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NFT Derivatives For Absolute Beginners?

What are NFT Derivatives? Why you should care?

“NFT has become a true medium of expression for creative people who not only can leverage it to craft beautiful art but also can generate a considerable wealth by trading it with complete ownership”

Few Numbers to Establish The Dominance Of NFT:

NFT has already become more than a 2 billion dollar play and growing fast with every tick of a clock. As per the latest report by Emergen Research,

The global Non-Fungible Token (NFT) market size reached USD 340.0 Million in 2020 and is expected to register a rapid revenue CAGR during the forecast period. They predict that, Global non-fungible token market will grow at a CAGR of 39.6% over the forecast period and revenue is projected to increase from USD 340.0 Million in 2020 to USD 3,57,316.3 Million in 2030.

The biggest contributor to the NFT market boom is the gaming industry which has hit the right cord and has been leading the industry growth worldwide from the front.

What Is NFT ??

Technically :

The non-Fungible token is a digital asset generated cryptographically containing identifiable info captured by the smart contracts. It makes use of blockchain technology to link with a unique digital asset that cannot be replicated.

We can also define NFT:

To be a digital asset that depicts these key attributes & these are the attributes that make NFT special.

Scarce:

NFT finds its real value because of its scarce nature. NFT creators always set a limited supply of NFT being generated, to ensure its scarcity is maintained to preserve its value.

Indivisible:

Unlike Bitcoin or any other crypto’s NFT are not divisible into smaller units. So if you want to buy any digital art, you can’t buy it in pieces, you have to buy it as a whole entity.

Unique: One Of Its Kind

Each NFT has got a unique identity and can’t be duplicated, the information associated with NFT is like a certificate of authenticity.

In a nutshell:

NFTs are tokens that can be used to represent ownership of unique items. They let us tokenize(Digitise) things like art, collectibles, even real estate. They can only have one official owner at a time and they’re secured by the blockchain network like Ethereum. The information stored in the blockchain network is unmodifiable(immutable ) thereby ensuring the ownership remains intact

To understand NFT in detail, requesting you to read my article below

Now that you have understood the NFT fundamentals, now it's time to decode What is NFT Derivative and how it functions?

What Are NFT Derivatives?

To put it simply :

NFT derivatives are a product that lets users bet on the future prices of non-fungible tokens (NFT). It is a kind of speculating the price on the future date.

Derivatives trading is not new when it comes to traditional crypto’s listed on an exchange, where two or more parties interested in trading come to an agreement based on the future price of an underlying crypto asset. This agreed-upon speculated price becomes the basis of settlement on the date of contract execution.

Futures and options trading in crypto exchanges are very common and popular derivatives, among professional traders who use this tool to hedge their risk and mitigate market volatility.

The same concept applies to NFT derivatives as an instrument,

Where the core idea is to provide a platform for retail users and traders, through which they can take long or short positions in NFTs, thereby enabling more robust trading strategies that can maximize profit opportunities for users while hedging risk and exposure.

How does it work & Why It Is important?

The core logic behind NFT derivatives lies in deriving any contract or token from the underlying NFT. The derived NFT will be a kind of fungible crypto tokens like ERC-20 tokens or BEP20 tokens, that will represent the Non-Fungible, NFT’s created using the Ethereum based ERC721 based standard, that has been designed to generate NFT’s.

This idea of generating derivatives opens up a new horizon to enhance NFT liquidity in the existing NFT marketplaces which often face the liquidity crunch. It will also encourage easy trading of NFT’s on the popular crypto exchanges, thereby opening up new revenue avenues through staking, lending, and borrowing against such NFT derivatives.

Some NFT Derivative use cases:

  • Predicting Floor prices of any existing NFT like Bored apes, or crypto punks
  • Shorting on NFT in the form of future contracts, using ERC-20 token
  • Building NFT swapping protocols

etc…

Companies Working To Make NFT derivatives Possible

There are few players who envision making NFT trading accessible to small retailers through the concept of NFT derivatives viz.

NFTures:

a product that lets users bet on the future prices of non-fungible tokens (NFT). They are bringing gaming elements and leverage trading to NFT marketplaces, via decentralized protocol sAMM(synthetic automatic market maker) that is also used by its parent product SynFutures .

In June, SynFutures raised a $14 million Series A round led by venture capital firm Polychain Capital.

Bliv.club:

Bliv.Club is an NFT derivative platform Co-founded by Serial entrepreneurs Vikas Singh, Abhishek Kumar Gupta, and Mohammed Sirajuddin, that aims to diminish this barrier of entry via various new-age instruments as well as facilitate liquidity into the NFT ecosystem via derivatives. They envision, allowing the average person to participate in the NFT market with a small ticket size.

Bottom Line:

NFT derivatives are still at a very nascent stage and very early in the market, but with a very promising future. It is very important to make NFT trading as simplified and popular as current crypto trading especially making it understandable and accessible to the masses. Yes, NFT buzz and hype are widespread but not amongst the retail investors, as not many people understand the Game of NFT trading.

In one of the statements covered on CoinDesk, Lauren Stephanian of Pantera Capital said:

“NFT-specific derivatives products will add more depth to the nascent NFT market, just as options and futures contracts play an important role in established financial markets,”

I would like to close this article with this food for thought:

“NFT, Cryptos, Stocks, Mutual funds got their share of limelight only when it was made accessible and easy to invest for masses. So it is the responsibility of all the aspiring and existing tech entrepreneurs to ensure that they are building such platform which is generating wealth for all democratically ”

Thanks for being there and reading this piece, wishing you all a lot of happiness and a prosperous new year 2022.

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Well researched educational content for the crypto enthusiast

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@pramodAIML

@pramodAIML

Passionate Blogger & Tech Entrepreneur | Founder of FinTech Startup | Write about AIML, DevOps, Product Mgmt & Crypto

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