While non-homogenized tokens (NFTs) have been around since early 2018, they started as a niche use case (collecting crypto-cats) among a fringe niche community (cryptocurrency enthusiasts). Three years later, we are witnessing the adoption and development of this technology by artists, designers, game developers, musicians and writers.
This is because NFT, like Bitcoin and decentralized finance (DeFi), is a financial, social and political movement. They make ownership and provenance of digital content traceable and allow people to buy content from creators around the world with near-instant value transfer. This movement is particularly driven by individuals from industries or regions that have difficulty directly cashing in on their work.
That said, we are still far from mainstream market adoption and realizing the full potential of this technology. The first phase of adoption will involve the tokenization of media assets, both off-chain and on-chain native assets, while the second phase will involve the financialization of these assets using the DeFi protocol to improve their value proposition and enable new use cases.
In this article, I’ll discuss why the DeFi protocol can be applied and beneficial to NFT, outline several financial use cases that leverage NFT, and explore what the future of NFT assets might look like. Let’s get started!
DeFi is the fuel for NFT
The “financialization” of NFT through the DeFi protocol solves many of the problems that NFT will face today, specifically.
Because NFT assets are unique by definition, buyers often need specialized knowledge of a particular asset in order to make an informed buying or selling decision. In addition, the asset’s scarcity can quickly drive up prices beyond the affordability of retail buyers. These two factors increase the barriers to entry for new buyers and impede the accumulation of value in the NFT market itself; because part of the value of an NFT transaction comes from its underlying community, restricting purchasers who buy products with low volume but high variety of transactions (the long tail segment) will make it more difficult for NFT transactions to penetrate the entire Internet (resulting in low commodity liquidity). the DeFi protocol can Reduce the capital and knowledge required to participate in the NFT market and open the floodgates to a new wave of retail investors.
For a given NFT transaction, having a liquid market of buyers and sellers can lead to better price discovery because it increases the speed at which NFT transactions can be traded in the secondary market (i.e., the more transactions, the better the perceived fair market value of NFT transactions). This makes it easier for sellers to liquidate their work, and for inexperienced buyers to enter new markets because they can more easily exit their investments if they wish.
Ownership and provenance are important attributes of NFT, and they are uniquely supported by license-free crypto networks, but their value proposition has yet to fully resonate with retail buyers. The inability to gain greater utility, such as access to cash flow, content and experience, all of which will be improved by the DeFi protocol, will make it more attractive for mainstream users to own NFTs.
Synergy of DeFi and NFT
There are a number of different use cases to increase DeFi and NFT synergies.
Banks have introduced traditional art collections as collateral to provide loans since the 1980s, a sizeable business; Deloitte estimates the global value of secured art loans at $21 to $24 billion in 2019.
For more information on the introduction of art collections as collateral for loans by banks in the 1980s see: https://www.artsy.net/article/artsy-editorial-jeffrey-deitch-citibank-christo-created-art-market
Your Art Collection Can Be Used as Loan Collateral” is available at: https://www.privatebank.bankofamerica.com/articles/your-art-collection-as-loan-collateral.html
According to Deloitte estimates the global value of art secured loans is detailed at: https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/lu-art-and- finance-report-2019.pdf
We can also do the same for NFT by offering non-recourse “non-recourse loans” for digital art, collectibles, virtual land and other content. rocket ran an experiment in early 2020 and NFTfi is currently building a bilateral marketplace on ethereum. However, this is still in the early stages and NFTfi has about $2.5 million in loans to date.
Non-recourse loans are detailed at: https://www.investopedia.com/terms/n/nonrecoursedebt.asp
Details of the experiments conducted at the beginning of Rocket are available at: https://medium.com/@AlexMasmej/introducing-rocket-get-a-loan-against-your-nfts-f67b1b5738f0
NFTfi details at: https://nftfi.com/
Total NFTfi loans are detailed at https://nftfi.com/app/stats
(Editor’s Note: This chart is the data at the time of the editor’s edit and has been changed from the article, please click on the link for real-time values)
Accepting NFTs as collateral for lending in a loan agreement increases the utility of the NFT to the owner while increasing the economic activity of the agreement – a win-win.
An important and relevant component is pricing, which is a broader issue for NFT assets, but is particularly important if the assets are to be used in a financial environment. In the absence of secondary market transactions, especially during liquidation, it may be necessary to assess the value of NFT transactions. This is a widely used practice in traditional art and collectibles markets, either through licensed appraisers or informal venues such as pawn shops. UpShot, a network that prices NFTs through participant appraisals by incentivizing participants.
UpShot details at: https://upshot.io/
ICO is the first killer application on Ether, as the platform is ideal for global capital formation and distribution; this use case also applies to NFT, where users from around the world can invest in creative works at various stages of their lifecycle, which will drive a renaissance in digital art and provide a new business model for a variety of content creators.
For example, a writer named Emily Segal was able to crowdfund $50,000 (25 ETH) for her next novel, distributing 70% of the work in the form of $novel tokens, which represent partial ownership of NFT. It is mentioned in the acknowledgements of this book that if NFT is sold on the secondary market at a higher price, holders of the $104 NOVEL token are entitled to a proportional share of the profits as well as other benefits.
Emily Segal for more information: https://twitter.com/khole_emily
Emily Segal crowdfunding event details at: https://fortune.com/2021/04/09/nft-book-author-advance-emily-segal/
Owning written content can also provide a new business model for publishers. For example, the NFT of a New York Times op-ed recently sold for $560,000, likely well above the company’s advertising revenue from the article.
Column article NFT selling event details at: https://decrypt.co/62856/new-york-times-nft
In the traditional business world, cooperatives are companies owned by their members and usually require members to pay a certain financial contribution to join. Decentralized Autonomous Organizations (DAOs) are the cooperative enterprises of the cryptocurrency industry and have become the standard way to manage the DeFi protocol.
We have already seen the appeal of these “collectible partnerships” as they allow groups to invest in NFT transactions that any individual would shy away from. and collectively deciding which NFTs to buy and sell.
“Collectible cooperative enterprises” can form spontaneously and grow organically. For example, PleasrDAO initially pooled their funds to purchase a specific NFT, and then they expanded their business by purchasing an NFT from Edward Snowden for $5.5 million. In both cases, DAO won the auction by outbidding a wealthy individual buyer.
DAOSaka details at: https://medium.com/metacartel/daosaka-daico-c8b3752acebd
FlamingDAO details are available at: https://flamingodao.xyz/
PleasrDAO details at: https://twitter.com/pleasrdao
PleasrDAO’s initial NFT purchase is detailed at: https://foundation.app/pplpleasr/x-y-k-13623
PleasrDAO’s NFT purchased from Edward Snowden is detailed at: https://foundation.app/Snowden/stay-free-edward-snowden-2021-24437
Economic Attribution “Economic Attribution
Public records of sources enable use cases that were previously impossible or difficult to implement, such as royalties on artwork and other assets sold on the secondary market.
Rarible, SuperRare and Zora all implement royalties with varying degrees of functionality and interoperability. mirror implements this functionality at the application level with a feature called “split splits” that allows authors to distribute a portion of the economic value of their work to others when it is sold.
For splits details see: https://jk.mirror.xyz/3iLll7F39DjeVlJo4XNlfunl-C0xD3l2X8sjIJoB9vc
Rarible details are available at https://rarible.com/
SuperRare details are available at: https://superrare.co/
Zora details at: https://zora.co/
Royalties can be applied to content other than digital art and music. For example, the “renegade” dance on TikTok made Charli D’amelio an overnight sensation. NFT could solve this problem by providing the ability to pass on such content and provide economic attribution to the creator when it is passed on. In the future, athletes, dancers, photographers and other creators will have their passes minted directly through NFT to receive accolades and revenue for the work they are producing.
For details of the “renegade” dance, see: https://www.youtube.com/watch?v=1DdigPwdKmo&ab_channel=Ilmagicomondodilele
Jalaiah, the creator of the “renegade” dance, can be found at: https://www.nytimes.com/2020/02/20/learning/lesson-of-the-day-the-original- renegade.html
Planck has recently experimented with this concept, publishing the results of a scientific study and casting it as an NFT, and will be implementing a feature called “SplitStream” that will allow NFTs to use a portion of future sales directly for other NFTs. of the NFT directly to other NFTs.
Source: Matt Stephenson
Details of Planck’s experiments with the concept can be found at: https://glyphx.medium.com/post-venture-capital-and-the-crypto-nobel-prize-29847faf3f08
Details of the experimental procedure can be found at: https://twitter.com/stephensonhmatt/status/1374348407272247298
For more information on the “SplitStream” feature see: https://twitter.com/stephensonhmatt/status/1381632170020732930
In the context of academia, this aims to stimulate and fund academic research by creating a social graph of citations and tying together NFT revenues to provide it with research.
The ability to exchange one NFT for another is important as it improves liquidity and price discovery by opening up potential trading pairs, but the lack of liquidity in the design of the NFT itself makes this difficult to achieve.
The 0x protocol first solved this problem in 2019 with Zeip-28, which addressed this issue by providing an order book-based NFT-to-NFT transaction where buyers could use one NFT to buy another NFT, but buyers had to specify the NFT they wanted to buy. 0x later implemented property property-based orders, allowing buyers to create orders to buy NFTs that satisfy a specific set of properties. assets. In effect, this liquidity based on certain properties (but still decentralized for a given “type” of NFT).
ZEIP-28 details at: https://github.com/0xProject/ZEIPs/issues/28
Property property-based orders are detailed at: https://github.com/0xProject/0x-protocol-specification/blob/master/order-types/property-based.md
Other solutions attempt to facilitate trading by leveraging intermediate fungible ERC20 tokens. NFT20 implements this concept by creating ERC20 tokens, each representing a different type of NFT, and pooling these tokens according to their type. Using a common meter, these NFT types can then be traded across multiple different pools via CFMM (Constant Function Market Maker).
NFT20 details at: https://nft20.io/
CFMM (Constant Function Market Maker) is available for details at: https://medium.com/bollinger-investment-group/constant-function-market-makers-defis-zero-to-one-innovation- 968f77022159
For example, if there is a pool of MASK20/ETH and a pool of MCAT20/ETH, users can immediately exchange MASK for MCAT on Uniswap. this solution is particularly suitable for those collections with a small amount of valuable assets and a large amount of low-value assets.
In addition, due to the atomicity of Ether transactions and the combinability of the DeFi protocol, developers can “Chain Together” multiple intermediate tokens and liquidity pools in a single transaction, thus enabling transactions across various NFTs.
“Chain Together (Chain Together)” for details: https://twitter.com/vasa_develop/status/1380582272580034560
Fractionalized ownership is an effective way to make assets mass marketable and has historically been used for high value assets such as vacation properties. Otis does this by purchasing assets of traditional art and collectibles, storing them in vaults, and issuing shares representing ownership of these assets.
Otis details at: https://www.withotis.com/
NIFTEX is also doing this for NFTs. It allows the owner of a particular NFT to deposit that NFT into a smart contract and issue a “shard” (ERC-20) representing that asset. The most basic NFT can be redeemed by gathering all the “shards” or by buying them out.
NIFTEX is detailed at: https://www.niftex.org/
One can also fragment ownership of a range of assets. Metakovan has done this with the B.20 token, which contains 28 assets, including Beeple’s cryptoart and digital lands in Cryptovoxels, Decentraland and Somnium Space.
B.20 tokens are detailed at: https://b20.metapurse.fund/
The 28 assets included are detailed at: https://opensea.io/accounts/the-b-20-bundle
Index Funds “Index Funds
Index-based investing in traditional financial markets has grown in popularity over the past decade because it provides a transparent, low-cost way to diversify across a variety of markets.
Similarly, NFT-focused index funds allow investors to invest in specific classes of NFTs without requiring them to evaluate specific NFTs.
NFTX does this by creating index funds for various collections, such as Cryptopunks, each backed 1:1 by a base NFT; for example, PUNK-ZOMBIE ERC20 can redeem a zombie Cryptopunks from the pool at any time.
For more information, see: https://nftx.org/
NFT-focused index funds can also improve the liquidity and price discovery capabilities of the underlying NFT and be used to attract additional demand and trading activity from a wider range of users.
Sometimes people want to rent rather than buy, and the art world has embraced this fact for decades – for example, the Museum of Modern art (MOMA) has been loaning out art since 1957. Artists and collectors get an additional source of income, and renters can enjoy the artwork at a lower price.
Source: Ottawa Daily News March 15, 1980
This model is equally applicable to non-reality areas such as the art and digital domains. Today, ReNFT is attempting to achieve this through a peer-to-peer marketplace for NFT leasing. Like most DeFi protocols in crypto, this is currently an over-collateralized solution; borrowers can rent NFT loans by depositing collateral equal to the market value of the NFT loan and additional rent. That said, the EIP-2615 proposal is an improvement at the protocol level, which itself supports the leasing functionality within the ERC-2615 token and no longer requires a margin.
ReNFT details at: https://devpost.com/software/renft
The EIP-2615 proposal is detailed at: https://eips.ethereum.org/EIPS/eip-2615
Yield Guild Games employs a slightly different model in its gaming environment, lending Axies to new players in exchange for a percentage of SLP tokens that are rewarded as the player plays the game. In effect, players are leasing Axies with a portion of their future income.
Synthetics are financial instruments that mimic other instruments. While most financing channels today are not financial instruments in the traditional sense, the concept can still be used to increase the liquidity of these NFT financing channels and lower the barrier to market entry.
One of the problems with generating NFTs on multiple blockchains is that it becomes more difficult to purchase assets. In addition, there may be a group of buyers who simply want to speculate on the price of an NFT transaction, rather than actually own it. For these users, there is an opportunity to provide a consolidated price share for a specific NFT. For example, we could use priceoracle to provide Ether users with a price index for NBA Topshot assets on Flow.
Having said that, some NFTs are indeed financial instruments, such as shares of Uniswap V3 LP. From this perspective, it is possible to combine shares of multiple limited partners to replicate the return structure of various derivatives.
Replication of the earnings structure of various derivatives is detailed at: https://stanford.edu/~guillean/papers/rmms.pdf
The Future of NFT
Over time, we will see more unique, complex and interconnected cryptographic mediums that will leverage multiple DeFi protocols to enable value propositions and use cases that would not be possible in the traditional world. The design patterns here could include, but are not limited to:
Bundlin²: Index Coop could provide retail users with an easy way to access various NFTs by creating an equally weighted Axie, Mask and Punk index fund from NFTX (since they are already ERC-20).
Index Coop details at: https://www.indexcoop.com/
Fractionalizing+Bundling: minting Axies, Catalog record, Cryptopunk and THE Sandbox land shards into 100 ERC-20 tokens and depositing 25 tokens of each asset into charge Particles to mint a shard representing asset diversification basket NFT.
Axies details at: https://axieinfinity.com/
Catalog record details are available at: https://beta.catalog.works/
Charge Particles is detailed at: https://charged.fi/
Composing: Multiple NFTs can be combined together or additional utilities and value layers can be added to existing NFTs. AlchemyNFT is using AutographNFT to implement the latter by providing the ability to sign existing NFTs using digital signatures. Punkbodies are created by allowing users to combine their CryptoPunk (an ERC-721) with a PunkBody (also an ERC-721) to create a Punkster they can download or cast. the implementation locks the original ERC-721 to cast the Punkster NFT, and users can destroy the composed NFTs to unlock the original NFTs. these composed NFTs inherit their original origin and utility, while providing additional features or utility.
AutographNFT details at: https://autographnft.io/
PunkBodies is detailed at: https://www.punkbodies.com/faq
Over the next few years we will see a series of experiments around these concepts and we will see how developers, creators and the community will work together to bring these concepts to life.
Author | Dmitriy Berenzon (2021-04-28)
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/financialization-of-nft/
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