1. We are on the eve of the NFTfi explosion
First of all, it should be made clear that the NFT and NFTfi markets have experienced a significant decline, but this does not mean that the NFT or NFTFi market has lost its growth potential. NFTfi is still one of the markets with the highest potential growth multiples. Still according to the technology maturity curve, when a new technology is born, it will climb to the top at the craziest speed, experience a possible bubble burst, and then slowly and steadily rise to enter the real large-scale adoption. Looking at the development of the encryption industry, this development path has been verified many times, from the initial BTC, to the PoW boom, to the ICO boom and DeFi Summer.
When talking about the market space of NFT/NFTfi, we cannot avoid the two important data mentioned in the previous research report: the market value of NFT and the proportion of NFT categories. According to statistics at that time (March 2023), the market value of the high-value and high-liquidity [core market] was only US$5.9 billion, which was about 4.2% of the market value of stablecoins (corresponding to the DeFi track) and 2.7% of the market value of ETH (corresponding to the ETH LSDfi track).
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. Affected by the characteristics of the category, most NFTs currently do not have rigid application scenarios and do not have the ability to generate revenue. The development cycle faces a binary choice between becoming a blue chip and entering a period of liquidity depletion. From a capital perspective, PFP, Art, and Collectibles mainly represent speculative demand and social demand. The strength of demand is related to the overall capital side of the market. Changes in market size are positively correlated with the cryptocurrency market. If the ceiling of the "big market" cannot be broken through, it will be difficult to generate excessive excess growth.
But at the same time, PFP's dominance will not last forever, and some new products are worth looking forward to. For example, the identity ecosystem represented by ENS and SBTs, utility NFTs in the fields of games/social/educational applications, and financial NFTs and RWA opportunities led by SOLV and [ERC-3525 protocol]; the structural market growth opportunities brought by these non-PFP category NFTs are far greater than the systematic growth opportunities.
Taking Financial NFT as an example, the average annual total financing of cryptocurrencies from 2020 to 2022 is about 30 billion US dollars. If 10% of it is realized through NFT or SFT (semi-fungible tokens) in the future, it will bring 30 (fund raising level) + 30 (investment level) = 6 billion US dollars to the NFT market; 10% of DeFi TVL will bring an increase of 4.8 billion US dollars. These two areas alone can bring 183% growth to the current NFT market size. As shown in the figure below, from an overall perspective, the stock market represented by PFP will be subject to the size of the homogeneous token market, but the incremental market has relative independence and may even exceed the size of the homogeneous token market. NFT or NFTfi does not lack new narratives, and the growth rate higher than the overall crypto market will be SLOWLY BUT SURELY.
2. Market Outlook by Track: The market space for trading and lending is far more than that
In the first part of this research report ("Panoramic Research on the NFTfi Track"), the focus is on explaining the current market landscape of NFTfi. From the perspective of different tracks, NFT transactions and NFT lending have begun to take shape, and the future development direction is mainly in integration and efficiency improvement. The view here remains unchanged: the first and last thing for NFT transactions is to improve liquidity. Although we have seen the rapid development of Blur in the past nearly 1 year, for me personally, Blur is still far from the real end. In the past few months, I have discussed further improvements to NFT transactions with many friends (including a large number of relevant team members). So far, the ideas that I can think of and that I have learned from other friends include:
Ø Use veToken (or time lock) to fix LP and provide predictable and sustainable liquidity supply (suitable for combination with AMM mechanism)
Ø Establish a dedicated clearing protocol (or an oracle with clearing functions) to act as a clearing counterparty and improve buy-side liquidity
Ø Build NFT-based options/dual-currency financial management protocols (theoretically, other types of derivatives also have similar composability space), act as a counterparty, and improve buyer-side liquidity
Ø Partial fragmentation (this idea also applies to lending protocols, but I personally don’t like this approach)
Ø Use LSD assets as the underlying liquidity to reduce liquidity supply costs
Ø Combine INO+OHM to establish an AMM-type NFT trading pool from the initial issuance
Ø vAMM+issuance of reverse IL positions or synthetic asset models
Of course, these are just preliminary ideas. In many cases, more problems will arise when we solve a problem. Friends who are interested in this direction are welcome to communicate with me further.
The second opportunity is lending. Considering that NFTfi, Bendao, Paraspace, and Blur have already provided quite a lot of excellent solutions, this track seems a little crowded. In my opinion, the opportunities are in yield optimization in the short term and aggregation in the long term. There are many experiences to learn from in short-term yield optimization, such as p2p matching in the FT field to optimize peer-to-pool interest rates, introduce yield income, asset reuse (LSD&LP), and possible interbank lending; long-term aggregation is relatively abstract. If we extract the needs of [borrowing] and [lending] and think of them as a scatter plot, peer-to-peer lending is a scattered point, and peer-to-pool lending is a continuous curve composed of many points (and this curve is changing dynamically), then the next problem becomes very similar to trading, and we need more and denser points or lines. The derived ideas include: lending aggregation, trading, derivatives and composability expansion.
3. Market opportunities by track: 3 growth factors, 2 demands and 2+N implementation solutions for derivatives
The third opportunity is derivatives. The reason why it is mentioned separately is that compared with the first two tracks, derivatives are a bluer market. This point has also been mentioned in previous research reports. NFT derivatives have shown very low market penetration, whether in terms of the number of active accounts on the user side or in horizontal comparison with homogeneous tokens. Based on the market size growth breakdown shown in the figure below, the NFTfi track has three growth factors: the growth of the existing NFT market (positively correlated with the overall cryptocurrency industry), the growth of the incremental market, and the growth of penetration. For derivatives, the third item (penetration) has a higher growth multiple.
By the way, non-PFP assets have a greater potential for integration with NFTfi. They may have more predictable volatility and more reliable value support. For example, bill-type and some utility-type NFTs can generate cash flow (possibly in the form of currency), which can be more effectively valued and traded. Therefore, the growth scale of the incremental market also promotes NFTfi in a nonlinear way.
The second source of confidence in the NFT derivatives track is demand. From the past experience of the cryptocurrency market, derivatives often achieve good growth in a bear market, which is driven by demand. Generally speaking, the demand for derivatives is mainly hedging (or risk swaps) + speculation. The risk aversion characteristics in a bear market and the reduction in investment options under limited capital adequacy will bring demand for derivatives. In addition, one of the important sources of demand for the earliest cryptocurrency derivatives was BTC/ETH miners, and now Blur, NFT lending, and NFT Staking all bring yields to NFT. The demand for pure hedging will increase, and it will also be foreseeable that NFT derivatives will bring real users and real protocol income.
The third point that needs to be explained is how to build a good NFT derivative product. It takes a very long space to analyze the entire NFT derivative product. Therefore, 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 of all, we need to determine what methods can be used to realize NFT futures trading. Due to the scarcity of NFT itself and the low order rate, delivery products are not suitable for constructing NFT futures (maybe options are suitable), so the remaining arsenal I can think of includes the following five categories. Among them, order book perpetual contracts and vAMM have been realized, and some teams are exploring other models.
The next step is to think about what is the key issue of FT derivatives? I think the essence is still liquidity, which includes three points: 1) How to price? 2) Who will provide liquidity (or act as the counterparty) when liquidity is insufficient? 3) How to liquidate/handle the position? From the current situation, NFEX and NFTperp's choice of perpetual contracts and vAMM provides a preliminary solution to these three problems. In addition, a feature of the NFT derivatives market is that the long-short ratio is extremely unbalanced, and the requirements for Funding Rate and dynamic opening rate will be higher, which should also be one of the factors when we compare products.
From the comparison, NFEX and NFTperp are close in data, and their products have their own advantages and disadvantages. NFEX can provide lower transaction fees and transaction categories (and faster transaction pair launch speed), and NFTperp provides non-custodial solutions, but due to the imbalance of long and short ratios, its transaction price itself has a large deviation. Although NFTperp has set Funding Rate + additional tx fee to solve this problem, it is obviously not enough (long positions require a three-digit annualized funding rate).
Source：NETperp Docs
4. Last words: Store up food and slowly become king
In general, my judgment is as follows: In the medium and long term, the growth rate of the NFT market will be much higher than the growth rate of the cryptocurrency market; the growth rate of the NFTfi market will be much higher than the overall growth rate of the NFT market, and the market growth rate of NFT derivatives will be much higher than the growth rate of NFTfi.
Track tides are derived from market tides. When liquidity is sufficient, it will inevitably lead to overinvestment. The market has sufficient funds to subsidize and support high valuations, but in the long run, whether it is the primary or secondary market, pure burning of money/hype will eventually pass. 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 get out of the valley of death, and the market will return to [technology-driven] and [demand-driven]. It is worth inserting that although it is not a good time to issue coins, among the top NFTfi protocols, Bendao and Blur have already issued coins, and NFTFi may not issue coins in the end. The remaining Opensea (which has already issued NFT), Paraspace, NFEX, and NFTperp are likely to issue coins, which is worth looking forward to.
