Vol.012 RBC Perspectives|Prepare for the Next Market Explosion, Infrastructure to Unleash US$100 Billion in NFT Market Liquidity “NFTFi”



Article by CChung and Denny Yang, Red Building Capital © All Rights Reserved


“If you are an artist and still don't use NFT (Non-Fungible Token), you are potentially missing millions of dollars.”

― Olawale Daniel



2021 is called the "year of NFT", this year around the NFT transaction volume of more than $ 19.6 billion, 228 times more than in 2020. As of the end of May this year, only the top three NFT trading market volume reached $46 billion, NFT is gradually considered to be a new choice for users to invest in the subject. ​​However, the current NFT trading market features its high volatility, which slightly deters investors in the investment and finance field. Looking ahead, the financial liquidity of digital assets and derivative financial infrastructure will be a very important sector for the expansion of NFT. The market will stabilize as the scope of NFT applications and infrastructure expands, such as digital artifacts, financial asset empowerment and GameFi-related assets, or the emergence of NFT lending and hedging protocols. All of this will lead to increased stability and capital efficiency in NFT.



There are three main factors behind the rise of NFT. the first factor is the "range of transactions". For example, most of the artworks in Taiwan can only be traded face-to-face. The second one is "payment method". Because different countries use different currencies, there are exchange rate conversion problems in payment settlement. The third factor is "high risk of centralization". Users must fully trust the centralized mechanism. Once the centralized credit collapses, the interests of users will eventually be damaged. Hence, the innovation of NFT lies in providing a way to mark the ownership of native digital assets. This ownership is not controlled by any centralized organization, and thus solves the problem of asset ownership verification as well.

Source from Lootex Whitepaper


However, the difference with cryptocurrencies, the NFT market, which lacks a financial technology infrastructure, not only has low liquidity and high floor prices, making it difficult for retail investors to participate and low capital efficiency, but investors also cannot operate trades like DeFi with leverage or Lego modules. At this time how to give NFT financial nature is even more important, so the financial infra of NFT was born in response "NFTFi"




It can be predicted that there will be many NFTFi-related projects in the second half of 2022, such as "specializing in Renting", "options hedging", etc. NFTFi is still in the stage of blue ocean strategy, and unicorns are bound to emerge under the competition of numerous players. Moreover, NFT is almost the first crypto product that all non-Crypto Natives are involved with. It is expected that there will be exponential growth in NFT-related applications in 2022.


Source from dovemetrics.com


The most difficult problem of NFT is hard to value. Some projects develop Oracle with complex valuation models, but they are difficult to understand and costly for most of the users. Some protocols allow users to directly P2P, but it is too inefficient and difficult to match. So far, the ideal lending project refers to the Floor Price and multiplies it by the LTV to determine the amount of loan. But how to make the collateral coefficient attain the best value depends on the project test. So there are bound to be questions about manipulation of the market floor price, which did happen and there are already examples. If some people go long, the others will go short. And this competition has invariably solved the liquidity problem that NFT currently lacks.



NFTFi Landscape


Red Building Capital has compiled the above image for the general area of NFTFi on the market today, including the current financial instruments related to the NFT area, exchanges, lending, renting, derivatives and oracle instruments. Among the more well-known NFT lending protocols are BendDAO or Pine Protocol. First of all, the concept of BendDAO is similar to that of Aave in DeFi protocol. That is to say, BendDAO focuses more on the lending and clearing mechanism on blue chip NFT. When the price fluctuates a lot, it gives the Lender 48 hours to top up the amount to avoid liquidation. In addition, lenders holding BoundNFT still enjoy the right to bid an airdrop. Secondly, Pine Protocol differs from BendDAO in that it focuses only on the Ethereum market. It also develops in Solana's NFT trading market. Its conceptual mechanism is similar to that of Euler Finance, which focuses on NFT long-tail assets and protects protocols and potential users with an on-chain scoring system. There are also indispensable NFT oracle machines in other types, such as Aabacus, which uses game theory and Dutch auction pricing, as well as Banksea, which has a built-in AI node data system. Those readers who are interested in NFT can delve deeper into each one of them to understand the big segment migration that may happen in the next crypto bull market.


In the field of renting protocols, Double Protocol, which separates the right of use from the right of ownership, is a must-be-mentioned. When facing the NFT leasing market for GameFi and metaverse assets, Double Protocol utilizes the unique dual-role NFT mechanism to separate the ownership and use of NFT assets. At present, it has been applied to the virtual land leasing in Decentraland. In this case, the thirtieth official protocol ERC-4907, which is officially certified by the EtherFund, can improve the utilization rate of NFT borrowing and reduce the situation that users in the traditional lending market would forcibly exchange your NFT for the current price and would not return it to you. Since the end of June this year, the number of projects running "ERC-4907" has reached 12. Double Protocol sets up all the conditions at the beginning of the lease, enabling a doNFT access to the renter, and destroying it immediately when the time is up. Moreover, Double provides a simple API for project owners to connect to, so that they can easily work with project owners. Double Protocol is also one of the portfolios of Red Building Capital. When NFT Summer hit the market, we noticed the constant truth of the crypto world that "whoever controls the liquidity of NFT controls the NFT market". Therefore, we chose Double Protocol because it tops the list in terms of technology and protocol development capabilities. Our goal for the next two years is to make the NFT leasing protocol available to all NFT market projects without any trace.


Source from Double Protocol


In addition, there is an NFTX liquidity pool protocol in cooperation with FloorDAO, where users can deposit NFTs into the pool in exchange for n vTokens to sell on the secondary market. Users can also redeem any of the NFTs in the pool by purchasing veToken.


NFT hedging protocols have also been emerging recently, such as Nftperp's attempt to solve two problems. First, traders can go short in the current NFT market, they can only buy low and sell high. Blue-chip NFT class holders have no way to hedge. Second, blue-chip NFT is too expensive for individual investors, making it impossible to participate. In short, the two main types of Nftperp users are retail investors who want to go long but can't afford to buy blue chip NFT, as well as blue chip NFT holders who want to hedge their bets. There are also platforms like Putty, a P2P Put Option that focuses solely on hedging NFT risk, where users simply pay an insurance premium to guarantee their NFT minimum price. If the market unfortunately falls below the agreed price, users can get the promised amount, and the counterparty can get the NFT plus the insurance premium.



The Conclusion by Denny Yang

The current NFT market is similar to the early development of cryptocurrency with great fluctuation in price. Therefore, a sound NFT financial protocol and underlying architecture have the potential to be a blue ocean market where crypto artifacts and voucherization are not yet fully shaped. For Opensea, the largest NFT trading platform for ethereum, its weekly trading volume has reached the level of one billion dollars, with the number of independent wallets maintaining above 300,000 (Dune Analytics, 2022). However, with such a large trading volume, there are many pain points that need to be addressed. Liquidity issues include (1) high threshold of entry; (2) crude and primitive trading experience; and (3) low capital turnover. The problems of market pricing involve (1) vague pricing mechanism; (2) insufficient value discovery mechanism. There are technology products that can improve the ecological environment accordingly in these aspects. Also, the actual potential users of NFT are probably the native residents of NFT who did not participate in cryptocurrency investment from the beginning. The number will not be lower than that of cryptocurrency participants.


Source from Cobo Venture


In addition to the NFT finance related projects listed above, there will be more NFT infrastructure and protocols emerging to reduce the volatility of NFT and improve capital efficiency. We are all looking forward to a higher level of integration and value realization of all infrastructures before the next booming NTF market.