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Messar: Take NFTX, NFT20, Unicly and Fractional as examples to look at the future trend of NFT financialization

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While the fundamental value proposition of NFT is its uniqueness, interchangeability is important to increase the liquidity and financialization of NFT

Title: Financialisation of NFT: How to Make NFT More liquid?

Eshita Nandini & Amp; Mason Nystrom, Messari analyst

South Wind & NBSP;

Similar to assets in DeFi, NFTs (Non-homogeneous token)& NBSP; Similar primitives are needed, such as lending, liquidity, and asset management, which are currently being built. Furthermore, while the basic value proposition of NFTs lies in their uniqueness & NBSP; (Each NFT is unique), but interchangeability; (fungibility) It is important to increase liquidity and financialization of NFTs.

NFT fragmentation map, mapping: Messari

There are thousands of buyers and sellers of liquid tokens, and each NFT transaction requires only one buyer and one seller, meaning that there are thousands of buyers and sellers of liquid tokens. NFT is less liquid. To date, several projects focused on financializing NFT are trying to make NFT as interchangeable and liquid as possible.

01. Liquidity of NFT & NBSP;

Like physical collectibles, such as trading baseball cards, NFT suffers from illiquidity, especially for items that are not highly valued. While the NFT market is on the rise, we typically see untapped potential for this asset. NFT transactions on Ethereum alone have exceeded $13 billion, and this number will continue to grow as new types of assets are tokenized on the blockchain.

Figure above: NFT's cumulative volume (orange line) and weekly volume (blue line) growth as of Nov. 22, 2021.

Currently, the market for blue-chip NFTs (such as CryptoPunks) has the greatest liquidity, but they are inaccessible to most NFT collectors due to their concentrated and expensive distribution.

02. NFT liquidity protocol & NBSP;

Most NFT liquidity protocols take one of these two approaches: The first approach is to create liquidity for NFTs by creating liquidity pools into which individuals can deposit similar NFTs and redeem them at any particular time.

For example, NFTX And & have spent NFT20 The advantage is that they can effectively build on the liquidity pool of NFT assets and become NFT markets. The second approach is to fragment NFT into smaller pieces that can be traded as homogenized tokens, for example, one NFT into 10,000 pieces. Homogenize tokens. Unicly And & have spent Fractional This is the approach adopted by the two agreements.

This second approach improves liquidity by reducing the purchase cost of acquiring a small portion of the entire NFT, similar to the way Robinhood split the stock so that instead of buying a $1,000 tesla share, individuals can buy a small portion for $100.

NFTX, NFT20, Unicly and Fractional liquidity protocols hold nearly &nbSP; Total lock-up value (TVL) of $80 million. As shown below:

Figure above: TVL growth for the four NFT liquidity agreements as of November 1, 2021.

At present, Unicly protocol has the largest market share among the four protocols, with its TVL accounting for 43%. NFTX Leading in liquidity pool protocol & NBSP; NFT20. While & have spent Fractional Since the end of July this year online has accumulated a considerable market share. As shown below:

Figure above: The TVL market share of Fractional protocols (gray at the top) has increased rapidly since its inception, but Unicly is still the dominant part. Data as of November 1, 2021.

03. NFT Liquidity Pool & AMP; Market Protocol & NBSP;

We will first examine two main NFT liquidity pool protocols: NFTX And & have spent NFT20.

1) NFTX

NFTX Is a market and liquidity protocol designed to enable NFTs buying and selling. NFT collectors can deposit the entire NFT in a Vault on NFTX and mint interchangeable tokens. vTokens (The NFTs in each vault are the same series of NFTs.) These vTokens represent the value of the NFT being deposited. At any time, the NFT collector can use these vTokens to randomly purchase another NFT asset from the vault. Alternatively, individuals can redeem specific NFT from the same vault by paying an additional fee.

To earn fees, collectors must pledge their vTokens to their respective liquidity pools. (E.g. Sushiswap). Each time someone buys or sells an NFT, the pledgee earns a fee. One feature underpinning the NFTX model is that users can access instant liquidity of NFTs with highly mobile vTokens. For example, BAYC (Boring Ape Yacht Club) holders can instantly deposit their "Boring Ape" NFT into the NFTX vault and earn BAYC vTokens.

Instead of pledging their BAYC vTokens, the holder can choose to sell their BAYC vTokens through a decentralized exchange, such as Sushiswap. Of course, if a particular vTokens is less liquid, then NFT holders may be able to sell their NFT in this way at a lower price than they would on a trading platform like OpenSea, but this way of obtaining instant liquidity is usually worth even the lower price.

Recently, NFTX has partnered with Futureswap to provide & NBSP; NFT perpetual contracts allow speculators to short or long derivatives of NFTs in NFTX vaults.

2) NFT20

NFT20 Is a decentralized NFT exchange that allows individuals to trade, sell and exchange NFT. Similar to NFTX, NFT20 allows NFT holders to add their NFT (such as Cryptopunk) to a liquidity pool, and in return they receive interchangeable amounts from that particular liquidity pool. ERC20 tokens, & have spent (Like $100 Punks tokens). With these ERC20 tokens, individuals can purchase NFT in the appropriate liquidity pool (such as Cryptopunk) or via Uniswap Wait for the exchange to sell it.

In addition, these NFT ERC20 tokens can be used as liquidity to deposit in a liquidity pool on Sushiswap or Uniswap, thus adding liquidity to the token and thus making the underlying NFT more liquid. Some NFT20 liquidity pools also offer liquidity mining incentives, whereby users can receive NFT20's local tokens. MUSE. In NFT20's existing NFT liquidity pool, the liquidity of the Boring Banana "S Co, Cyber Kongz, Wrapped Moon Cats and Gutter Cats NFT series accounts for approximately 50% of the TVL in the agreement.

NFT20 protocol local governance token & NBSP; MUSE Maintaining a supply of 1 million pieces, 500,000 MUSE was distributed to the Very Nifty game community in September 2020; In addition, 300,000 MUSE was reserved as a liquidity mining reward; Of the remaining 200,000 MUSE, 50% (100,000 MUSE) was allocated to the NFT20 DAO and 50% was reserved for the founding team of the protocol.

Every time an NFT is deposited into the NFT20 protocol, the protocol is minted. 100 exchangeable ERC20 tokens (as described above), of which 5% are allocated to the NFT20 protocol. The NFT20 agreement will exchange the 5% ERC20 tokens into ETH, and then use ETH to buy MUSE. Finally, 50% of the purchased MUSE will be allocated to &NBSP; The pledgee of MUSE tokens.

3) Floor price & NBSP;

The floor price is the lowest price of an NFT asset in an NFT series and is a widely tracked metric in the NFT world. In NFT series such as CryptoPunks or BAYC, the floor price is usually set by the least scarce NFTs asset in the series.

Obviously, a liquidity pool created by protocols like NFTX and NFT20 needs to consist of a base price NFTs in one of the NFT series, because if a user puts a more valuable NFT into the pool, that NFT will be purchased and/or replaced with a lower value NFT.

For example, if someone takes a zombie. (This is the rarest Cryptopunk.) Put it in a minimum price Punk NFTX vault and another collector will immediately buy the zombie Punk. NFTX tries to mitigate this floor price problem by creating parameters in the NFTX vault that require the NFT being deposited to have certain standards. (such as features, records, etc.).

NFTX allows NFT collectors to create multiple vaults for different levels of NFTs. For example, in the case of CryptoKitty (NFT), there is both a CryptoKitty &NBSP; Reserve vaults, too, have one (the rarest). The first Cryptokitty Vault & NBSP; (Only Cryptokitty with original metadata can be stored in the vault.)

NFT20, by contrast, aims to solve this floor price problem by allowing NFT sellers to create a decentralized Dutch auction on the NFT20 assets page, thus enabling sellers to receive a larger number of ERC20 tokens when they sell NFT.

4) NFTX vs. NFT20&NBsp;

Although both NFTX and NFT20 protocols have been online for more than a year, NFTX's V2 upgrade at the end of June has shown considerable success in accumulating NFTs.

In a matter of months, NFTX has attracted a significant number of high-value NFTs. The most liquid vaults on the protocol are made up of CryptoPunks ($PUNK), HashMasks($MASK), and CryptoPhunks ($PHUNK).

In contrast, NFT20 has more NFTs in its liquidity pool, although the average value of these NFTs is lower (hence TVL in NFT20 is significantly lower than in NFTX), and NFT20's NFT growth has stalled in the past few months. As shown below:

Above: Since July this year, NFTX has continued to acquire more NFTs, while the growth of NFT20 has been relatively stagnant.

NFT20's fee income has fallen sharply in the past few months; While NFTX's fee income also fell, it remained at 50% of its all-time high in August. As shown in the following illustration:

Figure: Monthly fee revenue for NFT20 (black bar) vs. monthly fee revenue for NFTX (red bar)& NBSP;

It is worth noting that all fee income from the NFTX vault goes to the pledgers in the vault, while fee income from the NFT20 market goes directly to all MUSE pledgers. Although direct cost capture is not necessary for NFT financialization protocols at this stage, NFTX protocols have a reliable cost generation pathway in the future.

04. NFT Fragmentation protocol & NBSP;

Asset fragmentation has become increasingly common in the traditional financial system, from real estate to art to cash flow, and traditional financial assets are creating innovative solutions to fragment these asset classes into smaller pieces to attract more buyers.

Source: Jump Capital

While some startups have attempted to fragment assets using their own proprietary networks and systems, blockchain networks offer a more open, liquid, and composable solution.

Currently, some protocols have begun to fragment tokens. Niftex The protocol, which allows NFT holders to fragment NFT into exchangeable tokens, is one of the first. Niftex was recently acquired by a recently unknown entity, but it has emerged that a large exchange could be the buyer.

At the same time, there are currently two major protocols leading the field of NFT fragmentation: Unicly And & have spent Fractional.

1) Unicly

Unicly Is a permission-free platform that allows users to assemble NFT collectibles and create them by creating uTokens To fragment them. These NFT collectibles (ERC-721 tokens or ERC-1155 tokens) can be traded after fragmentation, and the Unicly platform provides one directly. AMM (automated market maker) to allow users to trade or farm for profit without going to a third-party exchange.

When an NFT collectible is tokenized, that particular collectible is locked into Unicly's smart contract until enough tokenholders choose to unlock the NFT collectible. For example, the largest vault in the current Unicly protocol & NBSP; JennyDAO Have chosen to collect and manage all their NFTs on Unicly. UJenny tokens are used to govern JennyDAO's Treasury. As of now, JennyDAO has reached the 50% threshold for lockaware of this NFT series.

Above: & have spent Unicly protocol usage is on the decline.

The peak in the number of fragmented NFTs is roughly in line with the peak of this year's NFT market cycle. Currently, Unicly protocol usage is down slightly, partly due to its competitors. Fractional The introduction and popularity of. The Unicly agreement had a basically fair token launch in May, with 90% of the local token UNIC being used for liquidity mining in the community and 10% reserved for the core development team.

Users can do liquidity mining by pledging UNIC, which will convert UNIC into xUNIC. In addition, a fee of 0.05% of all trades traded on the Unicly exchange is used to buy back UNIC. UNIC's minting rate is reduced by 5 per cent each month to ensure that its supply never reaches 1m coins.

2) Fractional

Fractional Allow anyone to buy, sell, and cast fragmented NFTs. NFT holders or NFTs series owners can use Fractional NFT; ERC20 scrip. Curators on the Fractional platform & NBSP; The curator (who fragments NFT into ERC20 tokens) is essentially the asset manager for each NFT or series of NFT, fragmenting the NFT and receiving fee income from the auction.

Collectors can fragment the NFT into interchangeable ERC20 tokens, which can be combined to redeem the NFT or can be used to purchase the underlying NFT at a price higher than the minimum.

Any buyer can bid for the NFT at the lowest price set by the majority of owners of the NFT fragment. If the owners of a fragmented NFT want to sell the whole NFT, they first vote on the lowest price. If there is a buy-out or a buyer deposits ETH greater than or equal to the minimum price, the fragmented owners of the NFT will be able to exchange their NFT fragments for ETH. Currently, 2,277 NFTs are locked in Fractional protocols.

So far, transactions on Fractional tokens have exceeded those on the platform. $1.5 billion, a pretty impressive figure considering the deal only recently went live. See below:

Like most deals, it's in Fractional The few NFT series on the platform account for a large proportion of its transactions. Two memes NFT, namely Doge NFT And & have spent Etherrock #72 accounted for more than $300 million in trading. See below:

PartyBid It's a group auction that allows anyone to hold a "party" and bid collectively. , which uses Fractional smart contracts to implement its bidding process. PartyBid has just started supporting the Opensea auction, which is expected to give PartyBid and &NBsp; Fractional Bring in more activities.

3) Unicly vs. Fractional

Unicly was established before Fractional and still has more vaults and a much higher TVM. However, since June, Unicly's TVL has dropped significantly (down about 50%), possibly due to other new entrants into the NFT fragmentation space and attracting a large portion of what should have been. Unicly obtained & NBSP; NFTs.

Currently, all NFTs locked in Fractional protocols still account for only about 10% of all NFTs locked in Unicly (as shown in the figure below). Similar to NFT20 and NFTX, NFTX and Fractional protocols hold fewer NFTs, but the average value of NFTs/ series held by them is higher than that of their competitors.

The main difference between Unicly and Fractional is what the user can do after acquiring the fragmented token: just For Fractional, users can go to a third-party exchange, such as Sushiswap, to sell these tokens. Unicly, on the other hand, is an AMM (Automated market Maker) that allows users to use their uTokens to pledge or yield farming. Although functional as Unicly, Fractional is more user-friendly, especially for NFT novice users.

While these protocols are essentially competing around NFTs, their use is not necessarily mutually exclusive. As discussed earlier, each NFT liquidity protocol has a different set of capabilities that may perform better depending on the user's preference for what they want to achieve.

For example, NFTX might be better suited to a particular NFT asset class. For example, Sorare (NFT fantasy football) will publish dozens of identical cards around the same star, all of which have the same value. NFTX or NFT20 can also be used to improve minimum pricing of NFT series that have a large number of floor NFT assets. By contrast, fragmentation of NFTs enables DAOs to create a portfolio of different assets (such as BAYC + base Punks + non-base Punks), potentially creating a more valuable and liquid NFT series.

It is worth noting that many of these agreements focus on how to provide liquidity. Still, these agreements compete for liquidity, which will be concentrated in a handful of agreements.

05. The Future of NFT Liquidity & NBSP;

As the NFT market continues to grow and new users are added, NFT's liquidity issues need to be addressed. Currently, the financialization of NFT is addressed through liquidity and fragmentation protocols. Financialised agreements will become increasingly important as traditional asset classes are issued as NFTs.

In addition, as NFT becomes collateral for DeFi agreements such as Maker or Compound, finding ways to add these NFT assets to the system has the potential to enable meaningful improvements in the event of a liquidity crisis. Importantly, composability will allow these NFT financialization protocols to evolve further and integrate with other protocols.

Fractional has used PartyBid to allow strangers to band together to raise money and buy NFTs such as These. Elsewhere, Genie NFT20 and NFTX are aggregated to provide immediate liquidity to NFTs and facilitate large volumes of transactions. This further implements simple NFT behavior, such as buying a large number of base NFTs from a series of NFT.

In addition, existing NFT liquidity protocols will have a unique opportunity to benefit from new protocols, as these new protocols will leverage the capabilities of existing protocols and unlock new user behaviors.