Will financialization be the next expansion direction of NFT?

With the rapid development of NFT and the influx of capital and celebrities, the NFT market is now hot. However, it is worth noting that this prosperity is only temporary.

According to Dune Analytics data, according to Opensea’s transaction volume, it can be seen that after the outbreak of the NFT market in August, the rapid increase in transaction volume gave the market sufficient confidence, and the floor prices of various NFTs rose rapidly. However, after the short-term prosperity, its transaction volume fell rapidly and NFT artworks were priceless.

However, excitingly, the heat of the market has also triggered another wave of upgrades in the form and application of NFT, including the just-launched Loot and NFT fragmentation protocols. There is no doubt that NFT is developing towards higher liquidity, and the market is gradually becoming more mature and stable.

New trend of NFT development

Although the launch of Loot is exciting, the bottom-up decentralized cultural creation has given NFT more connotations, but the mainstream of the market, that is, we seem to have defaulted to the binding of NFT and art collections and other models The relationship has led to the development of NFT in a regular manner, and most NFT projects are innovative on the basis of Cryptokitties.

As Li Heifeng from DEGO China said :

The success of CryptoKitties and the popularity at that time made many people have a fixed mindset, believing that artworks are the right path for the development of NFTs, and naturally bound NFTs with art, collectibles, cards, and scarcity.

He believes thatthe value of NFT does not depend on NFT itself, the application scenario will empower the value of NFT, and the value of NFT can be redefined.

Therefore, how to build a decentralized application that can empower NFT is the most critical.

At present, many protocol developers regard the liquidity of NFT as the driving force behind the expansion of NFT boundaries, and are trying to solve this problem step by step. The emergence of the NFT fragmentation protocol is a manifestation. The NFT fragmentation protocol is an expansion of NFT liquidity under the original thinking.

Fractional.art is an NFT fragmentation protocol built on Ethereum. We can lock our own NFT into the smart contract and mint and issue the corresponding ERC-20 Token. It can lower the threshold for us to participate in the NFT market to a certain extent. However, according to Tokeninsight statistics, most of the fragmented tokens cannot maintain the high transaction volume and TVL when they were first issued.

In addition to fragmentation protocols, practitioners are also exploring how to increase application scenarios to empower NFT.

GameFi is a good direction-the Play to Earn model allows players to earn money while playing games. This process is sustainable, and the benefits belong to the individual player. In GameFi games, NFT can be set as an asset in the game, and players can participate in game content based on various functions of NFT.

Since GameFi's income is sustainable, the liquidity of NFT will be very sufficient. If you want to end the game in peace, we can easily sell the NFT assets in our hands.

The success of Axie Infinity is a good example.

Paradigm, a blockchain investment institution, is thinking about more possibilities for NFT derivatives. Paradigm research partner Dave White proposed an NFT derivatives solution "Floor Perps".

Floor Perps is a perpetual contract. We can create a synthetic NFT by locking our own NFT, which can be regarded as a perpetual contract. After selling it to a market maker, the market maker can offer it to both longs and shorts in the NFT market. Bulls and shorts can increase their leverage to participate, and benefit according to the rise and fall of the floor price of the NFT project.

Such a derivatives solution can improve the liquidity of NFT to a certain extent - it expands the application scenarios of NFT and the number of participants in the market.

Although this is just a concept, we can think that the financialization of NFT is a necessary way to achieve its high liquidity, and it is also the main driving force for the expansion of the NFT ecosystem in the future.

At the same time, with the emergence of NFT derivatives, NFT price oracles have also become a rigid demand. Pricing instability is also affecting its ability to become a bona fide asset class. A reasonable pricing method can better help investors judge the value of the NFT they own or want to buy.

But unlike homogenized tokens, we cannot determine its value through buying and selling in the market. Just like a work of art in an auction house, ordinary people cannot judge the true value of a work of art. The value range of a work of art is often determined by professional appraisers in auction houses and other collectors.

Lithium Finance is the first collective intelligence pricing oracle to provide accurate and timely pricing for unlisted, illiquid assets. Lithium seeks consensus by asking participants specific, multiple-choice questions, hoping to provide value discovery for more illiquid assets.

Lithium Finance co-founder Steve Derezinski hopes that Lithium will become a tool that allows anyone to price anything.

In the future, with the emergence of more imaginative oracle solutions, the price of NFT will gradually approach its true value—anyone can buy or sell NFT at a reasonable price. This will further enhance the liquidity of NFT.

NFT financial application case

Next, let's take a look at the current application cases of NFT financialization.

UniSwap v3 proposes the concept of centralized liquidity, which better improves capital utilization for DeFi users. Among them, UniSwap v3 uses NFT as LP Token, and the NFT adopts the ERC721 standard.

We can understand this NFT as a contract signed between UniSwap and LP. Previously, different LP Tokens only had differences in quantity. After using NFT to represent LP Token, LP Token has more attributes—that is, We have added more descriptions to the contract. For example, UniSwap v3 supports LPs to set the top price range for market making.

This range is one of the descriptions of the NFT "contract". The descriptive nature of NFT gives DeFi financial applications a richer imagination.

Meng Yan, deputy director of the Digital Asset Research Institute, believes:

Uniswap V3 has taken a key step in NFT financial applications. If digital currency is programmable money, then Financial NFT is automated money, smart money, and a general tool to help parties establish contracts and promote collaboration.

However, Meng Yan also believes that ERC721 is only a starting point for Financial NFT, and it will never be mainstream. This is why Meng Yan chose to launch Solv Protocol .

Solv Protocol aims to bring the primary market into the DeFi field through NFT. The Solv IC Market launched by it hopes to solve the dilemma faced by investors-the trust gap between investors and project parties through the investment certificate-based Invoice Token (IC). IC is based on the new NFT standard vNFT bill certificate protocol, which is more suitable for descriptions related to financial agreements.

After the project party creates the agreement, it can deposit the original token of the agreement into Solv, and set the lock mode, unlock time and other information. Investors can get an IC after investing in the project. This IC represents the investor's rights to the project and is automatically executed by the smart contract.

Through IC, the trust problem is solved. In addition, investors can also seamlessly trade IC bills with other investors to obtain benefits such as cash in advance. Compared with traditional NFT, IC has a more flexible form of expression and higher liquidity. Solv Protocol is empowering NFT by creating new application scenarios, based on more value of NFT.

In addition, many lending platforms are also considering the pledge of NFT to expand the usability and liquidity of NFT.

In July, Stani Kulechov, founder of the decentralized lending protocol Aave, tweeted that Aave is currently experimenting with using NFT as collateral, and hopes that the protocol will be suitable for various NFT use cases when it is released.

DROPS is the pioneer of NFT mortgage lending. We can obtain loans with 80% of the reserve price by pledging NFT assets. The launch of DROPS also aims to solve the problem of NFT liquidity and build more application scenarios for NFT.

With the improvement of NFT infrastructure, the financialization of NFT will have the opportunity to solve its liquidity problems and achieve considerable development.

The key to the development of NFT - the improvement of infrastructure

Only when the infrastructure is perfect enough can NFT have the opportunity to evolve into more forms.

We often think that the role of NFT is to confirm rights, and some people think that the development space of NFT lies in the confirmation of rights on the physical chain, but with the development of the NFT market, we have seen that NFT has little effect on the confirmation of rights.

There will even be a joke saying that Curry bought an ape NFT for US$180,000 as his avatar, and it took me 0.1 second to copy one as his avatar. It can be considered that the NFT avatar we purchased is actually an identity experience with a serial number, not the ownership of this picture.

The upside of NFT does not stop there, and its development also requires a complete NFT infrastructure. So far, the infrastructure architecture of the NFT ecosystem is gradually moving closer to that of the DeFi ecosystem.

In addition to Layer 1 public chains like Ethereum and Flow, many Layer 1 Dapps as infrastructure are also being built. Now many NFT protocols are considered to be built on high-performance public chains, such as BSC and Solana. At the same time, Layer 2 and side chains are also the choice of NFT protocols. Axie Infinity mentioned above has built an Ethereum side chain in order to improve user experience and reduce use costs.

On top of it is the construction of NFT market applications and vertical applications.

The development of NFT market applications is quite mature. In addition to the centralized NFT markets Opensea and SuperRare that have captured a lot of value, the decentralized NFT markets MyNFT and Metaplex are also rising rapidly, providing users with open source, anti-censorship and license-free NFTs transactional services.

And NFT vertical applications have shown us more imagination. In addition to the common NFT protocols in the past, there are more protocols such as NFT finance, NFT fragmentation, GameFi, etc. Various NFT protocols are being actively built on various infrastructures by developers.

It is foreseeable that with the improvement of infrastructure such as Flow and Opensea, it means that NFT will enter the fast lane of development and capture more value like the DeFi system. And this is also the key to the transformation of NFT financialization.