When companies like Taco Bell announce they are launching NFTs, it’s clear that something special is happening on Ethereum. Artists around the world are finding that they can now monetize their creative works at far better rates than in the traditional world through selling NFTs. Yet when I asked Jake Brukhman, a leading investor in the NFT space, what he thought was going to be the next big NFT project, he actually pointed to the emergence of financialization of NFTs as the most important trend to watch.
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. As DeFi has proven, the crypto investors prize liquidity and desire yield. Yet how can there be liquidity for an asset that is non-fungible? It’s not like there is a constant market for people who want to buy and sell expensive works of art.
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Yet there are innovative projects that are introducing liquidity for these assets into the market. One of the most appreciated projects by investors that focuses on making NFTs more liquid is NFTX, which is powered by Infura. NFTX allows for the creation of ERC-20 tradable products that are a basket of NFTs with similar characteristics.
For example, there is a PUNK-CORE ERC-20 that represents a claim over 1 PUNK in the NFTX PUNK fund. At any time, users who deposited a PUNK can redeem a random PUNK from the fund through burning their PUNK ERC-20. Additionally, PUNK ERC-20s are traded on Balancer (a decentralized exchange) through a pool called PUNK-CORE, which is comprised of 20% PUNK-FEMALE, 20% PUNK-ATTR-4, 20% PUNK-BASIC, 20% of PUNK-ATTR-5, and 20% PUNK-ZOMBIE . Liquidity providers can thus earn fees through depositing their PUNK NFTs into NFTX, receiving a PUNK ERC-20, and using that PUNK ERC-20 to provide liquidity on the Balancer PUNK-CORE pool. Daily fees generated vary widely, but the fees have reached as high as .75% for certain days. Effectively, NFTX allows for greater liquidity of NFTs and also enables holders of these NFTs to earn fees through pooling liquidity on decentralized exchanges.
“As 2021 is setting up to become the year where DeFi starts to become fully compatible with NFTs through protocols like NFTX, I envision the space to rapidly evolve into new territories similar to what we've seen during the DeFi summer of 2020. The NFT scene is reaching critical mass with both "NFT-native" artists such as Beeple and the teams behind Larva Labs and NFT42, as well as artists from the non-NFT scene (pick a celebrity) favoring the benefits of using the NFT standard for distribution and royalty purposes.
Another project, Charged Particles, allows users to combine their NFTs with interest bearing tokens, such as aDAI, adding a token flow component to the underlying NFT. Additionally, Charged Particles also allows users to combine NFTs to make a new NFT. Instead of having to sell each NFT in your collection piecemeal, you could combine all the NFTs in that collection into a single NFT and sell that collection as one collection set. Other features can be added to these particles, such as timelocks, which place parameters on when the assets can be withdrawn, and programmable interest distribution, which allows developers to design ways to portion of where the interest generated on the NFT goes. At any time, users can remove the interest bearing functions to reclaim the principal ERC-20 plus the generated interest.
Other projects are looking to capitalize on the success of existing DeFi brands in their desire to bring financialization to NFTs. Aavegotchi looks to capitalize on Aave’s brand in order to have a natural community for the NFT product. Unlike traditional NFTs, Aavegotchis are NFTs staked with DeFi-enabled ERC-20 tokens powered by Aave, which are called aTokens. In order to maintain an ERC-721 Aavegotchi, the owner must ensure that the Aavegotchi’s “Spirit Force” is growing overtime. Spirit Force only grows when the aTokens remain attached to the Aavegotchi. If an owner decides to redeem the aToken in order to claim the interest generated and also claim the collateral, then the ERC-721 will be destroyed forever. In this way, Aavegotchi’s introduce interesting new game theory into the NFT world. Will the ERC-721 be more valuable than the collateral and interest generated form the aToken attached to it?
Thank you to Consensys Ambassador, Emerick Mary, for bringing Charged Particles to our attention.