The NFT market has exploded since January last year and has become a hot field leading the market in the last year.
According to data from Dune Analytics, in January this year, the weekly trading volume of the NFT market reached $6.15 billion. Up to now, the cumulative transaction volume of the NFT market has reached more than 60 billion US dollars. During this time, a large number of popular NFTs appeared, such as Meebits, CryptoPunk, BAYC, etc. NFT has also led the blockchain industry to achieve another breakthrough. We can see that many friends around who did not belong to this circle have also changed to NFT avatars, which confirms the popularity of the NFT market.
However, as the entire crypto market began to run downward, the NFT market was inevitably affected, and the transaction volume and transaction volume began to decline rapidly.
With the contraction of the entire environment, the NFT market, which did not have much liquidity in the first place, cooled down rapidly, which put investors who entered before into a dilemma. The main reasons for the poor market liquidity are as follows:
- 1. The threshold is high. The price of blue-chip NFTs, which are popular in the current market, is already very high. The high price threshold makes ordinary investors discouraged, and assets can only be traded and circulated among some users with a large amount of funds. The market that has lost a large base of investors is inevitably illiquid;
- 2. Price discovery is difficult. NFT transactions are currently mainly point-to-point transactions between users. Due to the non-homogeneous nature of NFTs, each NFT is unique. Even for the same type of NFT, the price is difficult to unify.
At present, the market has not formed a good consensus on the price of NFTs, especially the current blue-chip NFTs are mainly pictures, and the pricing is subjective. Different users have very different estimates of the price, and there is no good value discovery tool in the market. , in the absence of fair pricing, it is difficult to facilitate peer-to-peer transactions, and transaction matching usually takes a long time. In addition, the price evaluation systems of blue-chip and non-blue-chip NFTs are also very different, and it is difficult to generalize.
- 3. Most NFTs lack practical value. After buying, the holders mostly wait for the price to rise and sell, and the few application scenarios make the transaction difficult.
Low liquidity and difficulty in price discovery, in turn, interact with each other. The lack of price consensus will affect the transaction frequency of NFTs, and if the liquidity of NFTs can be improved, the pricing of NFTs will be easier after the transaction frequency increases.
In order to improve the liquidity of the NFT market and revitalize the NFTs held by investors, the NFT financial track came into being.
Financialization gives illiquid assets liquidity by converting them into securities-like products. The market began to think, we have experienced the development of the traditional financial industry and witnessed the rise of the Defi industry, so can the NFT industry replicate the path of these industries? For holders of NFTs, how to obtain greater value and higher capital efficiency?
In the following, we will briefly sort out the subdivisions of the current NFTFi track, and briefly introduce some of the representative projects.
Current NFTFi track layout
Image credit: Fundamental Labs
The NFTFi track is currently mainly divided into several parts: NFT trading and aggregators, OTC trading, lending, leasing, liquidity pools, liquidity providers, fragmentation and valuation pricing .
1. Transactions and Aggregators
Trading and aggregators are places where users buy and sell NFTs. They are the earliest areas in NFTs, and they are also the sub-tracks with the largest market share. Representative products include Opensea and Looksrare. As can be seen from the figure below, the current major NFT trading activities are concentrated on these two platforms.
Daily trading volume of NFT on each platform
2. OTC transactions
Over-the-counter (OTC) refers to the direct transaction between the two parties without going through a third-party platform. Users can create a trade request on the platform and then wait for other traders to accept the request or negotiate a price. Users can also create trader-specific deals to sell assets to a pre-agreed and communicated trader.Transaction participants can agree on transaction details through the chat section, and when a transaction is determined, both parties need to send their assets to a security contract that automatically executes the transaction without the need for third-party involvement. Representative projects in this field include Sudoswap, X2Y2, tader.xyz, etc.
Sudoswap is a non-custodial trading platform that has no platform transaction fees, optimized gas fees, and can trade ERC-20 and ERC-721 assets at the same time.
Users can create an exchange transaction for a specific object (wallet address) on Sudoswap, add the assets they hold and the assets they want to exchange, and then send the exchange code to the transaction object to complete the exchange.
At present, Sudo has launched an automatic market maker contract – SudoAMM, which focuses on the liquidity of NFTs. Similar to the liquidity pools on Uniswap , anyone can create NFT and ETH liquidity pools and provide NFT or ETH liquidity to the pools, or exchange NFTs for ETH or ETH for NFTs in the pools.
3. NFT lending
Lending products are one of the earliest and most popular types in Defi. As the infrastructure of the financial market, lending products will have broad prospects for development in the foreseeable future.
NFT lending uses NFTs as collateral to obtain encrypted funds loans through over-collateralization.
To become collateral, the market is required to have a certain consensus on the value of NFT. On the one hand, everyone recognizes the value of NFT, and on the other hand, the price of NFT is generally accepted by the market.For these reasons, the NFTs currently accepted as collateral are mainly some blue-chip NFTs such as CryptoPunk.
Lending businesses rely on loan-to-value (LTV) for risk control. When the value of NFT falls below the value of the loan, the collateral needs to be liquidated, so the valuation and pricing of NFT becomes the basis for mortgage lending. Base. Pricing difficulties are common in the NFT market, which has become an important factor restricting the development of NFT lending.
There are currently three main modes of NFT lending:
1) Peer to peer mode;
2) Peer to pool mode;
3) Centralized mode.
Representative projects include NFTFi.com, DropsDao, Nexo, etc.
1) Peer to Peer
In the peer-to-peer lending model, borrowers need to place orders to show their borrowing needs, and then find a matching lender.
The current peer-to-peer model has a high interest rate, about 30%-100%, and the loan-to-value ratio is about 50%, that is, an NFT with a mortgage price of 100ETH can obtain funds worth 50ETH.
The disadvantage of this model is that it takes a long time to match borrowers and borrowers, and when the borrower is in urgent need of funds, the lender has a much greater say than the borrower. The representative platform for the peer-to-peer model is NFTFi.com.
NFTFi.com is a lending platform launched in 2020. The borrower mortgages the NFT they hold on the platform, and shows their borrowing needs, which mainly include the loan amount, loan period, interest rate, and the currency of accepting funds. The lender can browse all the borrowing needs on the platform, and then select the order that he or she intends to provide, and then provide the loan funds after negotiating the interest rate and time limit with the borrower. When the loan expires, if the borrower can repay it on time, the NFT will be returned to the borrower, and if it cannot be repaid, the NFT will be transferred to the lender.
2) Peer to Pool
The peer-to-peer pool model is that NFT holders mortgage NFTs to the NFT pool to obtain loans. Under this model, the borrower does not need to wait for a successful match with the lender, the time to obtain the loan is shortened, and the capital efficiency is higher. The peer-to-peer pool model also usually adopts over-collateralization, and the pricing of NFT is based on the floor price data of the series in the market in the recent period. This model relies heavily on the pricing accuracy of the NFT oracle machine, because the pricing of NFT determines the amount of borrowing that can be obtained by staking NFT, which directly affects the platform’s capital risk control.
DropsDao provides instant loans to borrowers in the form of NFT pools.
NFT holders mortgage the NFT they hold into the pool of this category. The price of the collateral is determined by the floor price of the category in the market collected by the platform, and then obtains a loan of about 30% of the value of the collateral. The platform pays a certain interest.
Lenders earn interest in the pool by injecting mainstream crypto assets or stablecoins into the pool.
The centralized NFT lending platform mainly targets institutions, and only provides financial services to large customers who hold blue-chip NFTs. A more representative platform is Nexo.io.
Nexo is a centralized lending platform where users can borrow NFTs and other crypto assets or lend their crypto assets to earn interest. Nexo’s NFT lending service is aimed at institutional users who hold blue-chip NFTs such as cypherpunks and BAYC worth more than $500,000 . Users are equipped with special account managers, and users who pass the review can get instant loans.
4. NFT Leasing
By retaining the ownership of the NFT and only transferring the right of use, the lease of the NFT is realized, so that the idle NFT can generate greater value.
At present, the popular types of NFTs mainly include avatar pictures, domain names, Metaverse virtual land, game equipment, etc. Although these types of NFTs have poor transaction liquidity due to high prices, they have a certain value in use, making short-term leases another optional value flow method. For the lessor, it is possible to obtain working capital without transferring the ownership of the NFT. For the lessee, it is possible to obtain the right to use the NFT for a period of time without paying a high price.
Representative projects include IQ Protocol, Double Protocol, etc.
Double Protocol is a rental agreement mainly for gaming NFTs.
Double’s technical team proposed Ethereum ‘s 4907 proposal, which eventually passed the review and became the ERC-4907 protocol. This agreement specifies some lease-related properties in NFT, such as user, lease term, etc.Through this agreement, the separation of NFT ownership and usage rights can be achieved, so that NFT leasing has a unified and reliable standard. This is the 30th ERC standard currently adopted on Ethereum. Before the adoption of this standard, there was no NFT leasing agreement that could be commonly used on Ethereum, and leasing-related business could only be achieved through the development of smart contracts by each project itself.
The holder of NFT can select the NFT to be rented on Double Protocol’s platform, and set the shortest and longest period and rent of the rental and then publish the rental information. After the lessee pays the rent after selecting the rental period, he can get the same amount of money with the NFT. The corresponding doNFT representing the right to use the NFT. When the lease expires, the contract automatically terminates the lessee’s right to use.
5. Liquidity Pool
Users can create an NFT vault (vault) and receive transaction fees generated by NFT transactions in the vault by providing NFT liquidity (depositing NFT) to the vault. Representative projects include NFTX, nft20, etc.
NFTX can help users convert inconveniently tradable NFTs into more tradable ERC-20 tokens.
Users can deposit NFTs into the vault of NFTX and obtain a homogenized ERC-20 vToken. Holding vTokens can exchange NFTs in the vault 1:1. When exchanging NFTs, it is random, or Redeem specific NFTs with an additional 5% service fee.
Users who have obtained vTokens can go to Dex (such as Uniswap, Sushiswap ) to sell vTokens to obtain liquidity, or they can buy vTokens in the Dex liquidity pool and exchange them for NFTs in the vault.
PUNK Vault for NFTX
When vToken is traded in Dex’s liquidity pool, it enters the price discovery stage. At the same time, since vToken can be exchanged for NFT in the vault at 1:1, it means that the value of vToken is endorsed by NFT, and it can also achieve a similar value. The effect of NFTs coming together. For example, if the user thinks that the price of a cypherpunk NFT is lower than the price of PUNK in the market, the user will tend to store the NFT in the library to exchange it for PUNK and sell it in the market. During this transaction process, the floor price of a certain type of NFT can be gradually discovered.
For collectors who hold NFT with low liquidity, they can obtain the handling fee for NFT transactions in the NFT vault by depositing NFT in the NFT vault, and the vToken obtained can be exchanged for stable currency after being sold to activate the liquidity. sex.
6. Liquidity Providers
The decentralized NFT market-making protocol mainly collects users’ NFTs and provides staking rewards to these users, and provides liquidity to the liquidity pool such as NFTX. Representative projects include FLOOR.DAO and MetaStreet.
Image credit: Fundamental Labs
FloorDao mainly includes three roles:
Provide NFT to Floor users, and users can get $FLOOR tokens at a discounted price after providing NFT to the protocol.
Stakeors can earn rewards denominated in $sFLOOR after staking $FLOOR into the treasury.
Floor treasury earns vault revenue by providing NFT liquidity to NFTX, and transaction fees by providing token liquidity to Sushiswap, all of which flow back to the FLOOR vault.
As a non-fungible token, each NFT is unique and cannot be divided like FT. This feature also limits the liquidity of NFT to a certain extent. But the ownership represented by NFTs can be divided.
Fragmentation is the creation of shards/fragments of a single NFT, dividing the ownership of the NFT into multiple shares and trading as fungible tokens, for example, converting 1 NFT to 10,000 FT. This approach improves liquidity by lowering the threshold for purchases. Fragmentation of NFTs is similar to a “stock split” in traditional financial markets, by splitting one stock of higher denomination into several shares of lower denomination. Similar to Robinhood’s case of fragmenting the stock so that instead of buying a full sheet of Tesla stock, buyers can buy multiple Tesla stock fragments. Representative projects include Fractional.art and Unic.ly.
Fractional.art is built on the Ethereum network and supports NFT collectors to lock NFT assets in smart contracts and then issue ERC-20 homogenized tokens. These fungible tokens represent the holder’s ownership of the NFT.
Users can set how many FT tokens to split NFT into on Fractional, and set a reserve price for the deposited NFT. After depositing NFT to VAULT, they will receive the corresponding amount of FT. For example, a cryptopunk collector can go to Deposit a CryptoPunk#7171 in the HOODIE Vault on Fractional, and then receive 10,000 HOODIEs. Users can gift these 10,000 HOODIEs to others or keep them for themselves. Those who hold these FTs have the ownership of part of the NFTs, and all these FT tokens can be used to redeem the deposited NFTs.
When the liquidity pool of HOODIE and ETH is established on DEX such as Uniswap, users can sell HOODIE on it.
For NFTs deposited in the vault, if a user bids a price higher than the set reserve price, the NFT can be auctioned, and users who hold FT tokens will receive the auction proceeds in proportion.
8. Pricing Valuation
As can be seen from the above, the valuation and pricing of NFTs is an important infrastructure for the entire NFT financial industry. Both NFT transactions and lending depend on this service. Accurate pricing plays a vital role in improving the liquidity of the NFT market. effect. A sound pricing system can shorten the time it takes to match buyers and sellers and promote the development of the lending market. At present, many projects have been explored in the field of NFT pricing. The main valuation methods are as follows.
In the Defi project, Oracle is an important part of the operation of the entire system, and it is a relatively common practice to use oracles as a price reference. Oracles are also widely used in the NFT financial field to achieve price links with external markets.
A well-run oracle requires reliable data sources and reasonable data aggregation methods. Currently, the two most used data sources in the NFT field are Opensea’s API and the floor price of NFTX. As the most commonly used trading platform in the NFT field, Opensea’s price has great reference value, but the way Opensea sellers bid also creates some room for price manipulation; NFTX’s floor price discovery mechanism is also mentioned above. , relying on the mechanism of similar aggregation, under the action of arbitrage activities, it is easier to eliminate price deviations in NFTX transactions and find the fair floor price of a certain series.
The agreement weights the prices from Opensea and NFTX, as well as the prices from some other sources, and uses the final result as a pricing reference, which is a common model at present.
b) Machine Learning
Some protocols use Machine Learning algorithms to build models that use past transaction data as input to make valuation predictions. The more representative projects are NFTbank, UPShot and Banksea.
Similar to oracles, machine learning also processes metadata after input, and then produces results. The difference is that the algorithm used in machine learning needs to define the characteristics of NFTs, group them according to these characteristics, and then process the price data of NFTs in different groups, and finally predict the prices of NFTs according to the characteristics of the groups.
Image credit: Fundamental Labs
The P2P model is the price discovery of NFTs in P2P lending activities.
In the lending activities, the borrower and the lender need to reach a consensus on the price of the NFT to complete a match, so the lending platform can also play the role of the market.
In this market, there is a great deal of latitude in price assessment, and it is also influenced by the urgency of borrowers’ need for funds, which can lead to a certain price deviation. In addition, the pricing in the lending market is finalized, and once the pricing is completed, it will not change dynamically in a short period of time.
d) Rational Agents
The Abacus protocol determines the valuation of NFTs through rational actors that maximize profits.
Abacus creates a liquidity-backed valuation system. Users can create different NFT pools on Abacus and then invest ETH liquidity into the pools. The value of NFTs in the pool is equal to the total value of ETH locked in the pool at any point in time.
Due to the lack of liquidity in the NFT market, the need for financialization was born. The market has attempted and explored the financialization of NFTs in several directions such as trading, lending, leasing, liquidity pools, and fragmentation. However, these explorations and attempts are still in the preliminary stage due to the difficulties of valuation and pricing, lack of price consensus, and lack of practicality.
The NFT market itself is developing and growing, and it has also achieved an initial breakthrough. Looking back at the development path of Defi and traditional finance, we believe that NFT finance is a track with great potential. With the continuous improvement of infrastructure and industry innovation, I believe that more complete solutions will emerge in the future to empower the entire NFT industry.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/overview-of-nftfi-track-layout/
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