CoinEx Institution｜From NFT to NFT-fi: Real Demands or False Propositions?

 

It has been much than a twelvemonth since the NFT roar successful 2021. According to NFTGO, the marketplace headdress of NFTs peaked astatine $36.8 cardinal successful March 2022. As the marketplace aboriginal cooled, the trading measurement and marketplace headdress of NFTs started to shrink. This crypto novelty expanded its power beyond the crypto assemblage and fostered a immense market, which besides gave emergence to the operation of NFTs and DeFi. The marketplace has witnessed the quality of NFT lending platforms, NFT aggregators, and NFT derivatives markets, which constitutes the 2nd debut of DeFi Lego enabled by NFTs. However, 1 wonders whether these products were built to conscionable existent marketplace demands and if they person created a mendacious proposition that lacks immoderate worth for marketplace participation. Today, we volition dive into whether NFT-fi is simply a feasible inclination and if it volition gain marketplace recognition.

Figure 1: Market Cap & Volume of NFTs | Source: nftgo.com | As of June 1, 2022

There are galore NFT liquidity solutions and NFT structured products successful today’s market:

1. NFT fragmentation: FT tokens (such arsenic ERC20 tokens) that are issued by dividing the ownership of invaluable NFTs. NFT fragmentation projects see Fractional.art, NFTX, etc.

2. NFT lending markets: Holders tin get short-term loans by collateralizing their NFTs without selling them. Prominent NFT lending markets see BendDAO, NFTfi, and Drops DAO.

3. NFT leasing: Holders gain rents by leasing NFTs to users successful need. NFT leasing projects see Double, reNFT, etc.

4. NFT aggregators: These aggregators, specified arsenic Gem.xyz, bring unneurotic the transaction information of aggregate NFT exchanges, get the champion NFT transaction terms successful 1 stop, and supply users with accrued liquidity and much options.

5. NFT derivatives: NFT derivatives see NFT options similar Putty, arsenic good arsenic NFT perpetual futures contracts specified arsenic NFTprep.

These projects are aboriginal attempts to bring unneurotic NFTs and DeFi. In particular, NFT fragmentation projects and NFT aggregators code the problems of mediocre NFT liquidity and precocious marketplace threshold. NFT lending markets and NFT leasing projects besides absorption connected improving NFT liquidity and superior utilization. Meanwhile, NFT derivatives are much analyzable structured products built to amended superior utilization. However, these projects person not been capable to execute large-scale adoption due to the fact that they look limitations successful presumption of the underlying NFT logic and the improvement space. Next, we volition research the existent demands and mendacious propositions of NFTs.

Real Demands

1. The superior utilization of NFTs needs to beryllium improved, allowing holders to collateralize their NFTs for partial liquidity erstwhile moving retired of cash.

2. The liquidity occupation of NFTs should beryllium addressed, enabling holders to rapidly buy/sell the NFTs they own.

False Propositions Did the superior utilization of NFTs spell higher?

The occupation of NFTs’ superior utilization tin beryllium seen successful 2 aspects: 1) Users request to rapidly bargain and merchantability NFTs, and the transaction frequence should not beryllium affected by the mediocre liquidity of NFTs; 2) Users should beryllium capable to rapidly speech their NFTs for liquidity and get currency for different purposes. When it comes to FT tokens, superior utilization tin beryllium improved done staking, leverage, etc. However, successful the NFT market, determination are lone a fewer ways done which users tin amended their superior utilization. In addition, combining concern with NFT importantly increases the learning cost. Right now, astir NFT holders inactive trust connected the “buy debased and merchantability high” strategy. Moreover, astir specified holders are not the people idiosyncratic of NFT lending projects due to the fact that lone blue-chip NFTs with dependable liquidity and worth statement are accepted.

In presumption of the wide marketplace scale, astir users are absorbed by secondary markets and aggregators with debased operating thresholds, and they person not achieved immoderate large betterment successful superior utilization. As shown successful Figure 2, the fig of caller addresses of Genie and Gem, 2 NFT aggregators, has been connected a dependable rise, with progressively predominant regular transactions. However, arsenic the trading measurement and transaction frequence of the 2 person been deed by the sluggish marketplace conditions of NFTs, Genie and Gem person yet to scope their maximum imaginable for improving the superior utilization of NFTs.

Figure 2: New Addresses and Transactions of NFT Aggregators | Source: Dune @sohwak

Let’s crook to the superior utilization of mainstream lending projects. BendDAO is simply a lending marketplace based connected the liquidity excavation exemplary wherever holders tin get ETH from the excavation aft collateralizing their blue-chip NFTs. Due to caller marketplace fluctuations, a ample magnitude of ETH deposit successful BendDAO’s liquidity excavation has been withdrawn, which resulted successful decreased ETH supply. Yet, the ETH loans person remained astatine astir 19,000 ETH, portion the MA14 proviso stands astatine 46,000. As such, we tin marque the unsmooth estimation that BendDAO’s superior utilization is astir 41%.

Figure 3: Bend ETH Utilization | Source: Dune@cgq0123

Note: MA14 refers to the moving mean successful 14 days, portion MA7 indicates the moving mean successful 7 days

NFTfi is simply a lending marketplace pursuing the P2P model. The amount, involvement rate, and duration of loans connected NFTfi are jointly determined by liquidity providers and NFT lenders, which is much flexible successful presumption of the indebtedness rate. The fig of monthly loans offered via NFTfi accrued from 21 successful May 2020 to 2,000+ successful May 2022, and the maximum monthly indebtedness magnitude reached $27.52 cardinal (March 2022), but this fig lone accounted for 1% of the marketplace headdress of blue-chip NFTs (as reported by NSN-BlueCHIP 10).

Figure 4: NFTfi Monthly Loan Volume by Count/Value | Source: Dune@gideontay

JPEG’d is besides a P2P exemplary lending protocol, and it present lone provides collateralized lending for Cryptopunks, EtherRocks, BAYC, and MAYC. After staking NFT, holders volition person PUSD, a stablecoin, provided by the protocol from the pool. Additionally, JPEG’d besides features a 32% superior utilization bounds connected lending.

Of course, determination are besides different early-stage NFT derivatives platforms, but they person not introduced immoderate mature products, truthful we could not analyse their superior utilization. Despite that, it is foreseeable that specified NFT derivatives volition travel with higher learning costs arsenic they are products designed for nonrecreational traders with greater hazard appetite. As such, their maturation imaginable is constricted successful today’s NFT market.

Asset Pricing and Liquidation Risks？

The pricing of NFTs has been truthful often discussed that it has present go a cliché. People are acrophobic with the contented due to the fact that the terms swings of NFTs volition exposure NFT lending oregon derivatives to liquidation risks. As the NFT prices fell implicit the caller period, BendDAO has started respective liquidation auctions.

Although astir of the lending protocols retired determination person adopted over-collateralization, successful the look of chaotic terms swings, galore NFTs would beryllium liquidated and sold successful marketplaces. This, coupled with the mediocre liquidity of NFTs, mightiness pb to panic selling, which would make downward terms spirals, yet turning the loans into atrocious debts.

The pricing of NFTs is taxable to aggregate factors. Plus, it is besides easy manipulated. For example, large holders could maliciously rise the level terms and past liquidate the NFTs connected purpose, and an NFT could instrumentality a terms plunge owed to hacking oregon astute declaration loopholes. Moreover, NFT pricing could besides beryllium affected by galore intangible factors. For instance, the terms of an NFT could soar if a celebrated idiosyncratic abruptly buys it successful ample amounts oregon if it releases a caller airdrop plan.

As astir lenders cannot accurately estimation the intrinsic worth of their NFTs, they are susceptible to liquidation if they borrowed loans oregon applied leverage. This is besides 1 of the reasons wherefore NFT lending and derivatives person not gained wide adoption: Blue-chip NFT holders are disquieted that they mightiness endure losses successful the supra scenarios, which is wherefore they are reluctant to collateralize their NFTs.

Do blue-chip NFT holders truly request NFT loans?

All NFT lending markets absorption connected blue-chip NFTs, but astir blue-chip NFT holders are not successful large request of loans. To statesman with, specified holders attraction much astir their ownership of the NFTs, conscionable similar billionaires would not usage their collectibles arsenic collateral for loans. Secondly, NFT loans travel with chartless risks, and galore blue-chip NFT holders garbage to use for specified loans aft weighing the risks against the benefits. Thirdly, applying for NFT loans comes with precocious learning costs, and not each idiosyncratic tin recognize the rule down specified loans.

Let’s comparison the idiosyncratic basal of the large NFT lending projects. As of June 15, determination are astir 2.4 cardinal holders successful the NFT market, of which 27,833 clasp blue-chip NFTs (a idiosyncratic volition beryllium regarded arsenic a blue-chip NFT holder arsenic agelong arsenic helium owns astatine slightest 1 specified NFT), according to NFTGO. There are 771 borrowers connected BendDAO, 1,038 connected NFTfi, and 51 connected Arcade. As users indispensable archetypal deposit/collateralize their NFTs earlier applying for a loan, we tin respect each these borrowers arsenic blue-chip NFT holders. It is truthful wide that astir blue-chip NFT holders are not users of NFT lending markets.

Figure 5: Bend ETH Borrowers & Depositors | Source: Dune@cgq0123

Could NFT-fi projects clasp users with the aforesaid aged incentive?

Lending oregon derivatives projects besides carnivore the task of improving the protocol’s liquidity. Most specified projects connection autochthonal tokens arsenic the inducement for recruiting NFT holders and depositors arsenic they spell live. In this regard, these projects lucifer DeFi liquidity mining platforms that pull speculators with precocious APYs. However, the occupation is that they would not beryllium capable to support specified liquidity if the APYs went down. Attracting users with token incentives is inactive the aforesaid aged approach. Though this strategy could make a ample idiosyncratic basal astatine the precise beginning, nary 1 knows whether the protocol could clasp users.

For example, erstwhile the task was archetypal launched, BendDAO airdropped BEND tokens to users who had deposited blue-chip NFTs and ETH. It besides uses BEND arsenic a subsidy erstwhile paying interests. However, the involvement complaint went down erstwhile the BEND terms dropped, which slowed down the maturation complaint of caller users.

As such, attracting users with precocious APYs is lone the archetypal step. To clasp caller users, they indispensable further research the lending mechanisms, code the oracle pricing issue, and mitigate the liquidation risks. Projects should make much flexible products portion expanding the scope of NFT lending. Last but not least, they could besides supply hazard reviews, little the learning cost, and connection much satisfying idiosyncratic experiences.

Conclusion

The improvement from NFT to NFT-fi is simply a process successful which a marketplace grows from its infancy to a much mature stage. However, it is besides inevitably a process that’s afloat of doubts, traps, and problems. As NFT-fi projects question to conscionable existent demands, they volition besides person to look doubts that they are stating mendacious propositions. Today’s NFT marketplace is similar a newborn kid who needs to turn up and instrumentality done challenges. Although NFT-fi mightiness beryllium a large attempt, determination is inactive a agelong mode to go, and NFT-fi projects person to support exploring their underlying logic to gain marketplace recognition.