Overview of 152 NFTFi track classification projects. Can the financialization of NFTs spark a wave of Web3 entrepreneurship?

Written by: Sally, IOSG Ventures

Introduction

As the NFT market gradually warms up, the competition for users in the trading market has entered a heated stage. As of now, the emerging NFT aggregator project Blur has already surpassed Opensea in trading volume.

Source: NFTScan

At the same time, the NFT lending protocol represented by Benddao is continuously setting new highs in total value locked (TVL). As of February 20, according to Defillama data, BendDAO's total TVL has exceeded $200M, and the gap with Synthetix on EVM chains is gradually narrowing.

Source: Defillama

On the other hand, other leading projects in the NFT Fi space, such as X2Y2, NFT.Fi, JPEG'd, etc., have also seen significant increases in macro lending trading volume since the end of last year.

Source: Dune @ahkek

This may indicate that the NFT Fi sector, which has attracted attention since last summer but has yet to explode, is about to welcome a wave of genuine systemic opportunities.

Theoretical Framework of NFT Financialization

Concept Deconstruction

In previous articles, we pointed out that the significance of NFT financialization lies in helping to expand and enhance the consensus and demand for NFTs. After recognizing the significance and importance of NFT financialization, the next core question is------how should we understand the concept of NFT financialization?

From a purely economic perspective, we attempt to propose an interesting but not necessarily correct viewpoint: to divide NFTs into two categories, A and B: Category A consists of NFTs with aesthetic and collectible value; Category B consists of NFTs with utility value. Based on this, we can align the financialization of Category A NFTs with the financialization of artworks, and the financialization of Category B NFTs with the financialization of commodities:

Images, avatars, and purely artistic NFTs like Punk, Azuki, Doodles, etc., can be simply categorized as Category A, which only possesses aesthetic and collectible value. The logical commonality between this type of NFT and artworks lies in:

• Non-fungibility
• Lack of utility
• Absence of fundamentals
• Valuation based on personal sentiment

Brand-issued membership token NFTs like Starbucks Odyssey and gaming NFTs like StepN sneakers, which support the internal operation of entertainment products, can be viewed as Category B, which possesses utility value. The logical commonality between this type and commodities lies in:

• Semi-fungibility
• Possession of utility
• Certain fundamentals
• Valuation based on functionality

Industry Deconstruction

After understanding and discussing the concept, we also need to further examine the industry structure of NFT Fi vertically based on segmentation. Although there have been many discussions about the NFT Fi landscape in the market, we prefer to divide it into three layers from top to bottom:

(1) The first layer is the direct trading layer, which includes Marketplace, Aggregator, AMM, etc., providing NFT and FT exchanges.

(2) The second layer is the indirect trading layer, which includes lending, renting, crowdfunding, etc., providing NFT custody and collateral financing.

(3) The third layer is the financial derivatives layer, which includes options, futures, indexing funds, etc., that increase trading risks and leverage.

The evolution from direct trading to indirect trading to financial derivatives reflects the financial deepening of NFTs from commodification to financialization to securitization.

We believe that NFT liquidity solutions with a reasonable pricing mechanism, smooth user experience, and sustainable trading models will ultimately lead to the continuous solidification and eventual takeoff of the complete NFT Fi industry structure.

NFT Financialization Track Map

Based on the above theoretical framework, we scanned the 152 projects currently operating in the track and created the following track map for reference:

Direct Trading Layer (52 Projects)

For NFT trading markets (Marketplace), we mainly categorize them into three types based on their functions:

• General marketplaces (General Marketplace) represented by OpenSea, LooksRare, X2Y2, etc., which are comprehensive NFT trading markets across different chains.
• Vertical trading markets for practical NFTs such as games, represented by Trove, Nifty Gateway, etc.
• Vertical trading markets for artistic NFTs, represented by KnowOrigin, makersplace, etc.

For NFT trading aggregators (Aggregator), we mainly categorize them into two types based on their accessibility:

• NFT aggregators open to all users, represented by Blur, Gem, Genie, etc.
• NFT aggregators with a paid membership system, represented by NFTNerds, TraitSniper, etc.

For NFT automated market makers (AMM), we mainly include those based on Bonding Curve, represented by Sudoswap, Caviar, etc. As an important decentralized solution for achieving instant liquidity between FT and NFT, we believe they will play a more central role in future direct trading.

Marketplace vs. Aggregator

As more players enter the market, a clear trend is that people are demanding higher trading speed and purchasing efficiency (liquidity) for NFTs. In traditional NFT markets like OpenSea, the slow waiting for project launches and bidding has become somewhat outdated. In aggregators like Blur, more professional data analysis functions enable faster-paced sales and purchases, making it more like an "exchange." The market has proven that NFT players currently favor "efficiency above all." We also note that as users demand higher standards for NFT trading and professional DeFi traders enter, the combination of data analysis functions and aggregator categories is becoming increasingly tight.

Aggregator vs. AMM

Although Blur's bid-to-earn model has largely disrupted traditional liquidity incentive methods and improved aggregation speed by 10 times compared to Gem, there is no enduring moat supporting its traffic. When emerging aggregators gradually align their bidding models, enhance user experience (simultaneously adding more trader-friendly features), and even launch vampire attacks, it is hard to predict whether Blur can maintain its leading position. This is also our concern regarding centralized exchanges that rely on order book models.

Assuming that people's core demand is to seek "the fastest trading method," AMM may be a better choice, as it can achieve instant exchanges between NFTs (erc721) and ETH (erc20) by removing bidding and centralized matching, and such functions can be more easily modularized and integrated into other platforms like NFT lending.

We can take DeFi AMMs like Uniswap as a good benchmark: compared to CEX, Uniswap's advantages mainly lie in: higher exchange trading efficiency (especially for long-tail assets), better user experience, better composability, fair incentive systems, and permissionless access. We look forward to seeing these advantages of DeFi AMMs fully realized in future NFT AMMs after multiple rounds of market refinement and iteration.

Indirect Trading Layer (70 Projects)

For NFT lending protocols (Lending), we primarily categorize them based on their lending models into over-collateralized lending and unsecured lending.

Currently, most NFT lending paradigms are based on three types found in protocols like Compound and Aave: peer-to-peer matching, liquidity pools, and stablecoins, providing over-collateralized lending or flash loans. Emerging unsecured private lending models like BNPL may introduce a more diverse user base on the demand side. We can understand the two verticals of collateralized lending and unsecured lending more intuitively from the diagram below:

Deposits, loans, and lending are the most basic components of any banking system, and we believe that focusing on the NFT lending direction in the indirect trading layer is the most reasonable choice.

For NFT liquidity providers (Market Maker), solutions represented by MetaStreet have deeply engaged in various aspects of the NFT ecosystem.

For NFT fractionalization (Frantionalizaton), we conceptually divide it into:

• Traditional solutions represented by unic.ly, nibbl that split NFTs into multiple tokens to lower the holding threshold.
• Crowdfunding solutions represented by partybid that reduce speculative barriers by splitting ownership through collective holding.

For NFT renting (Renting), we believe that there is still a more suitable development and a certain scale of audience in the vertical gaming track. The exploration and validation in other scenarios are still limited by the insufficient variety of NFTs, making it difficult to find PMF (Product-market fit) in a short time.

Collateralized Lending vs. BNPL

Renting essentially involves third-party payments based on time-based splits, while Buy Now Pay Later (BNPL) differs from ordinary renting in that: 1. The payment actions are completed by different entities 2. The payment timing is distributed.

With the maturation of on-chain credit systems and the growth of credit demand, we need more diverse credit products to meet the needs of different cryptocurrency user groups. The decentralized "credit certificate" system represented by Maker may not be a transferable solution in the NFT context:

On one hand, NFTs are typically sold as complete products, often at higher prices compared to FT (for most php-type NFTs); on the other hand, the groups of NFT holders/players differ from DeFi users (though there may be some overlap), but the general inference is that without the lure of huge investment returns, most NFT collectors will not have much motivation to deeply engage in complex lending systems.

In other words, if we simply transpose traditional DeFi lending models to the NFT context, the audience will be very limited, and subsequent growth will be relatively weak.

We believe that BNPL solutions like Cyan are a great entry point to involve NFT users in the lending system. NFT BNPL platforms may also collaborate with Maker, CreDA, etc., to establish a complete cryptocurrency credit system in the future (for example, creating a larger credit delegation system similar to Aave). Therefore, even if such products are still in their infancy and the risk management models are untested (it is unknown whether they will still function effectively with a large influx of users), we still believe this could be the most promising direction for the next cycle and will continue to monitor it.

Financial Derivatives Layer (16 Projects)

As the overall NFT financial derivatives layer is still in its early stages, we only briefly include options (Option), futures (Futures), and indexes (Indexes) in this section. Compared to options, futures derivatives trading may require less user education and is easier to attract traffic.

Compared to fractionalization solutions, in traditional financial markets, packaging non-liquid assets like real estate and artworks into indexes for investment is a more common approach. For artworks, common art indexes include the Mei Moses Art Index, Art Market Researcher, Art price indices, etc. For commodities, common indexes include major commodity indexes, CRB commodity index, S&P Goldman Sachs Commodity Index (GSCI), etc.

This indexing approach not only helps institutions and individual investors diversify their portfolios but also has shown satisfactory performance in returns. Between 1950 and 1990, the actual return rate of art investment was 8.2%. During the same period, the S&P 500 index, Dow Jones index, government bonds, corporate bonds, and treasury bond rates were 8.9%, 9.1%, 1.9%, 2.2%, and 1.3%, respectively. In the past decade, the average annual return rate of artworks has reached 8.5%, slightly exceeding that of stocks.

Projects represented by NFTX and NFT20 are creating a new asset class similar to art/commodity indexes in Web3. Based on this, LiquiFi Labs has utilized ML pricing techniques to eliminate the volatility factors of wash trading, constructing a safer and more reliable index category. We also look forward to seeing more index products enter the public eye in the future.

In Conclusion

David Ricardo, a representative of the classical school, pointed out in "Principles of Political Economy and Taxation" that the value of certain goods can be determined solely by their scarcity, and labor cannot increase their quantity, thus their value does not decrease with an increase in supply. Deloitte's research on art finance also shows that 80% of collectors believe buying and selling art is an investment. The arms dealer in the movie Inception even avoids taxes by trading artworks in the Geneva Freeport.

IOSG believes that NFT financialization may become the next explosive point leading the growth of web3 in the era of fat applications, and encourages more collectors, builders, developers, and us to explore the broader financialization application scenarios of NFTs together.