Panoramic analysis of the NFTFi track: the current NFTFi market structure

In terms of different tracks, NFT transactions and NFT loans have begun to take shape, and the future development direction is mainly in integration and efficiency improvement.

Written by: Loki's Blockchain Notes

1. We are on the eve of the outbreak of NFTfi

**The first thing to be clear is that the NFT and NFTfi market has experienced a significant decline, but this does not mean that the NFT or NFTFi market has lost its growth potential, and 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, and then rise slowly and steadily after a possible bubble burst, stepping into real large-scale adoption. Throughout 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.

Talking about the market space of NFT/NFTfi is inseparable from the two important data mentioned in the previous research report: the market value of **NFT market and the proportion of NFT categories. **According to the statistics at that time (2023.3), the market value of the [core market] with high value and high liquidity 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 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 of the current NFTs do not have rigid application scenarios and do not have hematopoietic capabilities. The development cycle faces the binary choice of becoming a blue chip or entering liquidity exhaustion. From the perspective of capital, PFP, Art, and Collectibles mainly represent speculative demand and social demand. The strength of demand is related to the overall capital of the market. There is a positive correlation between changes in market size and the cryptocurrency market, and they cannot break through. It is difficult to generate excessive growth if the ceiling of the "big market" is too high.

But at the same time, the dominant rate of PFP will not continue to exist, and some new product sprouts are worth looking forward to. For example, the identity ecosystem represented by ENS and SBTs, the utility NFT in the game/social/educational application field, the Financial NFT and RWA opportunities led by SOLV and [ERC-3525 agreement]; **These non-PFP category NFT bring The structural market growth opportunities to come are far greater than the systemic growth opportunities. **

Taking Financial NFT as an example, the average annual total financing of cryptocurrencies in 2020-2022 is about 30 billion U.S. dollars. If 10% of it is realized through NFT or SFT (semi-fungible tokens) in the future, it will bring new opportunities to the NFT market. 30 (fundraising level) + 30 (investment level) = 6 billion US dollars in growth; 10% of DeFi TVL will bring 4.8 billion US dollars in growth, and these two areas alone can bring the current NFT market size. Come 183% growth. As shown in the figure below, from an overall perspective, the stock market represented by PFP will be subject to the scale of the homogeneous token market, but the incremental market is relatively independent and may even exceed the homogeneous token market Scale, NFT or NFTfi does not lack new narratives, which will be SLOWLY BUT SURELY higher than the overall growth rate of the encryption market.

2. Market outlook by sub-track: the market space for trading and lending is far more than that

In the first part of this research report ("NFTfi Track Panorama Research"), the focus is on explaining the current NFTfi market structure. From the perspective of different tracks, NFT transactions and NFT loans have begun to take shape, and the future development direction is mainly in integration and efficiency improvement. The point here remains unchanged: **NFT trading first and last thing is to improve liquidity. **Despite the rapid development we've seen in Blur in the past nearly 1 year, Blur is still far, far from the real endgame, in my opinion. In the past few months, I have discussed with many friends (including a large number of related team members) further improvement measures for NFT transactions. So far, the ideas I can think of and what I have learned from other friends include:

• Use veToken (or time lock) to fix LP to provide predictable and continuous liquidity supply (suitable for combination with AMM mechanism)
• Establish a special clearing agreement (or an oracle machine with clearing functions) to act as a clearing counterparty and improve buyer-side liquidity
• Build an NFT-based option/dual currency wealth management agreement (in theory, other types of derivatives also have similar composability space), act as a counterparty to improve buyer-side liquidity
• Partial fragmentation (this idea is also applicable to lending agreements, but I personally don't like this method)
• Provide liquidity with LSD assets as the bottom layer, reducing the cost of liquidity supply
• Combining with INO+OHM, build an AMM-type NFT transaction pool from the initial issuance
• Applicability of vAMM+ issuing inverse IL positions or synthetic asset models

Of course, these are just preliminary ideas. Many times when we solve a problem, more problems will arise. Friends who are interested in this direction are welcome to communicate with me further.

The second opportunity is borrowing. Considering that NFTfi, Bendao, Paraspace, and Blur have provided quite a lot of good enough solutions, this track seems a little crowded. The opportunity in my eyes is short-term yield optimization. Aggregated for a long time. **Short-term yield optimization has a lot of experience that can be used for reference, such as p2p matching in the FT field to optimize point-to-pool interest rates, introducing Yield income, asset reuse (LSD&LP), and possible interbank lending; To be abstract, if we separate the needs of [borrow] and [loan] and think of it as a scatter diagram, peer-to-peer lending is a scattered point, while 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, we need more and denser points or lines. Derived ideas include: loan aggregation, and transactions, derivatives and composable expansion.

3. Market opportunities by track: 3 growth factors, 2 demands and 2+N realization schemes for derivatives

The third opportunity is derivatives. The reason why I talk about it separately is that compared with the first two tracks, derivatives are a blue ocean market. Regarding this point, it was also mentioned in the previous research report that NFT derivatives Whether it is the number of active accounts on the user side or a horizontal comparison with homogeneous tokens, it shows a very low market penetration rate. Then, based on the dismantling of the market size growth shown in the figure below, the NFTfi track has three growth factors: the growth of the stock NFT market (positively correlated with the cryptocurrency industry as a whole), the growth of the incremental market, and the growth of the penetration rate. For derivatives, the third item (penetration rate) has a higher growth multiple.

By the way, non-PFP assets can be combined with NFTfi more, they may have more predictable volatility and more reliable value support, such as bills, some utility NFTs can generate cash flow (maybe Currency standard), more effective valuation and transactions can be carried out. Therefore, the growth scale of the incremental market brings non-linear promotion to NFTfi.

The second source of confidence in the NFT derivatives track is demand. Judging from the past experience of the cryptocurrency market, derivatives tend to achieve good growth in bear markets, which is driven by demand. Generally speaking, the demand for derivatives is mainly hedging (or risk swap) + speculation. The risk aversion characteristics in bear markets and the reduction of investment options under the condition of limited capital adequacy will bring demand for derivatives. In addition, one of the most important sources of demand for cryptocurrency derivatives in the early days was BTC/ETH miners,** and now Blur, NFT lending, and NFT Staking all bring Yields to NFT, and the demand for pure hedging has increased, and it is the NFT derivative It will also be foreseeable that the product will bring real users and real agreement revenue. **

The third point that needs to be explained is how to build a good NFT derivative product. It takes a very large space to analyze the entire NFT derivative product. Therefore, index products, options, structured products, etc. may be discussed in special topics in the future. Presented in the form of a report, the futures contract is mainly discussed here.

First of all, we need to determine what methods can realize NFT futures trading. Due to the scarcity of NFT itself and the low rate of pending orders, delivery-type products are not suitable for constructing NFT futures (maybe suitable for options), so the rest I can think of The lower arsenal consists of the following five categories. Among them, the order book perpetual contract and vAMM have been realized, and several other models are also being explored by some teams.

The next step to think about is what is the key issue of FT derivatives? I think the essence is liquidity, including three points: 1) How to price it? 2) Who will provide (or act as the counterparty) when liquidity is insufficient? 3) How to liquidate/handle the liquidation? Judging from the status quo, the way NFEX and NFTperp choose perpetual contracts and vAMM provides preliminary solutions to these three problems. In addition, one of the characteristics 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 a comparison point of view, NFEX and NFTperp are relatively close in data, and the product solutions have their own advantages and disadvantages. NFEX can provide lower transaction rates and transaction categories (and faster transaction pair online speed), and NFTperp provides non-custodial solutions. However, due to the imbalance of the long-short ratio, the transaction price itself has a relatively large deviation. Although NFTperp has set a Funding Rate + additional tx fee to solve this problem, it is obviously not enough (you need to pay a three-digit annualized funding rate for long positions).

4. Written at the end: Accumulate food widely, become king slowly

**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 that of the cryptocurrency market; and the growth rate of the NFTfi market will be much higher than the overall growth rate of the NFT market. The growth rate of the derivatives market will be much higher than that of NFTfi. **

The tide of the track comes from the tide of the market. When there is sufficient liquidity, it will inevitably lead to over-investment. The market has sufficient funds to subsidize and support high valuations. However, in the long run, whether it is the primary or secondary market, pure money is burned / The hype will eventually pass, and it is also at this stage that those protocols that can achieve a complete business closure and create real income/value will continue to live and come 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, There is a high probability that NFEX and NFTperp will issue coins, which is worth looking forward to.