While NFT (non-homogenized tokens) emerged back in early 2018, it started out popular only among a small circle (digital currency enthusiasts) and with a niche use case (digital cat collectibles.) Three years later, we’re seeing artists, designers, game developers, musicians, and writers all start using NFT technology.
This is because NFT is as much a financial, social, and political movement as Bitcoin and DeFi. NFT can digitize the ownership and provenance of digital content, allowing people to buy content from creators spread across the globe, enabling near-instantaneous value transfer. This movement is largely driven by people from industries and regions that have difficulty directly cashing in on the output of their work.
Nonetheless, NFT technology is still far from mainstream adoption and has significant untapped potential. the first phase of NFT adoption is to tokenize on-chain and off-chain media assets, and the second phase is to financialize such assets through the DeFi protocol to enhance their value proposition and enable new use cases.
In this article, I will discuss why the DeFi protocol is beneficial to NFT, present financial use cases that leverage NFT, and explore the future of NFT assets.
DeFi as an Enabler for NFT
Financializing NFT using the DeFi protocol will solve many of the problems faced by NFT, as follows.
Because each NFT is by definition unique, buyers need to have asset-specific expertise to make informed buy or sell decisions. In addition, the scarcity of such assets can drive asset prices skyrocketing beyond the purchasing power of retail investors. It is these two factors that raise the barrier for new buyers to enter the NFT market and impede the accumulation of value in NFT. Since a portion of NFT’s value stems from its underlying community, limiting access to the market to buyers in the long tail makes it more difficult for NFT to penetrate the entire network. the DeFi protocol will reduce the capital and knowledge required to participate in the NFT market, attracting an influx of retail investors.
A liquid market for buyers and sellers around a particular NFT has better price discovery because it increases the speed at which NFTs can be traded in the secondary market (i.e., the higher the volume, the better the perception of a fair market price for NFTs). This allows sellers to better liquidate the output of their work and makes it easier for novice buyers to enter new markets because they can easily exit their investments.
While ownership and provenance are two important attributes that license-free cryptography networks give to NFTs, their value proposition does not fully resonate with retail buyers. the DeFi protocol can enhance the utility of NFTs (e.g., cash flow, content, and experience) and attract mainstream users to own NFTs.
Synergy between DeFi and NFT
There are many use cases for good synergy between DeFi and NFT.
Banks have been launching traditional art collateral lending businesses since the 1980s, and on a large scale. Deloitte estimates that global artwork mortgage volume is as high as $21 to $24 billion in 2019.
NFT can also be used to provide non-recourse loans for digital art, collectibles, virtual land and other content (Author’s note: The security of the claim comes from the collateral provided by the debtor. If a defaulting creditor obtains collateral, it is non-recourse and therefore “non-recourse” regardless of its value.) Rocket is experimenting with this in early 2020. nftfi* is building a bilateral marketplace on ethereum. nft is still in the early stages of development NFTfi* is building a bilateral marketplace on Ether. it is still in the early stages of development, but its loan volume to date is about $2.5 million.
Accepting NFT as collateral in a lending agreement increases both the utility of NFT and the economic activity of the lending agreement. This is a win-win.
An important and related component is pricing, which is a broader issue for NFT, but is particularly important when viewed in a financial context. We may need to value NFT in the event of a shortage of secondary market transactions, especially during liquidation. Appraisals are common in the traditional art and collectibles market. Appraisers are either licensed appraisers or informal platforms such as pawnshops; Upshot is more like the latter, pricing NFT by collecting valuations from a wide range of participants through financial incentives.
ICOs are the first killer application on Ether, as Ether is the ideal global capital formation and distribution platform. This use case is also applicable to NFT, where users from around the world can invest in creative works at different stages of their lifecycle, driving a renaissance in the digital world and providing a new business model for content creators of all kinds.
For example, Emily Segal crowdfunded about $50,000 (25 ETH) for her next novel and gave away 70% ownership of the work in the form of $NOVEL tokens (each $NOVEL token represents a fractional ownership of the novel’s NFT). If this NFT is sold on the secondary market at a higher price, the 104 $NOVEL token holders will be able to receive a pro-rata share of the profits, as well as other benefits, such as appearing in the acknowledgements for the novel.
The digitization of ownership of written content also offers a new business model for publishers. For example, the NFT of a New York Times op-ed was recently sold for $560,000, which has the potential to far exceed the advertising revenue the Times earned with the article.
In the traditional business world, a partnership is owned by its members, who usually need to contribute money to join. A decentralized autonomous organization (DAO) is the partnership of the cryptocurrency industry and has become the standard way to manage the DeFi protocol. a DAO will become even more important to NFT because the assets and community created around NFT will increase by an order of magnitude.
“Collector partnerships” have become a trend because they allow individuals to form groups to invest in NFTs, thus breaking down the barriers of high investment costs.This was experimented with by DAOSaka in late 2019 and is now being tried by FlamingoDAO. Both projects gather money from individuals to jointly decide which NFTs to buy or sell. collector partnerships are formed spontaneously and then grow organically; for example, PleasrDAO began by pooling money to buy one NFT and then expanded to buy Edward Snowden’s NFT for $5.5 million. in In both cases, the DAO outsmarted wealthy individual buyers to win the auction.
Public provenance records make possible use cases that were previously impossible or difficult to achieve, such as royalties on artwork or other assets sold on the secondary market.
Rarible*, SuperRare and Zora offer different features and interoperability in royalty implementation. mirror implements royalties at the application level and offers a “splits” feature that allows writers to distribute the proceeds from the sale of their work to others.
Royalties can also be applied to content other than digital artwork and music. For example, the “renegade” dance on TikTok made Charli D’Amelio an overnight sensation, and Charli (who now has more than 112 million followers) and TikTok have made a fortune, but the original creator of the dance, 14-year-old J’Amelio, has made a fortune. NFT solves this problem by tokenizing such content and giving the proceeds to the original creator. In the future, athletes, dancers, photographers, and other creators will mint their content directly into NFTs and then enjoy the acclaim and financial benefits of their content.
Economic attribution can also be programmed to be distributed to different NFT owners. Planck has recently experimented with this concept by casting the results of a scientific study as an NFT. In addition, Planck will implement a feature called “SplitStream” that will allow for the direct distribution of a portion of future sales from one NFT to other NFTs.
-Source: Matt Stephenson
The “SplitStream” feature is designed to stimulate and fund academic research by creating a citation map and cascading revenue streams for NFT owners.
Enabling trading between NFTs is important because it opens up more potential trading pairs, thereby facilitating liquidity and price discovery, but this is difficult to achieve because NFTs are inherently illiquid.
The order book-based 0x protocol was the first to address this issue in 2019 with ZEIP-28, opening up the ability to trade NFT pairs to users. That is, a buyer can use one NFT to buy another NFT supported by the protocol, but the buyer must specify the NFT they want to buy. 0x has since introduced attribute-based order functionality, allowing buyers to create orders to buy assets that satisfy a specific set of attributes. This feature effectively centralized the liquidity of the various NFTs that had been fragmented based on specific attributes.
Other solutions attempt to use homogenized ERC20 tokens as intermediaries to facilitate transactions. To enable NFT pair trading, NFT20 minted ERC 20 tokens for each type of NFT, pooled these ERC 20 tokens based on type, and then allowed these ERC 20 tokens to be traded across different trading pools using the same unit of account through Constant Function Market Makers (CFMM).
For example, if there is a MASK20/ETH transaction pool and an MCAT20/ETH transaction pool, users are able to instantly buy MCAT on Uniswap using MASK. This solution is particularly suitable for collectibles, as there are only a small number of high-value assets in the collection and the vast majority are low-value assets with a clear floor price. In addition, thanks to the atomic nature of Ether transactions and the combinability of the DeFi protocol, developers can connect multiple intermediate tokens and liquidity pools in a single transaction, thus enabling transactions between various types of NFTs.
Fractional ownership is a way to effectively democratize access to assets and has been used for high-value assets such as vacation properties. otis has applied this approach to traditional art and collectibles, i.e., buying such assets, storing them in a vault, and issuing shares representing ownership of these assets.
NIFTEX* introduces the concept of fractional ownership to the NFT space by allowing the owner of an NFT to store that NFT within a smart contract and issue “shards (ERC 20 tokens)” representing that asset. Collecting all “shards” or a one-time buyout gives full ownership of that NFT. Ownership of a group of assets can also be split. For example, the B.20 token issued by Metakovan contains 28 assets, ranging from cryptographic artifacts from Beeple to virtual lands in Cryptovoxel, Decentraland and Somnium Space.
Over the past decade, index-based investing has gained popularity in traditional financial markets because it provides a transparent and low-cost way to diversify positions across multiple markets. Similarly, NFT-focused index funds allow investors to buy into a particular class of NFTs without having to evaluate a particular NFT.
NFTX is exactly the kind of index fund that specializes in cryptographic collectibles (e.g., Cryptopunk). Each fund is backed by an NFT; for example, holders of PUNK-ZOMBIE ERC20 can redeem a zombie-style cryptopunk painting from the pool at any time. Index funds clustered in NFTs also improve liquidity and price discovery for the underlying NFTs by tapping into user demand and facilitating trading activity.
Sometimes people want to rent rather than buy art. This phenomenon has been prevalent in the art world for decades. For example, the Museum of Modern Art has been in the art leasing business since 1957. Artists and collectors have a new source of income, and lessees are able to own a work of art for a short time at a very low price.
-Source: The Ottawa Journal, March 15, 1980 – The leasing model can also be applied to art and NFT.
The leasing model can also be applied to artwork and NFTs. currently, ReNFT is building a peer-to-peer NFT leasing marketplace. Like most DeFi agreements in the cryptography industry, ReNFT currently uses an over-pledging scheme, whereby the lessee must pledge cryptographic assets equal to the market value of the leased NFTs and pay an additional lease fee. However, the EIP-2615 proposal has been improved at the protocol level by introducing ERC 2615 tokens with their own leasing capabilities, thus eliminating the need for pledges. The game project Yield Guild Games uses a slightly different leasing model, i.e., renting Axie to new players in exchange for a portion of the SLP token rewards they receive during the course of the game. In effect, players are renting Axie with a portion of their future income.
Synthetic assets are financial instruments that mimic other financial instruments. While most NFTs are not financial instruments in the traditional sense, the concept can still be used to enhance the liquidity of these NFTs and lower their market entry barriers. One of the problems with casting NFTs on multiple blockchains is that it makes it more difficult to purchase them. Also, there may be a group of buyers who only want to speculate on the price of a particular NFT and do not want to actually own it. For these users, they can provide a synthetic price exposure for a particular NFT. For example, they could use a price entry mechanism to provide exposure to the NBA Topshot asset on Flow to Ether users. Nevertheless, some NFTs, such as Uniswap V3 LP shares, are indeed financial instruments. From this perspective, we can combine multiple LP shares to replicate the return structure of various derivatives.
The future of NFTs
In the future, we will see more unique, complex and interconnected cryptographic mediums that leverage multiple DeFi protocols to achieve value propositions and use cases that are not possible in the traditional financial industry. Design models that could be implemented include, but are not limited to
Packaged²: Index Coop* creates equally weighted indices of AXIE, MASK and PUNK index funds from NFTX (as they are all already ERC 20 tokens), allowing retail investors to easily buy a variety of NFTs.
Cut + Pack: “Cut” an Axie, Catalog record, Cryptopunk and Sandbox* land separately and mint them into 100 ERC 20 tokens. Deposit 25 ERC 20 tokens of each of these assets together into Charged Particles to mint an NFT representing a basket of fragmented assets.
Combinations: We can combine multiple NFTs together, or attach additional utility and value to existing NFTs; AlchemyNFT’s AutographNFT falls into the latter category, offering the ability to sign existing NFTs using digital signatures; Punkbodies takes the former idea and allows users to combine Punkbodies take the former idea and allow users to combine Wrapped CryptoPunk (an ERC 721 token) with PunkBody (another ERC 721 token) to create a Punkster (punk villain) that can be downloaded or minted. Minting a Punkster NFT locks the original ERC 721 token, and the user can destroy this NFT to release the original ERC 721 token. Combination NFTs inherit the origin and utility of the original token, while providing additional functionality or utility.
In the coming years, we will see a lot of experiments based on these concepts. We’re looking forward to developers, creators and the community working together to bring them all to life.
If you’re also building a project that blends DeFi and NFT, please contact us!
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/homogenization-of-non-homogeneous-objects-the-financialization-of-nft/
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