OpenSea top-10 NFT projects soar as new liquidity enters the market

Mapping NFT Price Tiers to Liquidity Methods

Putting this all together, we arrive at a matrix that provides a rough mental model of where to look for liquidity for NFTs, depending on their price tier, supply, and utility.

Summary of the above discussion. Mapping NFT price tiers to their most effective liquidity methods.

• Explore
• Games
• Art
• Launchpad

Gaming Insights Based on DataNo more tedious investigations about profitable NFT games! Our data-driven recommendations help you make a killing with NFT games. Drink to Earn with RobotsGet robot to take part in violent fights and drunk races!
Earn $METAL in the most expected p2e game of 2022!

Let’s start with what is liquidity ?

If the company is not liquid, investors become wary, and the company faces challenges in raising funds and thereby stops growing. So, in short, liquidity refers to the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price.

Spring is here and with it came a newfound awakening for nonfungible tokens (NFTs). In the last week of March, total sales volume rallied to $20 billion, but this metric took a dive from mid April to $17. 6 billion.

However, on April 16, the newly landed Moonbirds NFT, pumped over $280 million worth of liquidity into the market and this, compounded with rumors of Yuga Labs’ Otherside land drop, sent the total volume sales for NFTs into a steady upward trend.

NFT 30-day market cap / volume. Source: NFTgo

In the last seven days, the sector’s total market capitalization increased over 3% to approximately $18. 6 billion and the total volume is up nearly 37% over $1. 65 billion.

While it’s yet to be determined if the “a rising tide lifts all boats” saying will be true for the NFT market, liquidity could be circulating into blue-chip NFTs and soon-to-be released collections.

Investors who survived the 2008 financial crisis understand the importance of liquidity. When an economic recession starts, deflationary pressure hits the market, and buyers disappear. Sellers frantically try to sell assets before their prices drop further, but buyers want to de-risk and go into safe-haven assets, such as treasury bonds and money market funds.

The lack of liquidity associated with nonfungible assets is the one reason why investors may think they are riskier than cryptocurrencies. When an investor wants to sell Bitcoin (BTC), they can easily sell to an order book of buyers at various price points. If a seller doesn’t sell their Bitcoin today, they can easily come back tomorrow and part ways with their Bitcoin in favor of willing buyers.

In contrast, nonfungible tokens (NFT) are unique, and matching sellers with buyers is much more difficult. Cointelegraph Research analyzed what liquidity looked like for NFTs and whether some collections were traded more frequently than others. Cointelegraph Research is releasing its first-ever report on NFTs in October to answer exactly this question and many more surrounding the risks associated with NFTs.

Evaluating NFT Financialization Methods

Like the fungible assets of yesteryear, we can expect that DeFi protocols can step in unlock liquidity for the long tail of NFTs as well. We previously wrote about why NFT financialization is important, and outlined early examples of protocols that lie at the intersection of NFT and DeFi. Less than a year later, we now have a suite of financialization protocols to play around with. More importantly, we can also begin to develop frameworks to evaluate the merits of each liquidity mechanism against different “types” of NFTs.

Each liquidity mechanism comes with tradeoffs that render it more suitable for NFTs with certain properties over others. The uniqueness and varied properties of NFTs give rise to new challenges in sourcing liquidity. Some have utility, others are mere status symbols. Some have many “classes” or “rarity tiers” of items within a collection, others are completely unique. In evaluating how to best find liquidity for a given NFT, it’s worth defining properties under which to group different NFTs and map these properties against the liquidity method that makes most sense.

An NFT’s pricing property, and its price tier within the collection gives more insight into appropriate liquidity methods than which NFT “category” it belongs to. A common way to categorize NFTs is how they manifest themselves. For example as virtual land, PFPs, game assets, domain names, music, and artwork. However, when evaluating liquidity methods these categories may only give a partial picture because items across collections and NFT categories may behave more similarly than those within the same collection. Instead, properties pertaining to price are key.

In this article I will:

• Map the current NFT financialization landscape
• Discuss strengths and limitations of existing NFT liquidity methods
• Define NFT price tiers, and the typical behavior of assets within those tiers
• Map NFT price tiers to liquidity methods and comment on suitability

Rising sales volumes and adoption is the prevailing NFT market trend. But behind the explosive growth lies a bottleneck in the nascent space, which industry participants such as Matrixport Ventures’ Daniel Yan say could be alleviated by new financial layers.

“When we talk about growth in the NFT market, we’re talking about the trading volume in marketplaces, primarily OpenSea,” Yan said.

Take CryptoPunks. There are about 10,000 on the peer-to-peer market, each with its own price. “It’s pretty difficult to aggregate that liquidity,” he noted.

NFT financialization verticals such as lending, fractionalization, rentals, pricing and aggregation of the assets could help solve this, according to a recent report from digital asset firm Matrixport.

Peer-to-peer NFT lending platforms and liquidity providers include NFTfi, Arcade and MetaStreet. Since 2020, NFTfi has underwritten more than 5,000 loans and recorded $80 million in cumulative loan volume, per the report.

Such loans, according to Fleyshman, could help people access the value of assets that have sharply appreciated but without selling them and potentially triggering taxable events. Many also become attached to their NFTs and don’t want to part with them.

Nexo, a major crypto lender, also announced it was launching an NFT-backed lending desk last year. The service, however, accepts only blue-chip collections such as Bored Ape Yacht Club (BAYC) and CryptoPunks right now.

Although industry participants are quickly exploring more financial layers of the asset class, NFT-backed lending makes up less than 1% of its total addressable market (TAM).

That, Fleyshman expects, will bring in more buyers.

Now let’s try to understand NFTs from the liquidity lens

But NFTs are not just tokens. They have elements of community and culture intertwined within them. It is the community that creates the value or scarcity for an NFT (or any asset). At the same time, the concept of ownership is a cultural statement as much as a driver for wealth accumulation.

However, to accelerate wealth and create cultural exclusivity, there needs to be a volume of trading in a centralised market where every buyer can buy any NFT using a standardised currency.

But that is not always the case.

Another challenge is in the inherent liquidity of the network.

What does the real-world retail investor want?

For retail investors, this security is essential.

Easy liquidity is thereby an essential factor for NFTs to gain widespread use cases and mass cultural adoption. However, liquidity depends on the NFTs supply and demand, which is what creates price stability.

This is not a good market dynamic for investors to invest their money.

So how is crypto solving for it?

One of the primary use cases that led to NFTs becoming popular was providing a solution for “platform risk. ” Buy an in-game add-on for a video game, and your purchase would exist only on the publisher platform. Files would be hosted on company servers until the game was retired, at which point everything would vanish into the Ether.

Now, if you want to own a part of that, you need to buy some Solana.

This could make it slightly tricky to quickly liquidate your NFT assets for cash using a standardised value or the ability to liquidate and create projections around your entire portfolio.

This is where crypto has brought the concept of secondary marketplaces into play.

Third-party services, listing aggregators and secondary marketplaces

The concept of NFT exchanges or listing aggregators came into existence because these could be made into marketplaces where supply would not be fixed and interoperability would not be an issue, thereby increasing liquidity, pricing, and trading volume.

To give you an example, let’s consider OpenSea, which acts as a listing aggregator. You cannot trade SuperRare NFTs on Foundation, or Foundation NFTs on SuperRare, but you can sell both on OpenSea. So while platforms like Foundation and SuperRare support trades only with specific, curated NFT collections, OpenSea supports a much more comprehensive range of projects.

It makes the OpeaSea network liquid and perfect for trade. It shows in the numbers as well. According to DappRadar OpenSea has done over $2B in trading volume in the last 30 days.

Here is a listing of the top marketplaces according to DappRadar

These marketplaces are how crypto is solving for the liquidity in NFTs, and with major centralised crypto exchanges like Coinbase and FTX announcing their own NFT marketplaces recently, it will no doubt bring more moderation and more investment into the market. Add to it other marketplaces like Foundation, KnownOrigin, Nifty Gateway, Rarible, SuperRare and Zora; it becomes increasingly apparent that there is a ton of focus in the crypto developer sphere around facilitating trade by creating more liquidity around NFTs.

Key takes

While I understand a bit more about liquidity and NFTs than I used to, some concepts are still unclear to me after spending a few days burrowing down the NFT rabbit hole. But that’s ok. That was the whole point of starting on this learning journey.

Here is where I am still not clear.

Investing in art as an asset has been there for a while and is a profitable trading option. You do not need crypto or NFT for that, so I am still struggling to understand the real-world use case that NFTs are solving for artists, to make them more successful by opening up newer markets and newer buyers.

Yes, in theory, one can own a portion of the Monalisa if it was made into an NFT, but to date, only a handful of classic masterpieces have been converted to NFTs. Experiments around this have met with widespread criticism. Also, I don’t know about others, but I have no intention of owning a portion of the Monalisa. There is only one Monalisa, and the only way I would love to own a Monalisa is if I could have the original hung in my house, but that too would be not very smart because I would not be able to secure or sell it easily.

Millions of people would lose out on the opportunity to see it in person. The concept of converting my home into a museum and charging tickets for people to come and see one Monalisa does not seem like a good business idea.

So bragging rights won’t work that well.

(Caveat: Yes I do agree that many people might want to own a piece of the Monalisa through tokens as an investment option for driving profit)

While we are at it, why don’t we take a look at the famous Bored Apes Yacht Club, one of the most famous and highly traded NFT collections ever. The website itself is not on a crypto stack. They have on sale 10,000 cartoon ape images which allow early adopters in crypto, gain access to a virtual club.

So what does this virtual club give you access to?

Maybe at some level, this is just a cultural zeitgeist. Maybe at the other extreme, people are not interested in owning apes. Perhaps they are just interested in flipping them overnight at 5x the price they were brought for.

Super influencers and early adopters have already created a hype train around NFTs. FOMO is real.

The feeling that everyone is getting rich overnight, but me, is real.

So, what if the real current craze is not around creating newer paradigms in art and artistry but in the opportunity of riding an early trend. A story of community leverage. Of an irreverent internet punk culture sticking a thumbs-down to traditional forms of finance that have mostly favoured the uber-rich for decades.

Maybe the APE symbolises irreverence. Not the art.

Isn’t that how most new tech consolidates? Think of the innovation and the cultural impact of open source and then the consolidation of services under closed source — billions of Microsoft PCs and iPhones.

I do not have the necessary knowledge or skill to future predict, but time will probably tell.

What I do have, is some data which says that the volume of trading in NFTs is mostly happening as a speculative asset that can turn an exponential profit quickly. Most of these investments are being made by people with liquidity who can afford to play the game and not get burnt. They are just investing their money into a market which, due to volatility and lack of regulation, can flip it 5x in a double short time than the average 12–15 % return in traditional stock markets.

Nothing wrong here, though. If there is indeed such an opportunity, why would anyone not take it? It is mostly happening as innovators try new things with early adopters to figure out what sticks.

Right now, it’s all games, but then games become solutions to real-world problems.

Take a look at the chart below (from Messari) and see how some popular NFTs have changed in value (YTD)

For now, though, it would seem like speculation and profitability are driving the NFT craze, not some artistic renaissance. I may be wrong, but I haven’t yet read glowing reviews of NFT art by renowned art critics’.

I do believe that this will change in time.

At least, I sincerely hope it does because that is the real promise of crypto. What makes it so seductive. The underlying concept of NFT can change the market dynamics for everyday artists, creators and gamers in unlimited ways. It has the power to unlock new buyers, weed out intermediaries, drive incredible transparency, promote REAL talent based on meritocracy and foster great communities.

But that’s not exactly what’s happening now in its very early days.

Technology has the power of driving the greater good when used in the right way. I am convinced that we will see unparalleled innovation in the crypto space in the next decade that will answer all these questions.

The fundamental core premise is extremely powerful.

I am also confident that as these concepts consolidate and become more popular, they will start getting more eyeballs from securities and tax offices and become far less volatile and far more predictable. By then, crypto will be solving far-ranging pertinent real-world problems. In the process, the industry will update rules, create regulations and invoke standards.

Liquidity is essential for the creation and growth of all dapps.

NFT growth has taken the spotlight after the long summer of DeFi. But the two categories are far more closely connected than some may be aware.

A true pioneer in the NFT movement was CryptoPunks, which was built on the ERC-20 standard. However, the current NFT standard – ERC-721 – gained popularity with CryptoKitties. CryptoKitties started the first wave of hype around the collectibles category back in late 2017.

Recently, the second wave of NFT hype has begun and it could be argued that DeFi played a major role in NFTs gaining this notoriety.

Within this overview, we will analyze how DeFi dapps are facilitating NFT growth. Yield farming, liquidity pools, NFT collateralization, and insurance options will be taken into consideration.

Key takeaways

• Adoption of yield farming by NFT dapps like Rarible and Meme.ltd has driven all-time high daily active wallets by 1,449 in October and 818 in September respectively.
• Another major catalyst for the NFT incentive mechanism is liquidity pools.
• NFTs being used as collateral for lending fungible tokens on DeFi lending platforms might trigger a significant increase in interest in the future.
• Insurance made its mark in the NFT world back in September fueling transaction volumes by $1.4 million.

Yield farming created a precedent for NFTs

As shown below it can be observed that since the time $RARI was introduced activity within the daily active wallets, and token price of $RARI has experienced fluctuations. The biggest peak was back in October.

Daily active wallets peaked at 1,449 in October, and currently, have dropped to 774 in November. From a token perspective, the $RARI  token value decreased to $2. 34 which is a 76% drop when compared to the all-time high price of $9.

As shown below the daily active wallets of Meme. ltd experienced their highest peaks in September with 818 wallets and currently, it has dropped to 56 in November. From a token perspective, the $MEME token value has decreased to $222 which is an 84% drop when compared to the all-time high price of $1,414.

DeFi dapps serve as fuel to NFTs liquidity

This is how liquidity on Uniswap for example is essential in order for the artist to swap rewards into ETH and continue creating further. It builds a kind of cycle that is essential for dapp success.

Source: Uniswap Liquidity Pool $RARI/ETH

$MEME

Source: Uniswap Liquidity Pool $MEME/ETH

$MEGA

The core idea behind the $MEGA token is enabling value transfer between chains and creating an independent and trustless market with no control from developers. $MEGA token is a utility and a governance token. It’s also an index for all resources produced in the game.

The token has a static supply that will not change over time as no Mint or Burn functions are in the smart contract – that means no new $MEGA tokens will be created.

NFTs used as collateral

Recently, a platform called NFTfi made it possible to borrow cryptocurrencies while locking non-fungible tokens as collateral. For example, an NFT such as art, a parcel of land from Axie Infinity, or a CryptoPunks collectible can now be used as collateral to borrow money.

To conclude, the opportunity to borrow using NFTs as collateral serves in creating additional liquidity to NTFs that might serve as fuel for sustained category growth in the future. Furthermore, at this point in time, we are seeing relatively small assets collateralized such as art or collectibles. How will the relationship deepen as NFTs come to represent bigger assets such as a house or car.

NFTs meet DeFi and insurance

Beyond use as collateral, NFT’s have started to incorporate other financial products such as insurance and bonds. Yearn. finance announced a new product on the 17th of August called the yInsure, also referred to as Cover.

In the event of insured smart contract risk, the wallet will be entitled to receive a fixed amount of 100 ETH as stated in the example below. Interestingly, this particular insurance policy is a unique NFT, also called yNFT, which could be transferred, bought, or sold only on the Rarible platform.

Source: UYniswap v

While looking at how insurance products are being adopted, it’s evident that the biggest peak occurred in the middle of September right after the platform was launched. As per the chart below, it is spotted $1. 48 million of costs generated within yInsure.

The peak was mostly triggered by the long-term insurance policies taken for 365 days mostly for the RenVM smart contacts. As a result, Rarible transaction volumes were also affected by such a peak.

By analyzing the data, it can be concluded the DeFi smart contract insurance has given birth to insured NFT’s which can be traded only on Rarible and helps to drive dapp growth.

Looking forward

The analyzed cases show that there is an exciting future ahead for the NFT category. While DeFi dapps are one of the major catalysts driving NFT growth to-date.

Firstly, DeFi dapps created a precedent for the yield farming initiative that was quickly adopted. Secondly, DEXs help the NFT dapps with liquidity which basically enforces the incentivization process.

Furthermore, while the projects related to NFT collateralization and insurance are still very experimental and rarely used. These examples indicate that the DeFi and NFT categories are likely to become far more interconnected.

Blue-chip tier volumes have been muted, but for how long?

Liquidity has already been making its way to the top NFTs in total volume sales with the Mutant Ape Yacht Club (MAYC) seeing a more than 200% increase over the last seven days.

MAYC 7-day market cap / volume. Source. NFTgo

With the number of NFT holders and buyers increasing, projects and investors are looking toward building out ecosystems of mutual value.

RTFKT studios’ CloneX has been emphasizing that the next stage of development will center on ecosystem building. CloneX has been riding a steady wave, hovering at around 18 Ether (ETH) ($53,073). However, the mysterious MNLTH NFT, airdropped to all CloneX holders, has surged in the last seven days to over 11 Ether since it no longer is a mystery box. Its contents revealed Nike’s first-ever NFT CryptoKicks equipped with customizable features, a DNA vial for future forging events and a MNLTH2. For every MNLTH burned, the items acquired are currently worth at least $26,000. A Murakami RTFKT Skin Vial also recently sold for 72 Ether ($212,976)

PROOF Collective, created by Kevin Rose, is a members-only project that launched Moonbirds NFT and many traders were shocked by the $354 million in volume generated in less than a week. Surprisingly, Moonbirds nearly flipped blue-chip tier NFTs like Doodles for total volume.

The current floor price of Moonbirds has increased by over 390% since it hit the secondary market and is trading at 33. 5 Ether ($96,447. 84) at the time of writing.

Moonbirds floor price. Source: NFT Price Floor

NFT denizens have been vocal about the legitimacy of its explosive growth, especially after announcing the NFTs that were gifted to notable celebrities like Jimmy Fallon, Steve Aoki, Pussy Riot, the New York gallery and Springberg Gallery, to name a few.

Despite some NFT collectors speculating that Moonbirds would remove liquidity from the market, data shows the opposite to be true. In 24-hours, the total volume of sales on OpenSea increased by nearly three times from $66. 7 million on April 15 to over $177. 5 million when Moonbirds launched on April 16.

To date, NFT prices continue to see an upward trend and blue-chip tier NFTs have seen a boost in total sales volume across the board. Although there is a divide in sentiment regarding the Moonbirds phenomenon, it could have been the liquidity boost the market needed.

NFT projects gearing up for launch

Run-of-the-mill NFTs have grown stagnant and the overall market sentiment has shifted gears from traditional roadmaps and quick-flips to strategically investing in projects and teams who are set to deliver for what investors believe will be years to come. NFT investors are keeping their eyes peeled for projects that can seamlessly intersect culture and community while providing value.

As such, creators and developers are once again steering away from static PFPs and aiming to bring more dynamic features to respective collectors.

Take for example, Anata NFT, which launched on April 21 and is a collection of 2,000 avatars that are created for its owner to embody. Anata NFT uses a webcam to track and mimic facial expressions and other movements and the anime-inspired NFT is suited for the Web3 pundit who takes their anonymity seriously.

Minting was conducted through a ranked auction starting at 0. 25 Ether ($752) and was limited to 3 NFTs per wallet. The bid closed at 5. 35 Ether, whereby 50% of the net proceeds will be allocated toward its DAO. The highest bid was 69. 42 Ether ($209,306), with the second-highest bidder at 10 Ether ($30,150). This incredible niche NFT, while seemingly anticipated, is trading below the closing auction price on OpenSea for 3. 49 Ether ($10,290).

Auctions may be the new standard for NFT drops, as the most recently hyped NFT collection, Akutars, launched its public mint. In true Dutch auction form, every bidder pays the same price as the (last) lowest bid. Bearing this in mind, Akutars started its utch auction at 3. 5 Ether ($10,552) and closed at 2. 1 Ether ($6,211).

However, a white hatter revealed that the contract was not properly written and was susceptible to exploit, and froze funds as to confront the Aku team developers about their mishap.

As a result, all it took was a misplacement of one line of code for $34 million to be locked indefinitely. The team has since acknowledged its shortcomings and has proceeded to distribute funds to all bidders, including the 0. 5 Ether discount granted to all Aku Mint Pass holders who placed a bid.

The Aku Mint Pass NFT grants each owner an Akutar. Its all time-high rose over 4 Ether ($12,060) suggesting the community could price this in when the PFPs hit the secondary market.

Sleeping giant Ragnarok is what seems to be a PFP collection intended to unlock access to its game-like metaverse. The multiplayer online (MMO) will combine elements of lore, Web3, social features and role-playing games and is set to launch on April 27.

The dynamic NFTs are projected to enable owners to trade, earn and own digital real estate, and the public sale will be 4,500 Ronin Zeros at a Dutch auction that will begin between 0. 5 Ether and 0. 1 Ether.

With new and old liquidity circulating in the NFT market, and highly-anticipated projects waiting to launch, it will be interesting to see where collectors make their consolidations and take their convictions.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

What does liquidity mean in the context of NFTs?

There isn’t a market for “Mona Lisa” paintings because there is only one “Mona Lisa. ” Similarly, NFTs have a low level of liquidity compared to fungible currencies. One reason is that collectors often wish to keep their NFTs rather than trade on speculative markets. Another reason is that NFTs are traded bilaterally on marketplaces, with a small pool of potential participants for each sale.

For example, a sports card NFT of a specific player might only be in demand by a subgroup of collectors. Furthermore, not every NFT is a perfect substitution for another NFT. If, for example, Mike wants a 1988 Michael Jordan NFT for his birthday but gets a 2014 Lebron James instead, Mike might not be very happy. Due to the difficulty of comparing different NFTs being offered by sellers and the low number of bids being made by buyers, there is a low number of total transactions. This low turnover makes it more difficult to determine each NFT’s value.

For markets with low transaction volumes per item, such as real estate or collectibles, the two main types of liquidity measures include “time on the market” and “level of transaction activity. ” For example, real estate liquidity can be measured by the average time between a home being listed and when it is sold. In NFT terms, this would be the “average time between when the NFT was listed on a secondary market and when it sold

According to Gauthier Zuppinger, chief operating officer of NFT data source NonFungible. com, time on the market is difficult to measure for NFTs because “thousands of assets are listed on the market for extremely high prices (some Punks are listed for billions of USD), waiting for the right time or hoping for a whale to buy it. On the other hand, a lot of people don’t ‘list’ assets but are open to bids

The second type of liquidity measure calculates the level of transaction activity. For example, NonFungible. com measures NFT liquidity by the percentage of the total supply of a specific type of asset that has been traded on secondary markets. This can be calculated by dividing the volume of unique assets that have been traded on the secondary market by the total supply available for each type of asset.

So, the answer to the question, “which NFT collection is traded the least?” is Meebits. Meebits is one of the least liquid collections, with over 66% not even being sold once. Interestingly, the majority (57. 7%) of CryptoPunks have only been sold one time or less.

Launching in October, Cointelegraph Research’s NFT report covers how to value different types of NFTs and how to discover exciting NFT collections before they go mainstream. The report also covers the dark side of NFTs, including their ecological impact and lack of liquidity. The report is supported by projects, including Enjin, OneOf, Nansen, Mintable, Alien Worlds, Animoca Brands, NFT Bank, The Sandbox and Pinata.

This article is for information purposes only and represents neither investment advice nor an investment analysis or an invitation to buy or sell financial instruments. Specifically, the document does not serve as a substitute for individual investment or other advice.

Sale mechanisms are also a relatively capital inefficient method to do NFT valuation. 100% of its value must be spent to achieve price discovery, and the owner must part ways with their asset for good.

Auctions

Auctions have commanded exuberant profits for creators, and is a great way to get liquidity for assets like 1/1 artworks or rare items in a collection (“grails”). While high-profile bidding wars play no small role in putting NFTs on the map, auctions are even less capital efficient than marketplace sales as a means to price discovery as they require that bidders lock up capital. The capital lockup across multiple bidders always ends up more than or equal to what the asset ends up selling for.

On the sellers’ side, auctions typically require pre-negotiations with potential buyers or wide marketing efforts to bring attention to the sale. Without potential buyers already vying for the NFT, time-to-liquidity may end up taking very long.

Cross-Marketplace listing on Genie

Source: Nonfungible. com

Loans/CDPs

NFT-collateralised lending protocols come in 2 main flavors, with complementary tradeoffs.

Squiggle up for a loan on NFTfi

There is room here for underwriter DAOs with whiteglove valuation capabilities to come in to offer informed, favorable loan terms. Gringotts formed as a community of NFT collectors, traders, and analysts pooling capital to give out loans through NFTfi. In its first season, the DAO used its collective expertise to define valuation models which were deployed through automated and manual lending strategies. MetaStreet is building infrastructure on top of lending protocols to enable more efficient capital aggregation and risk tranching, drawing inspiration from traditional securitization markets.

In P2Protocol lending solutions like JPEG’d and DeFrag, lenders can agnostically provide liquidity to a protocol, which then automatically allocates capital to borrowers who have collateralized their NFTs.

Unlike its P2Peer counterpart, P2Protocol lending can offer instantaneous time-to-liquidity as the protocol takes care of the matching process. However, this means they must rely on price oracles to automate loan terms. Therefore, eligible collateral will be limited to collections that have reliable price feeds (those that are already liquid) or quantifiable properties that enable valuations to be determined algorithmically.

Taker takes a hybrid approach and bakes peer appraisal into their protocol. Liquidity providers can form or join a “Curator DAO’’ on Taker to collectively appraise assets. This serves as a pricing mechanism which feeds into lending activities, giving instant liquidity to borrowers with the highest appraisal value for their assets.

The nice thing about NFT-backed lending is that debt positions can, too, be represented as NFTs which can then be plugged into other financialization protocols. For example, NFTfi promissory notes can be further leveraged or utilized in other hedging strategies.

It’s important though to consider that loan-to-value ratio is always less than 100% (typically 50%), and APRs may be high depending on the collateral’s risk profile as determined by the lender or protocol (60–80% for high-risk assets compared to 18–25% on blue-chips on NFTfi).

Liquidity Pools

Liquidity Pools allow individuals to deposit similar NFTs into a pool, minting a derivative fungible token that can be used to redeem any asset in the pool at any given time. NFT-LP protocols like NFTX and NFT20 effectively become marketplaces built on top of liquidity pools for “like” groups of assets.

Floor items are an obvious candidate for such protocols, but theoretically one can create liquidity pools based on certain traits for collections where non-floor items can be grouped into trait “classes”. Items within a class can be treated as fungible with one another, provided there is sufficient supply. Buyers can offer to purchase any asset that has that specific trait(s). Any non-floor or overpriced asset for a “class” will be arbitraged out of the pool, achieving price discovery.

Instead of having to find a buyer for a specific NFT, liquidity protocols opens the pool of buyers to those that want to acquire any NFT of the same class, offering faster time-to-liquidity than ordinary marketplace sales. Moreover, while representative ERC-20 tokens (e. NFTX’s vTokens) can be traded in any amount, the individual NFTs are not actually fractionalized, and one can redeem one from the pool as long as they have a whole vToken, avoiding the governance overhead of multiple owners of fractions.

Like with lending protocols, there is room to build services atop NFT-AMMs. FloorDAO is a decentralized market maker on top of NFTX. Through Olympus-style bonding, it “sweeps the floor” of community-voted blue chip projects, creating deep liquidity for the collection. This liquidity allows traders to instantly buy, sell, and swap assets, while the trading fees on DEXs and NFTX vault fees flow back to the DAO treasury.

Fractionalization

Fractionalization involves “splitting” an NFT into multiple fractions/pieces, which can then trade as fungible tokens (e. 1 NFT becomes 10,000 fungible tokens). By lowering the price to acquire a part of an NFT, more buyers can get exposure to the asset and its upside without having to purchase the entire piece. Fractions allow for composability with other DeFi protocols, and can command a premium to fair market value with a buyout clause.

The limitation with this method is the need to create new markets and supply liquidity per individual NFT, or more recently, per basket of NFTs. This introduces complexity around ownership and governance overhead, rendering this method more suitable for high value pieces, and less useful for low-value/floor assets.

Composability again allows applications to be built on top here. PartyBid — built using Fractional. Art smart contracts — is a crowdfunding platform that enables strangers to pool capital and collectively bid on NFTs. If the auction is won, capital contributors receive the fractionalized tokens pro rata to their contribution amount.

Szns takes another approach and enables communities to create lightweight curation DAOs that collectively govern fractionalized baskets of NFTs — called “Albums”. Album DAOs launch with similar parameters for each community, and can define their own processes for buyouts, NFT management, token distribution, and arbitrary actions.

Other Price Discovery Solutions

Before we map NFTs to their liquidity methods, it’s worth discussing 2 emergent solutions to price discovery and map them against NFT price properties.

Despite the often-cited uniqueness of NFTs, collectibles markets are often priced on quantifiable properties such as trait rarity (Alien Punks). In these cases, pricing can simply be computed based on historical sale data. NFTBank uses machine learning to predict prices of assets based on past pricing of similar assets.

Algorithmic Portfolio Valuation on NFTBank

This is a more capital efficient means to price discovery because the fixed cost of developing pricing models is amortized across many assets over time. However, given the relatively low amount of available data on top-tier items (“grails”), this method is likely most useful for liquid items within a collection for the foreseeable future (floors, mid-tier). Data-driven approaches are also less useful for items that are subjectively priced, like 1/1 art, for which crypto-economically incentivized appraisal protocols may be more suitable.

Peer-prediction or Appraisal-based

Peer prediction incentivizes participants to honestly answer questions about the valuation of an asset. In its first version, Upshot enabled NFT owners to put their assets up for valuation, and in turn incentivised individuals to appraise them using a crowdsourced approach*. Abacus offers another way for sellers to discover a spot price on their NFTs without having to give up ownership of their asset by creating a liquid market for traders to speculate on the value of an NFT’s pool.

Like the algorithmic methods, the valuation costs through peer prediction are amortized across a large number of assets.

Considering these trade-offs, we can deduce a simple mental model for appropriate price discovery methods for NFTs with certain price properties.

Defining Price Tiers

A rough framework to think about NFTs within a collection is the price “tier” that they fall under. By setting price bounds relative to the floor, we can map out the price distribution across collections:

Mids. Mid-tier NFTs within a collection may have properties that render them more valuable than floors, but are not the most valuable items in a collection. For the below graph we define this tier as items whose price lies between floor price * 1. 4 and floor price * 2.

Top. Top-tier items (“grails”) can include blue-chip collections in general (e. Fidenzas, Autoglyphs, CryptoPunks), or coveted works by prominent crypto artists (e. XCOPY, Beeple, Hackatao). But for our purposes here they are the rarest, typically most sought after items within any collection. For example, Alien Punks, Black Suit Board Apes, and Matrix CrypToadz. We define grails here as being floor price * 2. 5 and above.

Below is based on NFTBank data-pulls from 12/15/2021 and 01/15/2022: Former contained 279 collections with a total ~2. 4mn NFTs evaluated at 3. 7mn ETH market capitalization. The latter had 540 collections on ~14. 2mn NFTs estimated with 8. 9mn ETH.

*Prices are estimates by NFTBank algorithm. The data was pulled on 01/15/2022 and contains ~14. 2 million NFTs across 540 collections, totalling 8. 9 million ETH in market cap.

Across collections, we can see that floors (blue) make up the majority of items.

While at first glance it seems like financialization protocols targeted at floor items have the largest slice of the addressable market, there is plenty of untapped value in finding liquidity solutions for mid- and top- tier items.

Future Work

Beyond the development and adoption of the aforementioned financialization projects, some things I’ll be keeping an eye out for are:

• Specialization. Just like how there are generalized and specialized marketplaces today, it wouldn’t be surprising to see other financialization products emerge to target specific NFT categories — we’re starting to see land rental platforms, for example. The rapid proliferation of NFT projects across categories will soon render it futile to consider “NFTs” as a singular ecosystem. Instead, the NFTs and financialization products for virtual land, art, game assets etc. will be standalone ecosystems, with specialized protocols serving as the infrastructure layer for each vertical.
• Composability. Protocols can leverage each other for further utilization of idle assets. For example, an NFT liquidity pool could reuse assets inside the AMM, renting them out or use as loan collateral. Or an NFT that is used as loan collateral could also be rented for the same duration. Locked NFT’s can either be used to leverage liquidity or to offset loan repayment.
• Service DAOs. Communities of analysts, appraisers, underwriters, and liquidity providers will continue to emerge to either drive or service demand for financialization protocols. These can form from within communities of these protocols themselves, or a more agnostic party of NFT collectors. Service DAOs will play a key role in helping protocols bootstrap adoption, improving valuation capabilities and reducing time-to-liquidity for NFT holders.

If you’re working on improving NFT liquidity, have feedback on the article, or want to riff on the intersection of DeFi and NFTs, please reach out!

Renting/Lending

While typically only gets NFT owners a fraction of their asset’s value, it’s a good option for collectors who don’t want to part ways with their assets to earn yield on idle NFTs. For low velocity, high-value assets, renting is a valuable additional source of demand and liquidity.

Decentraland parcels available for rent on Landworks

Liquidity of the NFT is the ease with which it can be bought or sold within that network for cash in return. But in many cases, trades are made, not for cash but swaps

One of the greatest impediments to NFTs right now, at least in the world of crypto, is lack of liquidity and the ability to earn an ROI on your NFT without selling it