Several feasible directions to make NFT-Fi popular

The financialization of NFTs is a difficult journey, and it is difficult for us to understand all aspects of it. But it can be seen that the primary and secondary markets for illiquid assets are continuing to grow, which is a positive sign for those assets that were originally illiquid.

Making NFT-Fi popular

The financialization of NFTs is a difficult journey, and it is difficult for us to understand all aspects of it. But it can be seen that the primary and secondary markets for illiquid assets are continuing to grow, which is a positive sign for those assets that were originally illiquid.

Several feasible directions to make NFT-Fi popular

(Source: IOSG Ventures)

NFT-Fi1.0 awaiting adoption

As the size of the asset class grows, so does investor risk. The accompanying risks such as illiquidity and volatility cannot be ignored. Essentially, NFTs are illiquid assets, but their ETH denomination makes them volatile and subject to currency risk, as investors tend to measure profit/loss in a single accounting method – USD or local currency.

Although it is difficult to change the value measurement method of NFT, NFT enthusiasts have also created many alternative protocols for Aiden, such as NFTX, Unicly and Fractional. Although their mission is to bring liquidity to these markets, they themselves have encountered liquidity problems:

NFTX tracks the collectible floor price of its ERC 20 tokens; this means that the protocol’s coffers are more of an interest from holders of low-value NFTs. Most NFT investors will not use the protocol unless they wish to speculate on the NFT floor price, which is actually driven by market sentiment. Fractional and Unicly offer a more custom approach that doesn’t require tracking floor prices, but relies heavily on large numbers of investors and giant whales to speculate on NFT prices. Acquiring the entire collection is also difficult (but not impossible) as it requires the participation of whales/investors with deep pockets to get the ERC20 token holders of the collectible out.

Most of the assets deposited in fungibility protocols are also PFPs that are considered unproductive assets, and there seems to be no real reason to borrow them other than vanity.

Classification of NFTs

1. Productive NFTs

The concept of productive NFTs arose with the rise of guilds such as YGG and the intellectual property rights of collection holders such as BAYC.

2. Royalty NFTs

Royalties-backed productive NFTs are gaining traction, a wave likely started by Yuga Labs and Music NFTs. They earn revenue from commercially licensed NFTs and distribute the revenue to holders.

These royalty-based NFTs are unlikely to be lent/leased, as there is no “trigger” by the holder – royalties are charged as long as the underlying IP is commercially licensed. Typically, the transaction process will be initiated by a centralized entity such as Yuga Labs or Recur Forever. As a holder, the royalties collected are passive income.

Game NFT

Gaming NFTs provide core utility to their holders, which in turn spawns guilds and learners across the industry. Guilds that act as asset managers and resource allocators buy game NFTs in bulk and then rent them out to a group of players who use the NFTs to play games like Axie. Rewards earned in P2E games are then distributed back to players, guilds and middlemen called managers. Currently, this entire process takes place in a centralized manner, and a high level of trust needs to be established between managers and participants.

Access issues arise for gaming NFTs where supply is scarce and demand (players) is unlimited. NFTs also don’t generate passive income – they need to be used in-game for rewards, aka “triggering”. To make NFTs productive, owners now have an incentive to lend/lease NFTs. Insufficient supply and profit potential are incentives for players to borrow/rent from owners. Some players may buy directly from the marketplace, but from Axie’s case study we know that most “scholars” or players are not crypto-native, own ETH, and are primarily incentivized by $SLP income.

Currently, most crypto gamers are kryptonite players. As “play to earn” and guilds become mainstream, it is clear that more “time” and “renown” players will enter the market. In the future, a new group of players will inevitably emerge – star players, that is, e-sports teams in cryptocurrency games, who play high-stakes PvP games for high token rewards.

Several feasible directions to make NFT-Fi popular

Source: IOSG Ventures

As the game matures, new players will join. As a result, their player composition will change – skewed from kryptonite players to time players. However, just like in F2P games today, where most of the revenue is earned by a small group of players, money and fame-oriented players will dominate trading activity in the marketplace and earn in-game rewards through PvP tournaments. As this happens, guilds and asset owners will need to distribute their NFTs to the right players. We expect the decision-making process to become more data-driven than it currently is, driven by the key metrics shown in the chart below.

Several feasible directions to make NFT-Fi popular

Source: IOSG Ventures

Guild operation (centralized governance)

Centralized approaches to guild operations management have been increasing. The case study below shows how a guild manages its Axie assets. The administrator, Ronin Wallet, has joined Axies to natively distribute NFTs to academics via QR codes. These codes are assigned to scholars. Sub-accounts can use NFTs to play games, but not move assets. They carry out their day-to-day payroll, and the guild managers will manually transfer these earnings.

Key issues highlighted here include:

a) Too many administrative issues – managing QR code assignments and paying salaries 

b) Scholars must trust and rely on managers/guilds to pay their benefits on time 

This inspired guilds and founders to create their own smart contract solutions. After the realization, the guild took on the main role of being the asset manager. Their main responsibility is to allocate the right resources to the right players based on their past performance to maximize their returns on NFT assets.

Large guilds such as YGG and Merit Circle may create their own custom solutions, but micro-guilds (defined as guilds with < 100 players and < $10,000 in financial resources) will use more common SaaS platforms such as GuildFi, GuildOS , 0xAdventure, Blockchain Space, etc.

Assuming data becomes the next key, all guilds will try to gain as much advantage over other guilds as possible and subscribe to some services to track players’ off-chain data. Platforms like GuildFi do this with their guild IDs and leaderboards — features that are prominent in mobile games like Clash of Clans. While centralized platforms are efficient, they require players to have provable records or allow the platform to collect the required information. While this is a common practice among internet companies these days, tracking player data to cryptocurrency natives may not be a viable solution.

Forward direction

While centralized solutions have changed the game for most guilds, the centralized nature of tracking player data and services creates a single point of failure, as the platform evolves from a SaaS platform to a DeFi hub for NFT lending, leasing, staking solutions , this becomes crucial.

Player data that was once used by the guild to make allocation decisions will be used as a credit score for those players who want to use their future earnings as a loan/collateral to borrow ERC20 or NFT. Renting NFTs is done in escrow, so any hacking or restrictions on players by the platform will result in the loss of players’ funds and assets. This is especially a high-risk situation for players from sanctioned countries. Heavy reliance on the platform as an exchange or gateway for fiat.

The road to decentralization

The hope is that lending, leasing, staking solutions will be available on-chain with minimal human intervention. The outer framework for most of these solutions has been established and will continue to evolve as the entire industry becomes a scalable infrastructure through the use of L2 and faster L1. 

As more games embrace blockchain features like Monster Hunter or DeHorizon, the majority of player data will be accessible using Dune, Graph or CyberConnect. NFT lending and leasing can be accessed using vaults such as ReNFT or IQ Protocol. Pegaxy, a game on Polygon, already has internal borrowing capabilities, eliminating the huge need for guilds as asset managers. NFT staking protocol that allows players and guilds to buy NFTs, earn rewards from them, and use the proceeds to pay off debts (Alchemix model).

Next, let’s deconstruct some of the main challenges of DeFi currently holding back guilds/gaming:

1. Third-party NFT loan/lease agreement

These solutions, such as ReNFT and the IQ protocol, take on the role of the middleman and charge a small publicity fee. A P2P leasing/lending protocol would allow asset owners to deposit and lock NFTs in a vault, and then rent them out to interested parties in exchange for a small rental fee. The actual NFT never leaves the vault, but the NFT’s right to play (utility) is forwarded to the renter’s address.

The key challenge with third-party protocols is that they require games to integrate with their protocol. The game does not gain any material benefit from having third parties do so. Due to the open-source nature of cryptocurrencies, games can easily spin off their vault versions of Ronin QR codes/reNFTs. Ronin’s recipe is currently completely closed source, and a key obstacle to the game developing its own version is the lack of resources and energy to build auxiliary modules that don’t directly contribute to gameplay.

However, some games like Pegaxy have built in this functionality. Technically, they don’t need a guild, but continue to work with them to ensure community engagement and as a means of acquiring customers. We can expect more games to continue on this path in the future. 

2. Mortgage plan

The mortgage scheme of game NFT has a unique positioning in the market. Premium NFTs will remain a paid service as the free-to-play business model continues to prevail. Premium NFTs = enhanced game rewards, so guilds and asset owners will continue to buy NFTs.

Using debt to fund NFT purchases will be the first choice for some star players (aka esports teams) as opposed to cash or revenue sharing models (guilds). Since players have different play styles, esports teams are very sensitive to the ownership of their assets when playing MMO or TCG games. The potential looting of these assets by guild or centralized guild platforms or asset owners on ReNFTs is a threat to their income, so owning these assets makes the most sense.

A decentralized staking scheme will continue to have several factors that require significant governance/human oversight due to the nature of NFTs and game economies. Creating smart price tokens for NFTs at different price tiers is an open problem and a bottleneck for all DeFi projects that want to use NFTs in the system.

in conclusion

We see GameFi and guilds spawn in 2021. Many new primitives, ideas, incentive structures are being experimented, and although the field is relatively early, it is ripe for the financialization of NFTs.

Some noteworthy aspects:

On-chain gameplay 

On-chain player identity system 

Trustless NFT delegation 

Provide gamers with transparent credit scores 

GuildFi may start with a centralized system until we solve some structural problems: like price oracles for NFTs, smarter evaluation and analysis, and better risk models for games and their economies. Once these three issues are resolved, the GuildFi industry will begin its decentralization path. Of course, it may take a few years before we see mass adoption.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2022-03-20 09:14
Next 2022-03-20 09:17

Related articles