Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Similar to assets in DeFi, non-fungible tokens require similar basic elements, such as lending, liquidity, and asset management, which are areas that are currently being established. In addition, although the basic value proposition of NFTs lies in their uniqueness, interchangeability is very important for increasing liquidity and the financialization of NFTs.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Source: Messari’s NFT stack

There are thousands of buyers and sellers of liquidity tokens, but every NFT transaction requires a buyer and a seller-which shows that its liquidity is low. So far, projects focused on the financialization of NFTs are trying to make NFTs as fungible (and liquid) as possible.

Look at liquidity

Similar to physical collectibles (such as baseball card transactions), NFTs face the problem of insufficient liquidity, especially for low-value and coveted items. Although the NFT market is on the rise, we usually see the potential of this asset untapped. NFT trading volume only Ethernet Square on had more than $ 13 billion, and is the token of the block chain, trading volume will continue to increase over time as new assets.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Blue-chip NFTs on the market (such as Punks) have the most liquidity, and because they are concentrated and expensive, most collectors cannot access them.

NFT Liquidity Agreement

Most NFT liquidity agreements take one of two approaches. The first method is to create liquidity by facilitating the creation of liquidity pools. Individuals can deposit similar NFTs in the pool and redeem them at any given time. The advantage of agreements such as NFTX and NFT20 is that they effectively become a market, based on a liquidity pool of a set of assets.

The second is the method taken by Unicly and Fractional, which creates a single NFT fragment/fragment, which can be traded as a replaceable fractional token (for example, 1 NFT becomes 10,000 replaceable tokens) . The second method is to obtain a part of the entire NFT by lowering the purchase price, thereby promoting greater liquidity, similar to Robinhood’s fragmentation of stocks, so that individuals do not have to buy 1 Tesla stock for $1,000, but can Purchase 2 partial shares of Tesla for $100.

The top four NFT liquidity agreements are NFTX, NFT20, Unicly, and Fractional, holding a total value lock (TVL) of nearly $80 million.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Note that the TVL calculation of NFT20 may be lower because it does not take into account the value of NFT like NFTX. Despite this, the total reported TVL of NFT20 is approximately US$9 million, still lagging behind NFTX, which currently has a TVL of US$15 million. In addition, the liquidity of shards does not take into account the vault tokens locked in the pool.

Unicly currently has the largest market share of the four agreements, accounting for 43% of the total locked value. NFTX leads NFT20 in the liquidity pool agreement. Since its recent launch in late July, Fractional has accumulated a considerable market share.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

NFT liquidity pool and market agreement

We will study the two main NFT liquidity pool protocols, NFTX and NFT20.

NFTX

NFTX is a market and liquidity agreement that facilitates the buying and selling of NFTs.

Collectors can deposit the entire NFTs in the NFTX vault and mint replaceable tokens (vToken) representing the value of the NFT. At any time, collectors can use their vToken to randomly purchase assets in the vault. Alternatively, individuals can redeem specific tokens from the same vault by paying additional fees.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

In order to earn the fees of vault transactions, collectors must stake their vTokens in their respective liquidity pools (such as SushiSwap). Every time an individual sells or buys an NFT, the pledger earns a fee.

One feature of the NFTX mode is that users can obtain instant liquidity of NFT with high vToken liquidity. For example, BAYC owners can immediately deposit their Bored Ape into the NFTX vault to obtain BAYC vTokens. However, the owner can sell tokens on a decentralized exchange like SushiSwap instead of staking BAYC vToken. If liquidity is poor, NFT owners may sell NFTs at a lower price than on exchanges such as OpenSea , however, the ability to obtain instant liquidity is often worth lowering the price.

Recently, NFTX has also cooperated with Futureswap to provide NFT perpetual contracts for the NFTX vault, which will enable speculators to short or long with NFTX derivatives.

NFT20

NFT20 is a decentralized NFT exchange that also enables individuals to trade, sell and exchange NFTs. Similar to NFTX, NFT20 enables NFT owners to add their NFT (such as Cryptopunk) to the liquidity pool, and in return, they will receive a specific pool of replaceable ERC20 tokens (such as $100 Punks tokens). Using replaceable tokens (ERC20), individuals can buy NFTs (such as CryptoPunk) in the corresponding pool, or sell them through exchanges such as Uniswap.

In addition, NFT ERC20 tokens can be used for LP to enter SushiSwap or Uniswap pools to increase the liquidity of replaceable tokens, thereby making the underlying NFT more liquid. Certain NFT20 fund pools have liquidity mining rewards in NFT20’s native token MUSE.

In the existing NFT pool of NFT20, Boring Banana’s Co, Cyber ​​Kongz, Wrapped Moon Cats and Gutter Cats account for approximately 50% of the total value of the NFT in the agreement.

Everyone needs a MUSE

NFT20’s native governance token MUSE maintains a supply of 1 million tokens, of which 500,000 will be allocated to the community that will play the Very Nifty game in September 2020. In addition, 300,000 tokens are reserved for liquidity mining rewards. Of the remaining 200,000 tokens, 50% (100,000) are allocated to NFT20 DAO, and the other 50% is reserved for the founding team.

Every time an NFT is deposited into the NFT20 protocol, 100 tokens will be minted, and 5% of the tokens will be allocated to the NFT20 protocol. The NFT20 agreement sells ERC20 NFT tokens in ETH, which is then used to purchase MUSE. Finally, 50% of the purchased MUSE is allocated to the MUSE mortgager.

Floor price problem

Floor price refers to the lowest or smallest selling price of an asset in a collection, and is a widely tracked indicator in NFT. In collections like Punks or BAYC, the floor price is often set by the least rare (least desirable feature) asset in the collection. Protocols like NFTX and NFT20 naturally create pools. These pools must be composed entirely of the floor price NFTs in the collection, because users deposit the more valuable NFTs in the collection into the pool, and their NFTs will be purchased and/ Or replace it with a lower-value NFT. For example, if someone deposits a zombie punk (the most valuable) in the Floor Punk NFTX vault, another collector will immediately buy Floor Punk tokens to buy the zombie punk.

NFTX tries to alleviate the problem of floor price by creating parameters in the NFTX vault, requiring NFT to have specific standards (such as characteristics, records, etc.). NFTX facilitates this by letting collectors create multiple vaults for different types of NFTs. For example, there is a Cryptokitty floor price vault and a 0th generation Cryptokitty vault, in which only Cryptokitty with metadata reflecting the 0th generation is allowed to be added to the vault. NFT20 aims to solve the floor price problem by enabling NFT sellers to create a decentralized Dutch auction within the NFT20 asset page, thereby obtaining a higher amount of ERC20 tokens for the NFT project.

NFTX and NFT20

Although both of these protocols have been online for more than a year, the V2 upgrade of NFTX in late June has proved very successful in accumulating NFT. In just a few months, NFTX has absorbed a large number of high-value NFTs with its top liquidity vault consisting of CryptoPunks (PUNK), HashMasks (MASK) and CryptoPhunks (PHUNK).

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

In contrast, NFT20 has more NFTs in its liquidity pool, however, the average value of these NFTs tends to be lower (its TVL is significantly lower than NFTX), and the NFT growth of the agreement has stagnated in the past few months.

In the past few months, the cost of NFT20 has dropped significantly. Although the cost of NFTX has also decreased, it still remains at 50% of its historical high in August.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

It is worth noting that all fees from the NFTX vault are borne by the Stakers of the vault, while on the contrary, the fees from the NFT20 market are directly borne by all MUSE pledgers. Although at the current stage, the NFT financialization agreement does not need to directly obtain fees, but NFTX has a credible path to generate fees in the future.

NFT Fragmentation Protocol

Asset fragmentation is becoming more and more common in the traditional financial system. Traditional financial assets ranging from real estate to artworks to cash flow are creating innovative solutions to segment these asset classes to attract more buyers.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Source: Jump Capital

Although existing startups try to use their own proprietary networks and systems to segment assets, encrypted networks provide more open, liquid, and composable solutions.

Some protocols have adopted fragmented tokens, among which Niftex is the earliest one. It allows NFT owners to create “fragments” (scores) of NFTs as fungible tokens. Niftex was recently acquired by an unknown entity, but circumstances suggest that large exchanges may be the acquirer. During this period, users can access their shards, but cannot create new shards.

At the same time, there are now two main agreements that are in a leading position in the field of NFT fragmentation: Unicly and Fractional.

Unicly

Unicly is a permissionless platform that allows users to combine NFT collections and fragment them by creating uTokens. Then the collected fragments (ERC-721 and ERC-1155 tokens) can be traded, mixed with AMM and used for income farming on Unicly instead of going to a third-party exchange.

Once an NFT collection is tokenized, a specific collection (such as uPunks, which is an ERC-20 token representing the NFT collection) is locked in Unicly’s smart contract until there are enough token holders to choose from the collection Unlock the collection. JennyDAO, Unicly’s largest vault, has chosen to collect and manage all their NFTs on Unicly. uJenny tokens are used to manage the DAO’s vault. As of now, DAO must reach the 50% threshold to unlock the collection.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

The surge in the number of fragmented NFTs roughly coincides with the peak of this year’s NFT market cycle. Unicly’s usage declined slightly, partly due to the launch and popularity of Fractional, a fragmented competitor.

UNI C token

Unicly conducted a basically fair token release in May, of which 90% of UNIC tokens can be provided to the community through liquidity mining, and 10% are reserved for the core development team. UNIC can be obtained by staking UNIC and convert it to xUNIC. In addition, 0.05% of all trading volume on the Unicly exchange is used as a fee to repurchase UNIC. The monthly minting rate of UNIC tokens has been reduced by 5% to ensure that the supply will never reach 1 million.

Fractional

Fractional allows anyone to buy, sell and mint fragmented NFTs. The owner of an NFT or NFT collection can use Fractional to fragment their tokens. The curator is basically the asset manager of each fragmented NFT or NFT collection, and collects fees from each auction. Collectors can create fragments of an NFT as replaceable tokens, which can be combined to redeem the NFT, or they can purchase the basic NFT at a price higher than the reserve price. Any buyer can bid for NFT or Bundle products at the reserve price, and the reserve price is set by most of the holders. For example, if the real-time valuation of the Art Blocks Curated Bundle is 175 ETH, but the reserve price is 230 ETH, the token holders of the Art Blocks bundle stated that unless someone bids at least 230 ETH, they will not accept any sale of the entire Bundle.

If some NFT owners want to sell the entire NFT, they first vote on the reserve price. If a buyout occurs or the ETH deposit is greater than or equal to the reserve price, some NFT owners will be able to redeem part of their tokens. Currently, 2277 NFTs are locked on the platform.

So far, Fractional’s transaction volume of fragmented tokens has exceeded 1.5 billion U.S. dollars, which is quite impressive considering that the agreement was recently released.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Similar to most transactions, this story is a long-tailed story, and several NFT collections on Fractional account for a large proportion of transaction volume. Two memes, The Doge NFT and Etherrock #72, accounted for more than $300 million in transaction volume.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

PartyBid is an agreement that allows anyone to initiate a “party” to bid collectively in any public auction. It uses Fractional smart contracts to facilitate its bidding process. PartyBid only recently started to support Opensea auctions, and we expect this will bring more activities to PartyBid and Fractional.

Unicly and Fractional

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

Unicly was established earlier than Fractional, and still maintains more vaults and higher TVL. However, since June, Unicly’s TVL has dropped significantly (about 50%), which may be due to new players entering the field and gaining a larger share of NFTs, which usually end in Unicly. Note that the above chart checks the vault on Fractional, it can have multiple NFTs, but the total amount of NFT locked on Fractional is still about 10% of all NFTs locked on Unicly. Similar to the situation with NFT20 and NFTX, both NFTX and Fractional have fewer NFTs, but the average NFT/collectibles they have are more valuable than their competitors.

The main difference between the two protocols is what users can do after acquiring their fragmented tokens. With Fractional, users can sell or take tokens to third-party exchanges, such as SushiSwap. On the other hand, Unicly is an AMM that allows users to use their uToken to participate in staking or profit farming. Although it has fewer functions than Unicly, Fractional is more user-friendly, especially for new NFT users.

The world of fragmented tokens

Even from NFTs to fragmented, replaceable tokens, there are still many interesting usage scenarios outside of DeFi in which owners can participate. Like NFT, the system can be used to:

  • Gate community or DAO
  • Use scores to unlock content
  • Provide copyright fees
  • In-game/PFP avatar

The ETHLisbon hackathon project, defragment.art, enables curators of fragmented vaults to create new derivative NFTs that can be minted by the original NFT’s cent owners. This unleashes utility for the scattered NFT community and has the opportunity to build and manage together.

Notes on bridging NFT exchange and fragmentation protocol

Although these agreements are essentially a competition for NFTs, their use is not necessarily mutually exclusive. As discussed earlier, each NFT liquidity category has a different set of features and may have better performance, depending on the user’s preference for what they want to achieve. For example, NFTX may be more suitable for specific NFT asset classes. For example, Sorare issued dozens of equally valuable cards around the same player. NFTX or NFT20 can also be used to improve the underlying pricing of NFT collections with a large number of underlying assets. On the contrary, fragmenting NFTs through collections or single collections enables DAO to create a combination of different assets (BAYC + floor Punks + non-floor Punks), which makes it possible to create a more valuable and liquid NFT bundle.

However, it is worth noting that many of these agreements tend to converge on how they provide liquidity and are investments in NFTs (Fractional and Unicly) or single NFTs (NFTX and NFT20) with unique value in a collection of similar values. Combine to create a liquidity pool. But these agreements are still competing for liquidity, and liquidity will naturally be pooled in several agreements.

Explain in detail the major NFT liquidity agreements such as NFTX and Unicly to discuss the future of NFT financialization

The future of NFT liquidity

With the continuous development of the NFT market and the addition of new users, the liquidity problem of NFT needs to be solved urgently. Currently, NFT financialization is solved through liquidity and fragmentation agreements. As traditional asset classes are issued as NFTs, financialization agreements will become more and more important. In addition, as non-fungible assets are accepted as collateral for DeFi agreements such as Maker or Compound, finding alternative ways to add these non-fungible assets to the system may make meaningful improvements in the event of a liquidity crisis.

Importantly, composability will enable these financial NFT agreements to be further developed and integrated with other agreements. Fractional has used Party Bid to enable strangers to crowdfund and buy NFTs, such as Nouns. Elsewhere, Genie aggregates between NFT20 and NFTX to provide instant liquidity for NFT and facilitate high-volume transactions. This further enables easy NFT behavior, such as purchasing a large number of floor NFTs from a given collection. Existing NFT liquidity agreements will have a unique opportunity to benefit from new agreements, utilize their existing functions, and support new user behavior.

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