, for example, Bitcoin or Ethereum, that are interchangeable with each other and have the same value, each NFT is unique, and you cannot replace it with another.

Non-fungible tokens use blockchain technology, enabling secure verification of ownership and enabling creators to monetize their work by selling them directly to buyers, frequently through online marketplaces.

An NFT has several attributes that differentiate it from other types of digital assets. Some key characteristics of NFTs include the following:

Digital Asset

An NFT is a digital asset representing internet collectibles, such as music, art, and games, with an authentic certificate created by blockchain technology that underlies cryptocurrencies.

Uniqueness

Each NFT is a unique digital asset with its identification code, metadata, and ownership record stored in a blockchain network. This information allows you to verify the authenticity and ownership of each NFT.

Immutability

The place to store NFTs is on a blockchain which is a decentralized, immutable ledger that records all transactions securely and transparently, meaning that once you create and verify an NFT on the blockchain, no one can modify or delete it.

Interoperability

You can exchange or trade NFTs on different blockchain networks and marketplaces if compatible with the same standard. For example, you can exchange an NFT created on the Ethereum blockchain using the ERC-721 standard on a different blockchain network supporting ERC-721 tokens.

Scarcity or Rarity

You can design NFTs to be rare and in limited supply, increasing their value and appeal among collectors and enthusiasts.

Programmability

You may program an NFT with smart contracts that specify its use, ownership, and transfer conditions. This programming may enable an NFT to have specific functions, such as granting access to experiences or events, unlocking exclusive content, or triggering particular actions according to predefined rules.

Overall, the unique combination of these features or characteristics makes an NFT a powerful tool for creating and exchanging digital assets with verifiable ownership, scarcity or rarity, and value.

What is NFT Rarity?

The market value of an NFT has always been challenging to estimate objectively. Like a traditional work of art, an NFT is a unique item. Therefore, determining a fair market value for an NFT is not one of the most manageable tasks. For example, suppose a famous artist creates an NFT. In that case, it may be simpler to determine its value, but if you look at an unknown collection of NFTs, how do you decide which NFT of that collection is rarer and, therefore, more valuable?

In the above situation, the concept of NFT rarity comes in, so the rarity of an NFT’s traits or components depends on the rarity of an NFT within a collection.

How can you Calculate an NFT Value?

As an investor, you may question what causes specific NFTs to have a price higher than the rest, mainly when they all are from the same collection. As a result, the industry has developed concepts such as rarity values, rankings, and tools to give an objective approach to defining the value of an NFT.

No NFT rarity value calculation method can be considered an “industry standard.” Different NFT platforms may have their distinct calculation methods. However, there are several common rarity value calculation approaches. Next, we will briefly describe the most commonly used, which include the following:

Trait Rarity Classification or Ranking Model

This classification method examines the rarest trait of NFTs as a comparison tool.

Generally, several characteristics, traits, or attributes compose each NFT. The rarest trait method is relatively simple, assigning a rarity rank to an NFT based on its most unusual traits. The rarer that main trait or characteristic is, the higher the overall rarity rank.

At first glance, it seems logical to base rarity on an NFT’s champion trait. However, this method only analyzes the rarest feature of an NFT without a deeper look at each rare individual characteristic, which can make the calculation flawed. For example, an NFT with many relatively rare traits will be considered less valuable with this method than another NFT with only one scarce attribute and many prevalent characteristics.

Mean or Average Trait Rarity Method

This method adds up all individual attributes and makes a simple average. For example, if an NFT has two characteristics, number one has an average trait rarity of twenty percent and number two has an average trait rarity of ten percent, the overall average rarity for the NFT will be fifteen percent ((20% + 10%) / 2). However, this method also had the limitation of only analyzing the overall trait rarity without considering the rarity of a single attribute.

Statistical Rarity Method

This method calculates according to the statistical rarity of each attribute in an NFT as a result of multiplying the scores of the individual traits. For example, with this method, an NFT with two characteristics, one with a rarity of twenty percent and the other of ten percent, will have an overall value of two percent (20% * 10%). Like the average trait method, it also overemphasizes the overall trait rarity.

NFT Rarity Scoring Method

There are several scoring and ranking platforms to overcome the limitations of previous calculation methods. These platforms have a way of calculating the NFT rarity ranking, taking into account individual and general traits (NFT rarity value).

Using this method, first, you will determine a value for each trait individually according to the following formula:

(rarity score for a trait value = 1 / ((number of items with that trait value) / (total number of items in the collection)). Then add all the individual scores to arrive at the overall NFT rarity value; the higher the number, the rarer and, therefore, the more valuable the NFT.

In late 2022, there is no lack of NFT ranking and scoring platforms that can assist you in deciding on the rarity of an NFT without having to do your calculations. However, these platforms are rare tools, and various are on the market.

Concluding, the value of your NFTs may vary depending on the NFT community. For example, some community members prioritize the “attribute count” to rank the NFTs as the rarest, while others prioritize the combination of “clothing and style.” Therefore, each community has its preference on what to prioritize for ranking NFTs as the rarest.

However, remember that the NFT scoring and ranking field is changing rapidly, with new methodologies and approaches everywhere. So, be on the lookout for updates, and if you need help to undergo the diligence procedure yourself, some websites rank NFTs for you.

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