Two of the hottest trends in crypto have collided. Individually, non-fungible tokens (NFTs) and decentralised finance (DeFi) are extremely popular. Together, endless opportunities await investors and creators alike.
What’s the big issue with NFTs? Unlike other crypto assets, NFTs are relatively illiquid and unproductive. Most have no intrinsic value and are left dormant in wallets gathering dust.
NFT-Fi (NFT Finance) is an emerging sector, introducing financial capacity to the NFT space. It aims to create marketplaces where your previously unproductive NFTs can be used.
So, is this sector legit? Or another fad doomed to die?
Let’s find out!
Disclaimer: Not financial nor investment advice. Any capital-related decision you make is your decision and your decision only.
- NFT-Fi merges the NFT space with DeFi.
- Financial services in DeFi (such as lending and borrowing) are supplemented by specific products like renting to create a whole new sector.
- This innovation will completely revolutionise the landscape of NFT ownership.
- The implications for other sectors, like blockchain gaming, are huge.
- Most protocols are still in development, which shows just how early we are.
- NFT-Fi is not at the forefront of our attention at the moment. That, however, does not diminish our interest in this fascinating technology.
Want a piece of the pie? Try fractionalisation
Ever wanted to buy a Bored Ape but not had the money? How does a million-dollar Crypto Punk sound? Unfortunately, most of us can’t afford such price tags. That doesn’t mean there’s no way in…
You don’t need to buy a whole Bitcoin to gain exposure, so why a whole NFT?
Meet fractionalisation of NFTs.
Fractionalisation cuts ownership of an NFT into little pieces. The NFT is placed in a vault, and then “shares” are distributed. Users who can’t afford the whole token can get exposure to its price.
There is one glaring issue with fractionalisation, though. If you break an NFT apart, how do you then get all the pieces back to make it whole again? You can’t force the owner of a share to sell. What if they lose access to their wallet?
The solution? Many NFT fractionalisation protocols pool NFTs and fractionalise their attributes. Rare attributes make certain NFTs more valuable than others. Users can collect attribute tokens to withdraw a whole NFT with those attributes.
So where can you go to fractionalise some NFTs?!
There are currently four big players: Unic.ly, NFTX.io, Fractional.art, and PartyBid. This is how they work:
- Unic.ly (UNIC): users deposit NFTs into a vault and mint uTokens (the share token). These tokens can then be traded on UnicSwap, a DEX forked from UNISWAP. uToken holders can stake these tokens to earn UNIC (protocol governance token).
- NFTX.io (NFTX): works in the same way as Unic, except share tokens are called vTokens. They can be traded on a DEX like SushiSwap.
- Fractional.art: works in the same way, but has no token, thus no staking/Liquidity Provider yield.
- PartyBid: is a novel concept where users pool funds to buy NFTs. Participants then get a share of the purchased NFT.
Need a quick fix? Try renting
Renting is another option for those unable to buy an NFT outright. NFTs can be rented, allowing the renter to enjoy the NFT’s utility, whether it be for gaming, access to a community, or simply for flexing on their friends.
There are two types of renting:
- Collateralised: like DeFi borrowing, the renter posts collateral worth more than the NFT. They can then withdraw the NFT and use it for any purpose. When they’re finished, they “repay” the NFT and claim their collateral.
- Collateraless: users can rent NFTs without depositing collateral. A wrapped token that represents the rented NFT is issued. The renter doesn’t need collateral, and the supplier doesn’t need to rent out the real asset.
Protocols offering NFT rentals:
- IQ Protocol: offers collateralised NFT rental. It basically does what it says on the tin.
- Vera: offers a suite of NFT-Fi products, focusing on rentals. It’s planning to move into real-world assets and NFT “mortgages”.
- reNFT: is the largest collateral-free rental market.
- UnitboxDAO: offers both collateralised and uncollateralised NFT rentals. It focuses on blockchain gaming.
Renting is one of the more popular NFT-Fi products. NFT holders can generate yield through rent payments with minimal risk. Naturally, this sub-sector will become popular with the expansion of blockchain gaming.
IQ Protocol and reNFT are market leaders for collateralised and uncollateralised rentals, respectively.
For the traders out there, try derivatives
Falling under the investment/trading clientele, NFT derivatives are perpetual futures contracts. TLDR: they work in the same way as any other futures contract. The contract tracks the price of the underlying NFT, and traders can trade them with or without leverage. At no point does the trader own any part of an NFT, just as BTC futures traders don’t own any BTC.
Protocols (soon) offering NFT derivatives:
- SYNFutures: NFTures is a DEX created by SYNFutures. The product is still in development, with its launch due later this year.
- NFTPerp: is another NFT futures DEX with a paper trading feature. Again, the product is still in development.
Want to earn yield? Try lending & borrowing
Users can use NFTs as collateral for borrowing crypto. The market works in exactly the same way as protocols live Aave. Loans are over-collateralised, allowing borrowers to borrow a fraction of the value of their NFT. Lenders then earn yield from depositors. This allows NFT holders to unlock liquidity in their otherwise illiquid NFT. Consider it like using your house as collateral for a car loan, that’s what we’ve got here.
Protocols offering NFT lending/borrowing:
- Arcade: a lending platform like NFTFi. Arcade allows users to pool several NFTs as collateral to allow for larger loan sizes.
- NFTFi: a peer-to-peer (P2P) protocol that matches lenders with borrowers. It offers a wide variety of NFT collections (150+).
- JPEG’d (JPEGD): like NFTFi, JPEG’d offers P2P matching for lenders and borrowers.
- Astaria: a new NFT lending protocol currently in development. Astaria uses a different approach in that NFTs are appraised on a case-by-case basis.
We have one issue with most of these protocols. Most lending protocols use the floor price for the cheapest NFT in a given collection when deciding the loan amount. This is problematic. The most valuable NFTs can only loan as much as the least valuable in a collection. This is what Astaria is trying to solve by appraising each NFT based on its actual value.
We are damn early!
A lot of these protocols are still in development. Yet, the NFT craze of 2022 showed the potential of the market. As a supplement to sectors like gaming, art, and more practical use cases like real-asset NFTs, the potential reach for NFT-Fi is huge.
DeFi will revolutionise finance. The tokenisation of assets will revolutionise intellectual property rights and contractual obligations.
As with anything that has value, financial services are at the core of economic activity. NFT-Fi fulfils that demand, and we expect considerable growth in the sector. Of course, this depends on tokenisation concepts becoming more mainstream.
Having said that, NFT-Fi is not in the limelight at the moment. Although we are watching the sector.
- This watchlist will contain most of the main players going forward. Keep an eye out for token launches on the protocols without a token.
- Watch for product launches and upgrades. For those with tokens and a product, check for new token utility. Hawk-eyed investors will be looking for value accrual. This could be the requirement of staking a certain number of tokens to use the service, for example.
- Although the sector is not at the forefront, it will be in the future. Cryptonary Pro members will be the first to know!
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