NFTFI Research: Enhancing NFT Liquidity

Author: metapi

1. Current Status of the NFT Market

In 2022, the market trading scale was $23.7 billion, with a total market value of $22 billion, and the daily trading volume hovered around $12 million. Compared to the market scale of $35.5 billion in February and March, the market size shrank by 41%, and the daily trading volume plummeted by 99%.

In stark contrast to the sharply reduced trading volume, according to data from NFTScan on December 1, the Ethereum network added 21.4267 million NFT assets in the past three months, with an average of 238,000 new NFT assets minted daily.

As the number of NFTs increases, trading volume decreases, indicating a supply-demand imbalance in the market, suggesting that the speculative enthusiasm for NFTs is cooling, and people are no longer willing to spend large sums for images. Besides liquidity issues, the high floor prices of blue-chip NFTs also trouble users. The floor prices of top NFTs often reach dozens or even hundreds of ETH, making this market a game for whale players, while small investors find it extremely difficult to purchase blue-chip NFTs, leaving ordinary users as bystanders.

2. Three Major Application Scenarios of NFTFi

NFTs are not as easy to trade as fungible tokens (like BTC, ETH) because of their non-fungible nature; the market price of each NFT varies. Buyers and sellers need to reach a consensus on the same NFT (including its number); if the buyer thinks the price is inflated, the transaction will fail. This is particularly severe with CryptoPunks, where the price difference between expensive and cheap NFTs can be thousands of times.

The issues of NFT liquidity and high floor prices have directly led to a significant decline in trading volume. Some on-chain developers have attempted to solve these problems through decentralized finance (DeFi), leading to the emergence of the concept of NFTFi. NFTFi can be simply understood as the financialization of NFTs, allowing NFTs to leverage on-chain financial models to address their liquidity issues.

Currently, NFTFi mainly includes three scenarios: NFT ownership fragmentation, NFT lending, and NFT leasing.

NFT ownership fragmentation primarily involves splitting the ownership of high-value NFT assets and issuing ERC-20 fungible tokens to enhance the liquidity of NFT assets; NFT lending refers to holders being able to borrow short-term funds by collateralizing their NFT assets without selling them, thus enjoying the benefits of holding NFTs while improving the efficiency of NFT asset usage; NFT leasing refers to holders renting out their NFT assets to users in need to generate income.

Although these three scenarios aim to enhance NFT liquidity, the varying scarcity of each NFT asset means that even NFTs from the same brand can have vastly different prices due to certain characteristics. As NFTFi attempts to solve liquidity issues, pricing different NFT assets has become a challenge, which is also why there are currently no blockbuster applications in the NFTFi market.

3. How to Value NFT Assets

Current valuation assessment variables include: scarcity, less is better; applicability, use cases that surpass fungible assets, rewards, rights, privileges, etc., conferred on NFTs; team, celebrity effect; speculation: strong marketing, attention from KOLs, interest from diamond-handed users, etc.; community: the user base and quality of the community supporting the project; generally, the higher the community consensus, the higher the collectible price; aesthetic value: subjective appreciation of digital art, whether it is visually appealing; expectations: speculation around NFTs + metaverse/blockchain games; status: similar to luxury goods, NFTs can serve as expressions of identity and wealth.

It is undeniable that current NFT value assessments tend to focus more on evaluating speculative outcomes and project operational strategies, and players' purchases of NFTs are largely driven by speculation. Therefore, when the market cools, NFTs tend to experience more significant price declines compared to cryptocurrencies. How to address the pricing flaws of NFTs to support their floor prices with value?

Without considering the market-making by project parties, NFT asset pricing can be divided into two main parts:

First, the cost of owning NFT assets, which likely determines the bottom line of your selling price. The dramatic fluctuations in NFT prices are largely due to the varying costs at which people acquire NFTs: through airdrops, holding allocations, secondary market purchases, etc. If the holding cost can be continuously increased during both the purchasing and usage phases, the willingness of players to sell at low prices will significantly decrease, thus addressing the issue of protecting NFT floor prices.

Second, the consensus on price. Essentially, the value of an NFT is merely the highest price the market is willing to pay, not the "fair" price perceived by the seller. Therefore, the NFT market needs evaluators, or in other words, NFTs need a set of value growth logic. Just like artworks, a well-known artist + time = a treasure; the longer the time, the higher the value. Can NFTs find a more certain value appreciation logic?

Looking at the entire crypto space, in the long run, only mainstream digital assets have the potential for stable value growth. For example, Bitcoin has a 10-year compound annual growth rate of 196.7%. NFTFI projects represented by MetaPioneers bring mainstream assets into NFTs, and the price consensus is also solid. Therefore, to achieve a long-lasting, stable, and continuously growing NFT value consensus, the best approach is to anchor the value of NFTs to mainstream assets, thereby obtaining "certain value growth," using time to gain the genes of becoming quality investment assets. The longer they last, the higher they can rise.

4. How to Enhance NFT Liquidity

Currently, NFT lending platforms primarily address the issue of large holders needing to release liquidity in bear markets, but they do not adequately explain why the market should buy the liquidity they release.

As the underlying asset for lending applications, NFTs need to possess characteristics of collateral. First, there must be a value consensus, meaning the market recognizes that the NFT series has value and is confident in its price; it should not collapse due to price fluctuations in the short term, making lenders willing to accept this NFT as collateral. Additionally, the collateralized NFT assets must also have liquidity, as NFTs that are valuable but lack a market can lead to difficulties in liquidation, posing potential losses for lenders. Moreover, items with appreciation expectations will attract a continuous stream of buyers.

NFT assets generally have low liquidity, and users seek more liquidity to improve the efficiency of capital utilization. For blue-chip NFTs, users tend to hold them long-term; however, for new opportunities that continuously emerge, users need funds to participate. The higher the value of the NFT asset, the stronger the user's willingness to hold it long-term, and the larger the capital occupied by that NFT asset. Therefore, lending NFT assets has become an intrinsic demand for NFT players. In summary, due to the explosion of NFT assets, the formation of quality NFTs, and the liquidity needs of NFT players, the NFT lending market has begun to take shape. With the enrichment and continued development of blue-chip NFT assets and the growth of addresses participating in collateralization, the scale of the NFT collateral lending market will further expand. However, it is important to note that the scale of NFT collateral lending is limited by two factors: the scale of quality NFT assets and the proportion of assets participating in collateralization.

5. Conclusion

Overall, NFTFi is still in a very early stage, as NFTs themselves have only been popular for about a year, and there are only a few blue-chip NFTs. The previous NFTFi approach has directly led to a situation where there are many wolves and little meat, with dozens or even hundreds of projects in NFTFi, almost all targeting blue-chip NFT projects, while there are only a few blue-chip NFTs, and each user address is only around four to five thousand, meaning the total number of users holding these blue-chip NFTs is only about twenty to thirty thousand. After excluding overlapping owners, the actual number of holders is only about ten to twenty thousand.

Although NFT fragmentation and similar concepts should extend to non-holding users, mainstream NFT lending and leasing projects are still primarily competing for this small number of "big holders." In other words, even if you become the number one in the field, the user base is still limited. The user numbers of platforms like Uniswap and Compound are not even in the same league. By strengthening the connection between NFTs and core industry assets through MetaPioneers, we can attract shallow speculative liquidity through deep and continuous liquidity, thereby truly realizing the flow and growth of NFT value.