CoinEx Institution|From NFT to NFT-fi: Real Demands or False Propositions?
June 28 2022 - 2:00AM
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It has been more than a year since the NFT boom in 2021.
According to NFTGO, the market cap of NFTs peaked at $36.8 billion
in March 2022. As the market later cooled, the trading volume and
market cap of NFTs started to shrink. This crypto novelty expanded
its influence beyond the crypto community and fostered a huge
market, which also gave rise to the combination of NFTs and DeFi.
The market has witnessed the appearance of NFT lending platforms,
NFT aggregators, and NFT derivatives markets, which constitutes the
second debut of DeFi Lego enabled by NFTs. However, one wonders
whether these products were built to meet real market demands and
if they have created a false proposition that lacks any value for
market participation. Today, we will dive into whether NFT-fi is a
feasible trend and if it will earn market recognition. Figure 1:
Market Cap & Volume of NFTs | Source: nftgo.com | As of
June 1, 2022 There are many NFT liquidity solutions and NFT
structured products in today’s market: 1. NFT fragmentation: FT
tokens (such as ERC20 tokens) that are issued by dividing the
ownership of valuable NFTs. NFT fragmentation projects include
Fractional.art, NFTX, etc. 2. NFT lending markets: Holders can
borrow short-term loans by collateralizing their NFTs without
selling them. Prominent NFT lending markets include BendDAO, NFTfi,
and Drops DAO. 3. NFT leasing: Holders earn rents by leasing NFTs
to users in need. NFT leasing projects include Double, reNFT, etc.
4. NFT aggregators: These aggregators, such as Gem.xyz, bring
together the transaction data of multiple NFT exchanges, obtain the
best NFT transaction price in one stop, and provide users with
increased liquidity and more options. 5. NFT derivatives: NFT
derivatives include NFT options like Putty, as well as NFT
perpetual futures contracts such as NFTprep. These projects are
early attempts to bring together NFTs and DeFi. In particular, NFT
fragmentation projects and NFT aggregators address the problems of
poor NFT liquidity and high market threshold. NFT lending markets
and NFT leasing projects also focus on improving NFT liquidity and
capital utilization. Meanwhile, NFT derivatives are more complex
structured products built to improve capital utilization. However,
these projects have not been able to achieve large-scale adoption
because they face limitations in terms of the underlying NFT logic
and the development space. Next, we will explore the real demands
and false propositions of NFTs. Real Demands 1. The capital
utilization of NFTs needs to be improved, allowing holders to
collateralize their NFTs for partial liquidity when running out of
cash. 2. The liquidity problem of NFTs should be addressed,
enabling holders to quickly buy/sell the NFTs they own. False
Propositions Did the capital utilization of NFTs go higher? The
problem of NFTs’ capital utilization can be seen in two aspects: 1)
Users need to quickly buy and sell NFTs, and the transaction
frequency should not be affected by the poor liquidity of NFTs; 2)
Users should be able to quickly exchange their NFTs for liquidity
and obtain cash for other purposes. When it comes to FT tokens,
capital utilization can be improved through staking, leverage, etc.
However, in the NFT market, there are only a few ways through which
users can improve their capital utilization. In addition, combining
finance with NFT significantly increases the learning cost. Right
now, most NFT holders still rely on the “buy low and sell high”
strategy. Moreover, most such holders are not the target user of
NFT lending projects because only blue-chip NFTs with sound
liquidity and value consensus are accepted. In terms of the overall
market scale, most users are absorbed by secondary markets and
aggregators with low operating thresholds, and they have not
achieved any major improvement in capital utilization. As shown in
Figure 2, the number of new addresses of Genie and Gem, two NFT
aggregators, has been on a steady rise, with increasingly frequent
daily transactions. However, as the trading volume and transaction
frequency of the two have been hit by the sluggish market
conditions of NFTs, Genie and Gem have yet to reach their maximum
potential for improving the capital utilization of NFTs. Figure 2:
New Addresses and Transactions of NFT Aggregators | Source:
Dune @sohwak Let’s turn to the capital utilization of mainstream
lending projects. BendDAO is a lending market based on the
liquidity pool model where holders can borrow ETH from the pool
after collateralizing their blue-chip NFTs. Due to recent market
fluctuations, a large amount of ETH deposit in BendDAO’s liquidity
pool has been withdrawn, which resulted in decreased ETH supply.
Yet, the ETH loans have remained at around 19,000 ETH, while the
MA14 supply stands at 46,000. As such, we can make the rough
estimate that BendDAO’s capital utilization is about 41%. Figure 3:
Bend ETH Utilization | Source: Dune@cgq0123 Note: MA14 refers to
the moving average in 14 days, while MA7 indicates the moving
average in 7 days NFTfi is a lending market following the P2P
model. The amount, interest rate, and duration of loans on NFTfi
are jointly determined by liquidity providers and NFT lenders,
which is more flexible in terms of the loan rate. The number of
monthly loans offered via NFTfi increased from 21 in May 2020 to
2,000+ in May 2022, and the maximum monthly loan amount reached
$27.52 million (March 2022), but this figure only accounted for 1%
of the market cap 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 also a P2P model lending protocol, and it
now only provides collateralized lending for Cryptopunks,
EtherRocks, BAYC, and MAYC. After staking NFT, holders will receive
PUSD, a stablecoin, provided by the protocol from the pool.
Additionally, JPEG’d also features a 32% capital utilization limit
on lending. Of course, there are also other early-stage NFT
derivatives platforms, but they have not introduced any mature
products, so we could not analyze their capital utilization.
Despite that, it is foreseeable that such NFT derivatives will come
with higher learning costs as they are products designed for
professional traders with greater risk appetite. As such, their
growth potential is limited in today’s NFT market. Asset Pricing
and Liquidation Risks? The pricing of NFTs has been so frequently
discussed that it has now become a cliché. People are concerned
with the issue because the price swings of NFTs will expose NFT
lending or derivatives to liquidation risks. As the NFT prices fell
over the recent period, BendDAO has started several liquidation
auctions. Although most of the lending protocols out there have
adopted over-collateralization, in the face of wild price swings,
many NFTs would be liquidated and sold in marketplaces. This,
coupled with the poor liquidity of NFTs, might lead to panic
selling, which would create downward price spirals, ultimately
turning the loans into bad debts. The pricing of NFTs is subject to
multiple factors. Plus, it is also easily manipulated. For example,
big holders could maliciously raise the floor price and then
liquidate the NFTs on purpose, and an NFT could take a price plunge
due to hacking or smart contract loopholes. Moreover, NFT pricing
could also be affected by many intangible factors. For instance,
the price of an NFT could soar if a famous person suddenly buys it
in large amounts or if it releases a new airdrop plan. As most
lenders cannot accurately estimate the intrinsic value of their
NFTs, they are vulnerable to liquidation if they borrowed loans or
applied leverage. This is also one of the reasons why NFT lending
and derivatives have not gained mass adoption: Blue-chip NFT
holders are worried that they might suffer losses in the above
scenarios, which is why they are reluctant to collateralize their
NFTs. Do blue-chip NFT holders really need NFT loans? All NFT
lending markets focus on blue-chip NFTs, but most blue-chip NFT
holders are not in great need of loans. To begin with, such holders
care more about their ownership of the NFTs, just like billionaires
would not use their collectibles as collateral for loans. Secondly,
NFT loans come with unknown risks, and many blue-chip NFT holders
refuse to apply for such loans after weighing the risks against the
benefits. Thirdly, applying for NFT loans comes with high learning
costs, and not every user can understand the principle behind such
loans. Let’s compare the user base of the major NFT lending
projects. As of June 15, there are about 2.4 million holders in the
NFT market, of which 27,833 hold blue-chip NFTs (a user will be
regarded as a blue-chip NFT holder as long as he owns at least one
such NFT), according to NFTGO. There are 771 borrowers on BendDAO,
1,038 on NFTfi, and 51 on Arcade. As users must first
deposit/collateralize their NFTs before applying for a loan, we can
regard all these borrowers as blue-chip NFT holders. It is
therefore clear that most blue-chip NFT holders are not users of
NFT lending markets. Figure 5: Bend ETH Borrowers & Depositors
| Source: Dune@cgq0123 Could NFT-fi projects retain users with the
same old incentive? Lending or derivatives projects also bear the
task of improving the protocol’s liquidity. Most such projects
offer native tokens as the incentive for recruiting NFT holders and
depositors as they go live. In this regard, these projects resemble
DeFi liquidity mining platforms that attract speculators with high
APYs. However, the problem is that they would not be able to
maintain such liquidity if the APYs went down. Attracting users
with token incentives is still the same old approach. Though this
strategy could create a large user base at the very beginning, no
one knows whether the protocol could retain users. For example,
when the project was first launched, BendDAO airdropped BEND tokens
to users who had deposited blue-chip NFTs and ETH. It also uses
BEND as a subsidy when paying interests. However, the interest rate
went down when the BEND price dropped, which slowed down the growth
rate of new users. As such, attracting users with high APYs is only
the first step. To retain new users, they must further explore the
lending mechanisms, address the oracle pricing issue, and mitigate
the liquidation risks. Projects should develop more flexible
products while expanding the scope of NFT lending. Last but not
least, they could also provide risk reviews, lower the learning
cost, and offer more satisfying user experiences. Conclusion The
evolution from NFT to NFT-fi is a process in which a market grows
from its infancy to a more mature stage. However, it is also
inevitably a process that’s full of doubts, traps, and problems. As
NFT-fi projects seek to meet real demands, they will also have to
face doubts that they are stating false propositions. Today’s NFT
market is like a newborn child who needs to grow up and stick
through challenges. Although NFT-fi might be a great attempt, there
is still a long way to go, and NFT-fi projects have to keep
exploring their underlying logic to earn market recognition.
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