Thoughts on the Current NFTFi Scene
by @BeeGeeETH & @iamsixsix_eth
NFT is not just about art or jpg, it is more than that. It will become the token representing all kinds of non-fungible assets, including real estate, copyrights, gaming gear, LP positions, derivatives etc., from both web2 and web3 assets.
The biggest obstacle of NFT is the low liquidity given its nature. What’s more, difficulty to assess the price, not easy to cash out and low capital efficiency are hindering the market development as well.
The root of NFT’s problem lies in the difficulty to reach the consensus on the value of NFT. NFT-Fi is brought up to address the issue by standardizing, pricing and liquidating assets in crypto. Main approaches including a). standardize assets; b). create liquidity; and c). optimize the process.
1. Standardize Assets
(1) Define Pricing
a. Floor Price: adopting the floor price is easy to understand and safe to value. The down side is it neglects the value of rarity and can be manipulated by whales. (FloorDAO)
b. Machine Learning: adopting the model by taking into account all available information to predict the fair valuation of NFTs at any given time. (Upshot Analytics)
c. Price Oracle: taking price from different sources. (Chainlink)
d. PoS Appraisal: by investing stake to predict the price range of NFT, getting rewards if succeed and slashes if fail. (Abacus Protocol)
(2) Define Rarity: by identifying characteristics of NFT collection and calculating the rarity based on the traits, the NFT value can be defined in a reasonable way. (Trait Sniper / Rarity Sniffer)
2. Create Liquidity
(1) Exchange: creating order book market linking sellers and buyers. (Opensea; Binance NFT)
(2) Aggregator: further integrating listings from different exchanges/markets, the liquidity has been further widened and deepened. (Gem / Genie)
(3) Collateral: staking the NFT into the protocol and cashing out a certain percentage. Suitable for bluechip NFTs but not easy to scale. Peer to Pool is a better solution (JPEG’d, BendDAO)
(4) Tokenization: converting the non-fungible token into the fungible ERC20 token is one of the effective ways. (NFTX / Ape Coin)
(5) AMM: introducing Bonding Curves for NFT pools, NFTs get further liquidated. (Sudoswap)
3. Optimize Process
(1) Lower Entry Barrier: fragmentation — dividing the NFT into smaller pieces. (Fractional / Unicly)
(2) Reduce Cost: directly lowering the transaction fee will encourage users to trade more often. (x2y2)
(3) Minimize Transaction Traction: floor sweeping and instant checkout are two typical applications of reducing the transaction traction, and cross-chain application is essential as well.
Potential opportunities can be found in the following 3 aspects:
1. Programmable NFTs: as NFTs will be evolved into assets beyond art, more data source interaction will be needed, the need for programmable NFT will rise (Revise Protocol)
(1) Empowering NFTs with more use cases：
a. At present, the entire NFT market is mainly used in use scenarios such as games, social media, music and picture display.
b. The emergence of programmable NFTs can transform NFTs from a static cultural level to a practical level, which also means that NFT will change from a simple JPEG image to an interactive application, and further empower the value of NFT.
(2) Currently there are two types of programmable NFTs
a. Active programming of art NFTs: First Supper, which consists of 22 layers, each layer owner can modify different dimensions such as rotation, scaling, and visibility.
b. Status changes of functional NFTs: Taking STEPN as an example, the upgrade and wear of shoes can be regarded as the extension of NFTs in the field of programming interaction.
c. Future prospects: With the deepening of NFT’s pursuit of practicality in the future, programmability may become an essential basic quality for most NFTs.
2. Leasing Market: the ERC4907 will realize the separation of NFT ownership and usage rights and highly boost the application of utility NFTs. (Double Protocol)
(1) Active leasing services: Leasing services actively launched by guilds or project parties such as YGG, Axie Infinity, Starshark, etc.
The purpose is to stimulate the enthusiasm of community members to participate and maintain the activity of their own ecology.
(2) Protocol leasing service: mainly based on ERC-4907 or EIP-5006 protocols.
a. The protocol-based NFT lease agreement is oriented to the whole industry, and is no longer dominated by the project party, which standardizes the asset allocation of the entire NFT scene.
b. The popularization of lease agreements will give birth to two roles of lessor and lessee, and it will become a norm for players to participate in activities by renting NFTs.
c. Wealthy players, high net worth users and some institutions will hoard a large amount of NFT for rental profit.
(3) Potential problems
a. Lessors and lessees prefer stable NFT products.
b. The essence of the rental service is the temporary transfer of production tools and production materials. The biggest application scenario is the farming service, which has less impact on art NFTs.
c. At present, it is impossible to make a reasonable calculation of the ROI of leasing NFTs. If you refer to housing leases, it will take 200 to 300 months to realize the recovery of housing costs, but this indicator seems to be difficult to be accepted by lessors.
d. NFT leasing, the current big controversy is how to determine the value-added rights and interests of NFT. For example, whether the Pass Card should get double verification.
3. Derivatives: by introducing the Price Index ETF of a NFT collection, more buyers are able to get into the NFT with smaller investment. (Margole)
(1) NFT ETF is an NFT trading fund issued by financial companies. Users can indirectly enjoy the returns brought by the rise of NFT by purchasing corresponding funds or bonds.
(2) Advantages and disadvantages:
a. It can allow more players outside crypto to participate in NFTs.
b. Do not directly hold NFT assets: The essence is to invest in a venture capital company, which does not mean that investors directly own NFT assets, and users cannot enjoy value-added services such as the project party’s whitelist or airdrop, etc.
