Financialization of NFT: How to make NFT more liquid?

Similar to assets in DeFi, NFTs (non-homogeneous tokens) also require similar primitives, such as lending, liquidity, and asset management, which are areas that are currently being built. In addition, although NFTs fundamental value proposition lies in its uniqueness (NFT each is unique) , but interchangeability ( fungibility ) is very important for increasing mobility and NFTs financialization.

Financialization of NFT: How to make NFT more liquid?

NFT fragmented layout, drawing: Messari

Liquidity tokens have thousands of buyers and sellers, and each NFT transaction requires only one buyer and one seller, which means that NFT liquidity is low . So far, some projects focused on financializing NFTs are trying to make NFTs as interchangeable and liquid as possible.

NFT liquidity

Similar to physical collections (such as trading baseball cards), NFTs face the problem of insufficient liquidity, especially for items that are not highly valued. Although the NFT market is on the rise, we usually see that the potential of this asset has not been exploited. The NFT transaction volume on Ethereum alone exceeded $13 billion, and this number will continue to grow as new types of assets are tokenized on the blockchain.

Financialization of NFT: How to make NFT more liquid?

Above: The growth of NFT’s cumulative trading volume (orange line) and weekly trading volume (blue line), as of November 22, 2021.

Currently, the market for blue chip NFTs (such as CryptoPunks ) has the most liquidity, but because they are concentrated and expensive , most NFT collectors cannot obtain them.

NFT Liquidity Agreement

Most NFT liquidity agreements use one of these two methods : The first method is to create liquidity for NFTs by creating a liquidity pool. Individuals can deposit similar NFTs in the liquidity pool and use Redeem them at any given time . For example, protocols such as NFTX and NFT20 adopt this approach. The advantage is that they can be effectively constructed based on the liquidity pool of NFT assets and become an NFT market.

The second way is to NFT debris into smaller pieces so that these smaller sections can be used as homogenization tokens to trade , such as the one NFT 10,000 pieces of debris into ERC20 homogenization tokens The two agreements, Unicly and Fractional , use this approach. This second method reduces the purchase cost of a small part of the entire NFT, thereby improving liquidity, similar to the US Internet broker Robinhood splitting the stock, so that individuals do not need to buy a whole share worth $1,000. Sla stock, but a small portion of it can be purchased for $100.

The four NFT liquidity agreements, NFTX, NFT20, Unicly, and Fractional, hold a total lock-up value (TVL) of nearly US$80 million . As shown below:

Financialization of NFT: How to make NFT more liquid?

Above: The TVL growth of the four major NFT liquidity agreements, as of November 1, 2021.

Currently, the Unicly agreement has the largest market share among the four agreements, with TVL accounting for 43%. NFTX liquidity pool agreement ahead of NFT20 . And Fractional has accumulated a considerable market share since it went online at the end of July this year. As shown below:

Financialization of NFT: How to make NFT more liquid?

Above: Since its launch, the TVL market share of the Fractional agreement (the top gray part) has grown rapidly, but the Unicly agreement is still the dominant part. The data is as of November 1, 2021.

NFT Liquidity Pool & Market Agreement

Let’s first study the two main NFT liquidity pool protocols: NFTX and NFT20 .

1) NFTX

NFTX is a market and liquidity agreement aimed at realizing the buying and selling of NFTs . NFT collectors can deposit the entire NFT into a vault on NFTX and mint exchangeable tokens vTokens (NFTs in each vault are the same series of NFTs) . These vTokens represent the The value of the NFT deposited. At any time, the NFT collector can use these vTokens to randomly purchase another NFT asset from the vault . Alternatively, individuals can also redeem specific NFTs from the same vault by paying additional fees.

Financialization of NFT: How to make NFT more liquid?

In order to earn fee income, collectors must pledge their vTokens to their respective liquidity pools (such as Sushiswap). Every time someone buys or sells NFT, the pledger can earn fee income.

One feature that supports the NFTX model is that users can obtain instant liquidity of NFTs with the help of highly liquid vTokens . For example, holders of BAYC (Boring Ape Yacht Club) can instantly deposit their “Boring Ape” NFT into the NFTX vault and obtain BAYC vTokens. The holder may not pledge his BAYC vTokens, but choose to sell his BAYC vTokens through a decentralized exchange (such as Sushiswap). Of course, if the liquidity of a certain vTokens is poor, the price at which NFT holders can sell NFTs in this way may be lower than the price on a trading platform such as OpenSea , but in this way they can get instant Liquidity , so even if the price is lower, it is usually worth it.

Recently, NFTX has partnered with Futureswap to provide NFT perpetual contracts , enabling speculators to short or long the derivatives of NFTs in the NFTX vault.

2) NFT20

NFT20 is a decentralized NFT exchange that allows individuals to trade, sell and exchange NFTs. Similar to NFTX, NFT20 allows NFT holders to add their NFT (such as Cryptopunk) to a liquidity pool. In return, they will receive interchangeable ERC20 tokens (such as 100 $Punks ) in a specific liquidity pool. tokens). ERC20 using these tokens, individuals can buy NFT respective mobility cell (such Cryptopunk) or by Uniswap other exchanges sold.

In addition, these NFT ERC20 tokens can be used as liquidity to be deposited in a liquidity pool on Sushiswap or Uniswap, thereby increasing liquidity for this token, thereby making the underlying NFT more liquid. Some NFT20 liquidity pools also provide liquidity mining incentives, and users can obtain NFT20’s local token MUSE .

In the existing NFT liquidity pool of NFT20, the liquidity of the four NFT series Boring Banana’s Co, Cyber ​​Kongz, Wrapped Moon Cats and Gutter Cats accounted for about 50% of the TVL in the agreement. 

The local governance token MUSE of the NFT20 protocol maintains a supply of 1 million, of which 500,000 MUSE was distributed to the player community of the Very Nifty game in September 2020; in addition, 300,000 MUSE is reserved for liquid mining rewards; the remaining Of the 200,000 MUSE, 50% (ie 100,000 MUSE) was allocated to NFT20 DAO, and 50% was reserved for the founding team of the agreement.

Every time 1 NFT is deposited into the NFT20 agreement, the agreement will mint 100 fungible ERC20 tokens (as described above), of which 5% of the tokens are allocated to the NFT20 agreement. The NFT20 agreement will exchange these 5% of ERC20 tokens into ETH, and then use ETH to purchase MUSE. Finally, 50% of the purchased MUSE will be allocated to the pledger of MUSE tokens.

3) The reserve price issue

Floor price is the lowest price of NFT assets in a certain NFT series, and is a widely tracked indicator in the NFT field. In NFT series such as CryptoPunks or BAYC, the reserve price is usually set by the least scarce NFTs in the series.

Obviously, liquidity pools created by protocols like NFTX and NFT20 need to be composed of NFTs in a certain NFT series, because if a user deposits a more valuable NFT into the pool, the NFT will be purchased and/or Replace with a lower value NFT. For example, if someone deposits a zombie Punk (this is the most scarce Cryptopunk) into a Punk NFTX vault with a reserve price, then another collector will immediately buy the zombie Punk.

NFTX attempts to alleviate this reserve price problem by creating parameters in the NFTX vault. These parameters require the deposited NFT to have certain specific standards (such as characteristics, records, etc.). NFTX allows NFT collectors to create multiple vaults for NFTs of different levels . For example, in the case of CryptoKitty (NFT), there is both a Cryptokitty reserve price vault and a (most scarce) original Cryptokitty vault (only Cryptokitty that reflects the original metadata can be deposited in this vault).

In contrast, NFT20 aims to solve this reserve price problem by allowing NFT sellers to create a decentralized Dutch auction on the NFT20 asset page , so that sellers can obtain a larger number of ERC20 tokens when selling NFTs.

4) NFTX vs. NFT20

Although both NFTX and NFT20 have been online for more than a year, NFTX’s V2 upgrade at the end of June this year has shown that it has been quite successful in accumulating NFTs. In a few months, NFTX has significantly attracted a large number of high-value NFTs . The most liquid vaults in the agreement are CryptoPunks ($PUNK), HashMasks ($MASK) and CryptoPhunks ($PHUNK). composition.

In contrast, the NFT20 protocol has more NFTs in its liquidity pool , although the average value of these NFTs is lower (so the TVL in the NFT20 protocol is significantly lower than NFTX), and the NFT20 protocol’s NFT growth has been in the past It has stagnated in a few months. As shown below:

Financialization of NFT: How to make NFT more liquid?

Above: Since July this year, NFTX has continued to acquire more NFTs, while the growth of NFT20 has relatively stagnated.

In the past few months, NFT20’s fee income has fallen sharply; although NFTX’s fee income has also declined, it still remains at 50% of the historical high level in August. As shown in the following figure:

Financialization of NFT: How to make NFT more liquid?

Above: Monthly fee income of the NFT20 agreement (black bar graph) compared to the monthly fee income of the NFTX agreement (red bar graph)

It is worth noting that all fee income from the NFTX vault will be owned by the pledgers in the vault, while the fee income in the NFT20 market will be directly owned by all MUSE pledgers. Although there is no need to directly capture fees for the NFT financialization agreement at this stage, the NFTX agreement has a reliable way to generate fees in the future.

NFT Fragmentation Protocol

Asset fragmentation has become increasingly common in the traditional financial system. From real estate to artwork to cash flow, traditional financial assets are creating innovative solutions to fragment these asset classes into smaller parts to attract more Buyers.

Financialization of NFT: How to make NFT more liquid?

 Source: Jump Capital

Although some start-up companies have tried to use their own proprietary networks and systems to fragment assets, blockchain networks provide more open, liquid, and composable solutions .

Currently, some protocols have begun to fragment tokens, among which the Niftex protocol is the earliest one, which allows NFT holders to fragment NFT into exchangeable tokens. Niftex was recently acquired by an unknown entity, but the situation suggests that a large exchange may be the buyer.

At the same time, there are currently two major protocols that are leading the way in the field of NFT fragmentation: Unicly and Fractional .

1) Unicly

Unicly is a permissionless platform that allows users to gather NFT collections and fragment them by creating uTokens . These NFT collectibles (ERC-721 tokens or ERC-1155 tokens) can be traded after being fragmented. The Unicly platform directly provides an AMM (Automated Market Maker ) for users to trade or carry out income farming without going to A third-party exchange .

When a certain NFT collection is tokenized, the specific collection will be locked in Unicly’s smart contract until enough token holders choose to unlock the NFT collection. For example, JennyDAO, the largest vault in the current Unicly agreement, has chosen to collect and manage all their NFTs on Unicly. uJenny tokens are used to govern JennyDAO’s treasury. So far, JennyDAO has reached the 50% threshold to unlock the NFT series.

Financialization of NFT: How to make NFT more liquid?

Above: The usage of Unicly protocol shows a downward trend.

The peak number of fragmented NFTs is roughly the same as the peak of this year’s NFT market cycle. Currently, the usage of the Unicly protocol has declined slightly, partly due to the launch and popularity of its competitor Fractional .

The Unicly agreement carried out a basically fair token release in May, of which 90% of the local token UNIC was used for liquidity mining in the community, and 10% was reserved for the core development team. Users can staking UNIC for liquidity mining, and the staking operation will transform UNIC into xUNIC. In addition, 0.05% of all trading volume on the Unicly exchange is used as a fee to buy back UNICs. UNIC’s minting rate will be reduced by 5% every month to ensure that its supply will never reach 1 million coins.

2) Fractional

Fractional allows anyone to buy, sell and mint fragmented NFTs. NFT holders or owners of the NFTs series can use Fractional to fragment their NFT into ERC20 tokens . The curator on the Fractional platform (curator, who is about to fragment NFT into ERC20 tokens) is essentially each NFT or NFT series asset manager. They fragment the NFT and obtain fee income from the auction. Collectors can fragment the NFT into interchangeable ERC20 tokens, which can be combined to redeem the NFT, or can be used to purchase the underlying NFT at a price higher than the lowest price. Any buyer can bid for the NFT at the lowest price, which is set by most holders of the NFT shards.

If the owners of a fragmented NFT want to sell the entire NFT, they must first vote for its lowest price. If there is a buyout or the ETH deposited by the buyer is greater than or equal to the minimum price, then the fragmented owners of the NFT will be able to exchange their NFT fragments for ETH. Currently, 2,277 NFTs are locked in the Fractional agreement.

As of now, the transaction volume of fragmented tokens on the Fractional platform has exceeded 1.5 billion U.S. dollars , which is quite impressive considering that the agreement has only been launched recently. See below:

Financialization of NFT: How to make NFT more liquid?

Similar to most transactions, the few NFT series on the Fractional platform account for a large proportion of its transaction volume . Two memetic NFTs, Doge NFT and Etherrock #72 , accounted for more than $300 million in transaction volume. See below:

Financialization of NFT: How to make NFT more liquid?

PartyBid is a platform that allows anyone to initiate a “party” ( biding party) to bid for NFTs in a collective fundraising way . The platform uses Fractional smart contracts to implement its bidding process. PartyBid has just recently started to support Opensea auctions, which is expected to bring more activities to PartyBid and Fractional.

3) Unicly vs Fractional

Unicly was established before Fractional and still maintains a much higher vault and a much higher TVM. However, since June, Unicly’s TVL has fallen sharply (by about 50%), which may be due to other newly entered agreements entering the field of NFT fragmentation and attracting a large portion of the NFTs that should have been acquired by Unicly. Currently, all NFTs locked in the Fractional protocol still account for only about 10% of all NFTs locked in Unicly (as shown in the figure below). Similar to the situation of NFT20 and NFTX, both NFTX and Fractional agreements hold fewer NFTs, but the average value of the NFTs/series held by the two is higher than that of their competitors.

Financialization of NFT: How to make NFT more liquid?

The main difference between Unicly and Fractional lies in what users can do after obtaining fragmented tokens: As far as Fractional is concerned, users can go to third-party exchanges (such as Sushiswap) to sell these tokens; on the other hand, Unicly is an AMM (Automated market maker), allowing users to use their uTokens for pledge or profit farming. Although Fractional is functionally like Unicly, Fractional is more user-friendly, especially for NFT novice users.

Although these agreements are essentially competing around NFTs , their use is not necessarily mutually exclusive. As discussed earlier, each NFT liquidity protocol has a different set of functions, which may perform better based on the preferences of the user who wants to achieve the goal. For example, NFTX may be more suitable for a specific NFT asset class. For example, Sorare (NFT fantasy football game) will release dozens of the same cards around the same star, all of which have the same value. NFTX or NFT20 can also be used to improve the lowest price pricing of NFT series with a large number of reserve-priced NFT assets. In contrast, by fragmenting NFTs, DAOs can create a portfolio of different assets (such as BAYC + reserve price Punks + non-reserve price Punks), which may create a more valuable and liquid NFT series .

It is worth noting that many of these agreements focus on how to provide liquidity. Nevertheless, these agreements are still competing for liquidity, which will be aggregated in a few agreements.

Financialization of NFT: How to make NFT more liquid?

The future of NFT liquidity

With the continuous growth of the NFT market and the increase of new users, the liquidity problem of NFT needs to be solved urgently. At present, the financialization of NFTs is solved through liquidity and fragmentation agreements. As traditional asset classes are issued in the form of NFTs, financialization agreements will become more and more important. In addition, as NFT becomes collateral for DeFi protocols such as Maker or Compound, finding a way to add these NFT assets to the system may enable the system to be meaningfully improved in the event of a liquidity crisis.

Importantly, composability will enable these NFT financialization agreements to be further developed and integrated with other agreements. Fractional has used PartyBid to enable strangers to join forces to raise funds and purchase NFTs like Nouns. Elsewhere, Genie aggregates NFT20 and NFTX to provide instant liquidity for NFTs and facilitate the realization of large-scale transactions. This further implements simple NFT behaviors, such as purchasing a large number of reserve price NFTs from a certain NFT series. In addition, the existing NFT liquidity agreements will have a unique opportunity to benefit from the new agreements, as these new agreements will utilize the functions of the existing agreements and initiate new user behaviors.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/financialization-of-nft-how-to-make-nft-more-liquid/
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