Satoshi Nakamoto believes that bitcoin is a self enforcing prophecy. By analogy, if NFTs can achieve the same consistency of beliefs and choices as bitcoin, we also have reason to think that the value of NFTs can be continuously strengthened in the long-term Nash equilibrium. Of course, the anchoring of beliefs and choices is floating. At present, NFTs are far from reaching the consensus of bitcoin, so it is naturally difficult to control or ensure such anchoring.
To solve this problem, it means that we still need to increase the conditions that support the Nash equilibrium equation - the intrinsic value and use value of NFTs. In fact, the truth is very easy to understand. Teacher Guo Jingming once told us in his youth pain literature that "love without matter is like a plate of loose sand." he highly refined the essence of materialistic values. Therefore, interest and belief are only necessary and insufficient conditions. Only when the real value is improved, the demand will be rigid and the choice will be firm.
It is not difficult to see that there are two ways to open the demand side in the market:
Take a step to the right to improve investment attributes -- NFT financialization
Take a left step to improve consumption attributes -- NFT commercialization
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Next, we will discuss these two ideas separately.
1. NFT financialization: defi x NFT = NFT fi
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NFT financialization is not a novel topic. As early as the first half of 2021, we have seen many discussions around this narrative (see iosg, 1kx, hashkey and other research reports for details). Because NFT itself is a token standard on the chain, including erc20, erc721, erc1155 and other protocols, it is a very direct and robust logical chain transmission to regard it as an investment product and further extend and explore its financial attributes and derivatives. So the question is: (1) can NFT financialization solve the demand? (2) To what extent can NFT financialization open up the demand side of NFT?
We believe that the financialization of NFTs can help expand and enhance demand to a large extent, mainly based on the following two points:
Enhance NFT consensus by combining defi play. When NFT is combined with the defi protocol, it can reduce the threshold of participating in the NFT market and the cost of education. Because the transaction entry threshold for non-traditional financial instruments is relatively high, players often assume higher transaction risks when they lack knowledge and information about this unique or exotic asset, thus hindering more long tail buyers from entering the market. The lack of sufficient transaction depth and market confidence will naturally delay the accumulation of consensus on the overall value of NFTs.
Enhance tradability and stimulate liquidity through securitization. By converting illiquid NFT assets into tradable securities, NFTs can be used as collateral like traditional securities assets to help cut and disperse the underlying asset pool and credit risk. With the birth and application of NFT assets and their derivatives, Web3 participants can spread risks to a wider range of categories through the way of division of positions, so as to benefit themselves.
On the basis of the above cognition, we think we can first focus on the following three directions in the NFT fi track:
Exchanges: establish NFT instant trading pairs
Collaborators: using NFTs as collateral
Derivatives: develop NFT derivatives
A. Exchanges
A big bottleneck of traditional pending order exchanges like opensea and looksrare lies in their inability to provide instant liquidity for NFTs, which further fails to improve capital efficiency. The most straightforward and effective way to solve this problem is to build an instantaneous trading pair of NFT (erc-721) and ft (ETH / erc-20).
AMM is undoubtedly an excellent form to realize this idea. In the past, fragmented NFT flow pool solutions such as nftx and nft20 have successfully realized the value aggregation and averaging of the same series of NFT collections. However, the problem is that a single NFT is represented by a fixed number of FTS, which is similar to the constant product algorithm of X * y = k of uniswap v2. However, there is a great difference between NFTs and FTS in circulation, so it is easy to lead to insufficient NFT market depth and high slippage.
Another upgraded AMM mechanism, represented by sudoswap, has improved this problem to a great extent. On the one hand, it allows LP to set the parameter variable Delta by itself through the binding curve in the form of constant, linear or exponential, thus freeing the freedom in the quotation mode and controlling the deterioration of the sliding point of large orders. On the other hand, what is different from traditional AMMS such as nftx is that sudo saves the process of converting NFTs into erc-20, and players can choose to set up unilateral or bilateral trading pools. Therefore, this kind of AMM based on the joint curve to the constant product AMM can be considered as V3 to V2 of uniswap.
However, the current NFT AMM mechanism on the market still simply homogenizes NFTs into FTS, which to a large extent only applies to game NFT assets with medium and long tails. It is far from a satisfactory liquidity solution for head NFTs with obvious content characteristics and large price differences in collections. At the same time, in terms of user operation flow and joint curve setting, the processing of the existing platform is very rough, and it is expected that some simple step functions and data analysis interfaces for reference can be added in the future.
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B. Collaterals
Considering that the current mainstream NFT lending is actually based on blue chip PFP NFTs, we can first take the traditional art collection lending market as a reference. Historically, the financial paradigm of obtaining loans by mortgaging art collections has existed in the traditional banking industry for a long time. The valuation of the art collection loan industry has already accounted for a quarter of the total value of the global art market. Deloitte and Arttactic estimated in last year's Art & finance report (p193-202) that the total amount of mortgage loans for global art collections had exceeded 24 billion US dollars, an increase of 10.7% year-on-year. In addition, relevant studies in the past have also pointed out that during the economic depression, the borrowing demand for art collections will increase based on geography.
Then the next question that arises is, where does this demand for mortgage loans come from?
We believe that compared with tokens, market entrants tend to be less willing to sell their blue chip NFT collections directly. However, holding NFTs for a long time also means that a large amount of funds will be locked in illiquid assets. Therefore, on the one hand, when the market environment is good, holders can easily find better short-term speculation opportunities. Naturally, using NFTs as collateral for temporary lending to release liquidity will be a good option; On the other hand, when the economic environment is poor, holders will tend to take advantage of the excess mortgage method in defi agreements such as compound and AAVE to hold more cash to prevent potential or sudden shortage crises while ensuring that NFTs in hand are not lost (this also explains why the default rate of overall NFT lending is low).
In general, we can divide the NFT mortgage lending solutions currently on the market into four categories: Peer-to-Peer (P2P), peer-to-peer pool (P2P pool), mortgage bond warehouse (CDP) and over-the-counter lending (OTC):
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C. Derivatives
Financial derivatives are contracts or financial instruments generated around underlying assets. Common financial derivatives include prediction, futures, options and so on. Usually, financial derivatives have the characteristics of high risk and high return, and are widely used to hedge and disperse risks. Taking real estate as an example, buyers can buy the senior tranche CDO without holding the original assets (actual real estate), but they also face the possibility of default. With regard to underlying assets such as NFTs, we also observe that emerging derivative agreements are emerging in the market, trying to further activate the liquidity of the NFT market and reduce transaction costs. Simply put, we can divide NFT financial derivatives into four categories: futures, options, insurance and structured products.
NFT futures schemes represented by nftprep and nfcures can help realize long-term and short-term trading of NFT assets and boost profit and loss leverage. But this also puts forward higher requirements for the price feeding of Oracle machines and the depth of market makers' supply pools. At present, the main products on the market are still at the stage of testing the network.
NFT option schemes represented by jpex, nifty, etc. allow users to hedge the floor price fluctuations of NFTs in their hands by buying call or put options, and reduce the speculation threshold of NFTs to a certain extent. But at present, several projects are also in their early stages, facing liquidity difficulties.
Insuring NFTs that are scarce / high net worth or represent off chain assets is also a risk transfer method worth exploring. Considering the characteristics of NFT, it needs to be adjusted on the basis of traditional insurance mode.
Index funds such as index coop JPG established according to different NFTs or NFT products, as well as buy first and pay later projects represented by cyan and cedar, are all good explorations of NFT structured products.
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In the past research, we have interpreted and sorted out some of the above-mentioned lending and derivatives projects, and more will be further discussed in the future NFT fi report.
2. NFT commercialization: new consumption x NFT = NFG
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Commercialization of NFTs is a very interesting topic, because it may mean subversion of the whole big consumption track. But before discussing the commercialization of NFTs, we need to answer one question first:
Can NFTs be regarded as traditional goods?
Fundamentally speaking, the existence of consumer goods is to solve and calm the widespread demands and worries in Maslow's pyramid. The primary purpose of people buying and consuming bulk commodities must not be to speculate or make profits, but to use their unique functional value to alleviate their own pain in the short term. To give a few simple examples, we buy rice to eat, cars to walk, games to entertain and coffee to refresh ourselves. From this, it can be inferred that when a commercial item is purchased mainly for the purpose of using and exchanging its own functional attributes rather than seeking profit return, it should be regarded as a consumer goods.
By following the underlying logic of public consumption and combining with the current background of the times, we can make a hypothesis to be verified, that is, if NFTs can achieve:
Primary purchase purpose: de speculation
Popular recognition of endogenous culture
Scale coverage of functional categories (assets)
It can be nested into the narrative logic of traditional goods and consumer goods.
If NFTs can be directly equated with traditional goods, an idea worth discussing, but not necessarily right, will be to shift the investment logic of web2 e-commerce to the NFT marketplace track of Web3.
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Then, returning to the main topic, what are the directions of the commercialization of NFTs? What usage scenarios can it represent?
We believe that all digital certificates that have (1) incomplete homogeneity and (2) benefit from ownership. In fact, any product with these two kinds of attributes can be expressed in the form of NFT. And an interesting concept arising therefrom will be non-homogeneous goods (NFG). This narrative concept of combining virtual assets with real economy can further broaden the practical use value and future application scenarios of NFTs to a great extent.
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NFT related commercialization use cases (picture source: @ shivsakhuja)
Simply put, we can divide NFG into private goods and public goods according to its different characteristics. Among them, the private type can be subdivided into two paradigms: transferable and non transferable / soul binding (SBT). The public type is mainly based on cc0/
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