Securitization has been a long-time practice in the field of finance.
Financialization transforms illiquid assets into tradable securities, which helps to channel cash flow to borrowers and fund significant economic development.
3/ Where is the market today?
@NFTfi issued $36 million worth of loans in May, while NFT transaction volume exceeded $3 billion.
The penetration rate of NFT credit market is slightly north of 1%
vs. 10% in traditional art lending and >50% in mortgage markets.
4/ NFTs suffer from low liquidity:
‣ Unique characteristics -> limited market
‣ High price -> low affordability
‣ Lack of utility -> speculation deters investors
Which leads to:
‣ High slippage
‣ Capital inefficiency
‣ Poor price discovery and valuation
5/ Current market landscape for NFT financialization
Categorized into...
‣ Marketplace and Aggregator -> facilitate transactions
‣ Lending and Rental -> improve capital efficiency and
explore yield-generating possibilities
‣ Liquidity and Valuation -> infra for trading
6/ Protocol deep-dive
LIQUIDITY POOLS
Liquidity is a key trading infra.
Abundant liquidity ->
+asset utilization rate
+user participation.
@NFTX_ regards the NFTs within the same vault fungible. The mechanism is suitable for floor items within the same collections.
7/ Deeper pool can maintain a stable price, and create a smooth trading experience.
The similarity comes from transforming ERC721 tokens into ERC20 tokens and the difference lies in the ability of yield generation.
9/ Why is fractionalization not a solution?
Fractionalization just transfers existing liquidity issues from NFTs to fractional NFTs, meaning: instead of having one illiquid NFT, you now have many illiquid ERC-20 tokens.
Good for community building, not so good for trading.
10/ LENDING
There are three mechanisms to facilitate NFT-as-collateral loans:
‣ Peer-to-peer lending
‣ Peer-to-pool lending
‣ Over-the-counter (OTC) lending
11/ Peer-to-peer lending
@NFTfi
The loaning process is similar to a loan marketplace, where the NFT owner selects the offer from several liquidity providers based on their terms.
OTC
+institutional scale
-KYC required; blue chips only
All with low LTV->low capital efficiency
14/ RENTING
NFT rental market is still young. As of June there are <100 NFTs for rent on @renftlabs, indicating room to grow.
Lack of PFP utility + guides providing in-game asset rental service = low rental demand
However, we expect new use-case NFTs to boost the growth.
15/ VALUATION AND APPRAISAL
Valuation and appraisal is a fundamental infrastructural component of any trading market and can be used across many NFT financialization use-cases.
Pricing mechanisms can be categorized into:
‣ oracle-based
‣ optimistic proof of stake pricing.
16/ @abacus_wtf uses optimistic proof-of-stake to create a liquid backed valuation system.
The value of the NFT equals the total value locked in the pool.
The valuation mechanism of Abacus is one of a kind and its effectiveness remains to be proven over time.
17/ There are several protocols experimenting on leveraging machine learning technology to predict NFT prices, such as @NFTbank_ai, @banksea_finance, and @UpshotHQ.
Data fed for training models can be categorized into three types:
‣ pricing data
‣ NFT metadata
‣ market data
18/ Determining valuation: Pricing oracles
In this method pricing is determined through on-chain data that is fed to the protocol using oracles. While this improves trustlessness, unexpected short-term upsides cannot be captured as this method is backwards-looking.
19/ Determining valuation: Machine learning based pricing oracle
This method also relies on pricing oracles for on-chain data, but also off-chain data and uses pattern recognition to provide more context to the data. This method needs more data to properly evaluate a collection.
20/ Determining valuation: Optimistic Proof of Stake pricing
Spot traders form a network of real-time human appraisers, whereas the value of the trading pool reflects the value of the NFT. While unique, this approach faces scalability challenges that are yet to be overcome.
21/ The development and experimentation of NFT financialization just started.
Despite all the progress in various verticals, we see some common challenges:
‣ Foundations waiting to be established
‣ Limited utility layers
22/ Here are some of my thoughts on where we can find opportunities in building this space.
‣ Segmenting NFTs into different categories with
different tranches of risk and return profiles
‣ Building risk profiles of borrowers
‣ Extending utility layers
23/ If you're working on building this space, have feedback on this piece, please reach out!
Special thanks to @0xPhillan for his support on this piece.
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1/ @LidoFinance, @Rocket_Pool, soared after Kraken paid a $30M settlement and announced to shutter its U.S. staking operations. And Shanghai Upgrade is imminent. It is time for us to take a deeper look at the existing PoS economy players. open.substack.com/pub/lingchenja…
A thread🧵
@LidoFinance@Rocket_Pool 2/ I published research about Proof-of-Stake economy end of last year and haven't got time to write a twitter thread as I decided to take a long holiday to reflect and recharge. Following recent hypes, I reckon it is a good time to look back and dive into this exciting space.
@LidoFinance@Rocket_Pool 3/ I started by explaining what The Merge is and the impact of The Merge.
And followed by introducing actors within Proof-of-Stake economy
‣ Node management service providers
‣ Staking-as-a-service providers
1/ Recent crisis of @BendDAO started me revisiting NFT lending space and I came across a new player @Sodium_fi. Below I will explore the existing mechanism, the pros and cons analysis and the in-depth explanation of Sodium mechanism.
@BendDAO@Sodium_fi 2/ If you are not familiar with NFT financialization space and are curious about the players and development of it, I wrote an overview this June to elaborate its current bottlenecks, market landscape, and potential opportunities. Jump back in
1/ Web3 social is an exciting space with pouring capital and developers. However, since the debut of this space in 2016, there is no protocol dominating the market yet. Why? fundamentallabs.substack.com/p/web3-social-…
A thread🧵
2/ Existing web2 social networking platforms cause issues like data and security breaches, manipulation of public opinion, and relaying false information. Documentary like @SocialDilemma_ elaborates the struggles well.
@SocialDilemma_ 3/ A core philosophical principle of web3 is that there are more ways to provide value to an ecosystem than through capital. Platforms rely on their users and stakeholders to engage and contribute to be able to form a strong network effect.
1/ Music NFT is pretty hyped; however, I am playing the devil's advocate here and share some of my thought process.
A thread🧵
2/ Nowadays. we consume music in a completely different way. From CD and iPod, iTunes to Spotify, we used to buy albums and then we started to realize we can only buy tracks and now we bring our music around with streaming apps. Are we really going back to "own" music again?
3/ Does it really matter to have ownership over music?
If we think about why people buy albums or subscribe to Spotify, access is the key reason. Owning a piece of music will not increase ease of access or enhance listening experience.