Comprehensive Study of NFTFi Track (2): Slow is Fast, NFTfi Drives the Next Bull Market
NFTFi Track (2): Slow is Fast, NFTfi Drives the Next Bull Market
1. We are on the eve of the NFTfi boom
First and foremost, it should be clear that the NFT and NFTfi markets have experienced a significant decline, but this does not mean that the NFT or NFTFi markets have lost growth potential. NFTfi is still one of the markets with the highest potential for growth. According to the technology maturity curve, when a new technology is born, it will climb to the top at the craziest speed, experience possible bubble bursts, and then slowly and steadily rise, entering true mass adoption. This development path has been repeatedly verified in the development of the crypto industry, from the beginning of BTC to the PoW craze, to the ICO craze and DeFi Summer.
When discussing the market space of NFT/NFTfi, it is inseparable from the two important data mentioned in the previous research report: NFT market capitalization and NFT category proportion. According to statistics at the time (March 2023), the market value of the [core market] with high value and high liquidity was only 5.9 billion U.S. dollars, which is about 4.2% of the stablecoin market value (corresponding to the DeFi track) and 2.7% of the ETH market value (corresponding to the ETH LSDfi track).
Source: Public data collation
The proportion of NFT categories can explain this phenomenon to a certain extent: PFP, Art, and Collectibles account for more than 75% of the total market value, followed by Utility, Land, and Game categories. Influenced by the characteristics of the category, most NFTs currently do not have rigid application scenarios and do not have the ability to generate power, and the development cycle faces a binary choice of becoming a blue chip or entering liquidity exhaustion. From the perspective of funding, PFP, Art, and Collectibles mainly represent speculative and social needs. The strength of demand is related to the overall funding of the market, and the change in market size is positively correlated with the cryptocurrency market, making it difficult to break through the ceiling of the “market” and generate excessive growth.
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However, at the same time, the dominance of PFP will not continue to exist, and some new product buds are more worthy of our expectations. For example, identity ecosystems represented by ENS and SBTs, utility NFTs in the fields of games/social/education applications, financial NFTs and RWA opportunities led by SOLV and the ERC-3525 protocol; the structural market growth opportunities brought by these non-PFP category NFTs are far greater than the systemic growth opportunities.
Using Financial NFTs as an example, the average annual financing amount of cryptocurrencies from 2020 to 2022 was about $30 billion. If 10% of this amount is realized through NFTs or semi-fungible tokens (SFTs) in the future, it will bring about $6 billion in growth to the NFT market ($3 billion from fundraising and $3 billion from investment). If 10% of DeFi TVL is also added, the two fields alone can bring 183% growth to the current NFT market. As shown in the figure below, from a holistic perspective, the stock market represented by PFPs will be subject to the scale of the homogeneous token market, but the incremental market has relative independence and may even exceed the scale of the homogeneous token market. NFT or NFTfi does not lack new narratives, and its growth rate is higher than that of the overall cryptocurrency market, albeit slowly but surely.
II. Outlook for segmented markets: Trading and lending markets have much more room for growth
In the first part of this research report (“NFTfi Track Panorama Study”), the focus was on explaining the current market pattern of NFTfi. Looking at the segmented markets, NFT trading and NFT lending have already taken shape, and the future development direction is mainly integration and efficiency improvement. The view here remains unchanged: The first and last thing to improve NFT trading is liquidity. Although we have seen the rapid development of Blur in the past year, personally, I think Blur is still far away from the real end. In the past few months, I have discussed further improvement measures for NFT trading with many friends (including a large number of relevant team members). So far, the ideas I can think of and the ideas I have learned from other friends include:
Ø Fix LPs using veToken (or time locks) to provide predictable and sustainable liquidity (suitable for combined use with AMM mechanism)
Ø Establish a dedicated clearing agreement (or an oracle with clearing functions) to act as a clearing counterparty and improve buyer-side liquidity
Ø Build NFT-based options/dual currency financial protocol (in theory, other types of derivatives also have similar combinability space), act as a trading counterparty, and improve buyer-side liquidity
One potential strategy for lending agreements is to reduce fragmentation (although I personally don’t like this method). Another is to use LSD assets as a base layer to provide liquidity and reduce the cost of liquidity supply. Additionally, combining INO+OHM to establish an AMM-type NFT trading pool from the initial issuance is an option. The applicability of vAMM+issuing reverse IL positions or synthetic asset models is also a consideration. Of course, these are just preliminary ideas, and in many cases, when we solve one problem, more problems arise. Friends interested in this field are welcome to communicate further with me.
The second opportunity is lending. Considering that NFTfi, Bendao, BlockingrasBlockingce, and Blur have already provided quite a few and sufficiently excellent solutions, this field seems slightly crowded. In my opinion, the opportunity lies in short-term yield optimization and long-term aggregation. In the short term, there are many experiences to draw from, such as FT’s p2p matching optimization points for pool interest rates, introducing yield income, asset reuse (LSD&LP), and possible interbank borrowing; in the long term, aggregation is relatively abstract. If we separate the demand for borrowing and lending and think of it as a scatter plot, point-to-point lending is a scatter plot, while point-to-pool lending is a continuous curve composed of many points (and this curve is dynamically changing). The next problem is very similar to trading, and we need more and denser points or lines. Derived ideas include lending aggregation, trading, and the expansion of derivatives and combinability.
Three, sub-race market opportunities: three growth factors, two demands, and 2+N implementation solutions for derivatives
The third opportunity is derivatives. The reason why it is discussed separately is that compared with the previous two fields, derivatives are a more blue ocean market. This has been mentioned in previous research reports, as NFT derivatives have very low market penetration rates in terms of both the number of active user accounts on the user side and horizontal comparison with homogenized tokens. Therefore, based on the market size growth decomposition shown in the figure below, the NFTfi field has three growth factors: the growth of the existing NFT market (which is positively correlated with the overall cryptocurrency industry), the growth of incremental markets, and the growth of market penetration. For derivatives, the third item (market penetration) has a higher growth rate.
By the way, non-PFP assets have a larger combinable space with NFTfi. They may have more predictable volatility and more reliable value support, such as bills and some utility NFTs that can generate cash flow (possibly currency-based) and can be more effectively valued and traded. Therefore, the growth scale of the incremental market brings non-linear promotion to NFTfi.
The second source of confidence in the NFT derivative track is demand. Based on the experience of the cryptocurrency market, derivatives often achieve good growth in bear markets, driven by demand. Generally speaking, the demand for derivatives is mainly hedging (or risk swapping) + speculation. The risk aversion characteristics and reduced investment options under limited funding availability in bear markets will bring demand to derivatives. In addition, one of the important sources of demand for early cryptocurrency derivatives was the miners of BTC/ETH. Now, Blur, NFT lending, and NFT staking all bring yields to NFTs, and the growth of pure hedging demand, as well as real users and real protocol revenue for NFT derivatives, will be foreseeable.
The third point that needs to be explained is how to build a good NFT derivative product. Analyzing the entire NFT derivative product requires a very large space, so index products, options, structured products, and other products may be presented in the form of special research reports in the future. Here, we mainly discuss futures contracts.
First, we need to determine how NFT futures trading can be realized. Due to the scarcity of NFTs themselves and the low order placement rate, delivery-type products are not suitable for constructing NFT futures (perhaps suitable for options). The remaining arsenal that I can think of includes the following five categories. Among them, the order book perpetual contract and vAMM have been implemented, and some teams are exploring other modes.
The next step is to think about what the key issue of FT derivatives is. I think the essence is still liquidity, specifically including three points: 1) how to price? 2) Who will provide liquidity when it is insufficient (or act as a counterparty)? 3) How to liquidate/handle the position when the margin is reached? From the current situation, NFEX and NFTperp have chosen the perpetual contract and vAMM method to provide initial solutions to these three problems. In addition, a feature of the NFT derivative market is the extremely unbalanced long and short ratio, and the requirements for funding rates and dynamic opening fees will also be higher, which should also be one of the factors we consider when comparing products.
Source: 0xLoki Compilation
Comparing the data of NFEX and NFTperp, the two product plans have their own advantages and disadvantages. NFEX can provide lower transaction fees and more trading categories (as well as faster trading pair listing speed), while NFTperp provides a non-custodial solution, but due to the imbalance of long and short positions, its trading prices themselves have a large deviation. Although NFTperp has set up Funding Rate + additional tx fee to solve this problem, it is clearly not enough (longs need to pay a three-digit annualized funding rate).
Fourth, in conclusion: accumulate grain, slow to become king
Overall, my judgment is as follows: in the medium to long term, the growth rate of the NFT market will be much higher than that of the cryptocurrency market; while the growth rate of the NFTfi market will be much higher than that of the overall NFT market, and the market growth rate of NFT derivatives will be much higher than that of NFTfi.
The tidal wave of the track comes from the market tide. When the liquidity is sufficient, it will inevitably lead to excessive investment. The market has sufficient funds to subsidize and support high valuations. However, in the long run, both primary and secondary markets, pure burning money/speculation will eventually pass, and it is also at this stage that those protocols that can achieve a complete business closed loop and create real income/value will continue to survive and come out of the valley of death, and the market will return to [technology-driven] and [demand-driven]. It is worth mentioning that although it is not a good time to issue coins now, among the head NFTfi protocols, Bendao and Blur have issued coins, and NFTFi may not issue coins in the end. The remaining Opensea (which has issued NFT), BlockingrasBlockingce, NFEX, and NFTperp are likely to issue coins, which is worth looking forward to.