‘Demand for rarity is self-defeating’: Unlocking a theory of value for NFTs

Non-fungible tokens (NFTs) are unique digital assets that took the world by storm in 2021, catapulting into public view following the sale of Beeple’s “Everydays: The First 5000 Days,” a collage of digital images, for $69 million last March.

Since then, everyone from artists and celebrities to teenagers on Instagram have looked to ride the hype train by minting their own NFTs. Meanwhile, collectors are spending huge sums – in some cases, tens of millions of dollars – to own and trade NFTs.

The phenomenon now offers researchers a unique opportunity to study the way people learn about new marketplaces and assign value to different categories of assets.

Published last month, a cognitive study conducted on NFT trading – the first of its kind – showed there is a fine line between buzz and boredom in NFT collecting.

“Because NFT trading records are public, they offer a remarkable chance for us to look at why people perceive collectible items as valuable, and how those perceptions change over time,” said Jordan Suchow, a cognitive scientist who led the study at Stevens Institute of Technology.

Called ‘The paradox of learning categories from rare examples: a case study of NFTs & The Bored Ape Yacht Club’, Suchow’s team looked at the popular collection of NFTs known as the Bored Ape Yacht Club – a set of 10,000 computer-generated cartoon apes, each with different features like colour, clothing and accessories.

According to NFT marketplace OpenSea, nearly $1 billion worth of Bored Ape NFTs were traded by the end of 2021. At the start of 2022, the average price of one Bored Ape Yacht Club NFT was $238,500 and there were 6,200 owners possessing a total supply of 10,000 tokens.

Each individual Bored Ape is unique – and thus, equally rare – but some features might be more common than others. For example, an ape in a plain striped sweater might be more common – and potentially less valuable as a result – than an ape in a suit and tie, or one wearing a hat, for instance.

“It’s a bit like stamp collecting: the stamps printed in the same run all look the same, so if there’s a printing error or some other rare feature that sets a stamp apart, people will pay far more for it,” explained Suchow, whose work, co-authored with Stevens doctorate student Vahid Ashrafimoghari, will be presented at the Cognitive Science Society Conference on July 27-30 in Toronto, Canada.

When people first began trading Bored Ape NFTs, apes with the rarest features became highly sought-after. However, it also distorted the information landscape; since rare apes were more valuable, they became more widely discussed, which subsequently made them more visible.

“Today, a newcomer to Bored Ape trading sees these rare apes everywhere and perceives them to be much more common than they are in fact,” Suchow explained. “That creates a puzzle: how can people be expected to learn about a new category when their experience of that category is dominated by the rarest examples?”

To test their theory, Suchow’s team identified the rarest and most common features in Bored Ape NFTs, then mapped their findings onto the relative value of the NFTs over time.

The results were significant: While rarity was correlated with value in the early days of trading, the connection faded as newcomers began trading the NFTs.

“Over time the influx of newcomers learning about BAYC [Bored Ape Yacht Club] has been associated with a decrease in the demand for tokens with rare attributes,” the authors said in the study.

According to Suchow, the findings provide several lessons for NFT collectors.

“We’ve shown that a focus on rarity can become self-defeating – if you want to sustain value, you need to make sure that people don’t see only the rarest items in a given category,” he explained. For online marketplaces, that could trigger a rethinking of how they are designed and lead investors to assign less value to rarity in new markets.

Other questions remain: the team found that some rare NFT features, such as unusually coloured backgrounds, retained their value over time, while others, such as an ape’s fur colour, quickly lost value.

Suchow said that understanding how some features correlate with value and others don’t, and how that plays out in other categories like stamp collecting or art markets, will require further study.

“The exciting thing here is that we’ve revealed a general principle: that demand for rarity is self-defeating,” Suchow said. “That should be very broadly acceptable, so the big question now is where we can observe this effect in other categories of collectible items, too.”