Why we are HODLing NFTs and why you should too.
NFT 101:
An NFT is a digital object that carries ownership of something. The ‘something’ (usually some property) could be online, a digital art piece, virtual real estate in some digital world (like your CoC village), or a special gear in a video game. It might also be something tangible: a banana, actual real estate, a seat at an NBA match, or a painting. Alternatively, an NFT might be some hybrid like the right to own an asset: like options.
It would be nothing short of a miracle if you haven’t heard about NFTs. According to an application tracking firm, DrappRadar, in May, people were buying and selling an estimated 85,787 NFTs — at a total value of $5.8 million — a day. To put it in perspective, BSE’s daily trade value is about $771 million, and it’s been around for 147 years.
We’ve seen influencers mention their investments in NFTs or by using some other form of the same technology. Beeple sold his “Everydays 5000” for $69.3M via Christie’s Auction on 11th March 2021. But the NFTs are not just for KOLs — A Junior VC just launched their NFT — platforms like Rarible and Mintbase allow anyone to mint their own NFT for some gas.
While NFTs (in their primary use case), have been pleasant accessories to the crypto world, they seem to be a short term hype that will eventually frizzle out — we will most likely not see another Beeple for a few years. 1% of all NFT collectibles will hold 99% of the value generated in the market.
However, the core functionality of NFTs could become something far more widely used. NFTs have multiple practical business uses; once people iron out some significant problems.
The underlying concept is pretty straightforward:
- Like any technology, NFTs can render more efficient ways of conducting business, transactions can happen swiftly and effortlessly.
- The blockchain keeps a record of all the transactions connected to the NFT and the asset it represents. Let’s take an example; if you want to know which farm the cucumbers in your salad came from, you will be able to do so because of the underlying blockchain hash — with NFTs, transparency in commerce will be the norm.
- NFTs can include smart contracts that automatically take actions under certain preset conditions (automated and self-enforcing set of rules that can’t be overlooked or skipped).
We believe that crypto & NFT will continue to exist, their functionalities will evolve into multiple different use cases before seeing mainstream adoption. Most recently we have seen functionality evolve in the financialization of digital assets.
NFT x DeFi:
NFTs have led to the conception of unique financial services — which are mostly analogous to traditional banking practices — with the aim of bringing liquidity to DeFi. Let’s explore a few developments in this space below:
- Lending/Borrowing and Collateralization:
Crypto lending platforms have seen exponential growth in the past two years and with the emergence of DeFi the growth has only accelerated. Looking back at 2018, when everyone was sceptical about the utility of this space, we can now see that lending played a crucial role in rendering real value in the market with products that had real adoption and traction. This case stands with NFTs as well — the need for collectors to leverage their digital assets (even more so, when we take the intrinsic value of the NFT into consideration) has facilitated the inception of multiple projects in this space.
Drops NFT: Drops is a platform that brings DeFi-style infrastructure to NFTs, adding some much-needed utility to idle NFT assets. Users can leverage their NFTs to get credit and earn yield, which significantly reduces the opportunity cost of holding them for the long term.
NFTify: A P2P marketplace for collateralized NFT loans. It allows small businesses to create their own NFT store without coding, helps NFT authors issue NFT easily and detect fake/similar content for copyright protection purposes, provides NFT collectors with a platform to transact at a much lower cost.
PawnSpace: It is a decentralized NFT collateralized lending protocol that allows users to put their NFTs as collateral for borrowing loans.
2. Fractionalization:
Fractionaliazation is allowing smaller investors to pool resources to purchase fractional interests of an NFT. Fractionalizing enables the NFT holder to realize some liquidity from their asset without selling the entire piece. The concept is analogous to REITS, and the holders trade on a percentage of the asset. F-NFTs can be further extended to any digital asset and facilitate fractional ownership.
NIFTEX: NIFTEX makes fractional ownership of NFTs possible, by allowing creators to earn royalties on trades of fractions, governance over the underlying NFTs for holders of a fraction and other tools that allow for more fine-grained ownership. Also, a decentralized autonomous organization (DAO) is coming to govern the whole application.
Nftfy: Nftfy is a decentralized protocol that enables NFT holders to Fractionalize their Non-Fungible Tokens (NFTs) in a trustless and permission less manner. Nftfy utilizes smart contracts to Fractionalize digital assets into several ERC-20 compliant components while ensuring that each component is backed by the NFT itself.
3. Index Funds:
Index Funds are financial instruments that trace the value of a group of assets. NFTX (an Index Fund) is a protocol built on top of Ethereum which lets you deposit your NFT collections into vaults, giving you back an ERC20 token to be utilized as a composable money lego in the broader DeFi ecosystem. This means you can utilize your NFTs as collateral for anything the DeFi ecosystem offers. NFTX also enables community-owned index funds so that one token represents ownership in many NFTs.
NFT20: NFT20 is a permission less P2P protocol to tokenize NFTs and make them tradable on decentralized exchanges such as UniSwap. Anyone can create a pool for an NFT contract and get ERC20 token derivatives of their NFTs in a permission-less way, those tokens can be transferred and traded on DEXes right away.
4. Appraisal and Valuation:
Fair pricing is the foundation for an illiquid asset like NFTs. Pricing that defines the market sentiment is complicated to derive in NFTs — appraising NFT artwork and items is difficult and cumbersome. Some NFTs sell for coppers and some auction for millions.
Upshot: Upshot uses predictions market (DMI-mechanism) to appraise NFTs.
Showtime: Showtime uses a social media approach to gauge the popularity and hence price of the NFT.
Some other interesting DeFi projects:
Centrifuge uses NFTs to track assets or contracts like invoices, real estate, royalties etc. The NFTs are already accepted by MakerDAO as collateral.
Charged Particles: This protocol aims to enable any NFT to be wrapped or embedded with an ERC-20 token. So just in case, there was any doubt an NFT had value, a user could wrap it with interest-earning tokens, such as the Aave tokens, and it would have value beyond any doubt.
Unifty is an NFT management system. Unifty has a marketplace coming with new features around copyright management and value drops, among others.
Ruler Protocol accepts NFTX’s $PUNK-BASIC and $MASK as collateral.
The NFT ecosystem is working on developing a rigorous DeFi Infrastructure and we will soon see a rise in NFT-related financial strategies (NFT-based investment portfolios, crowdfunding to become LPs, etc.). We should be excited to see new models that inevitably crop up in this space.
NFT x Creator Economy:
With GenZ moving online, the world is becoming full of digital-native objects. The creator economy is catching up with traditional entertainment media (mobile viewership surpassed 50% of all global traffic in Q3 of 2020, reaching 54% by Q1 of 2021) — and these creators are looking for ways to monetise their content. There are many platforms for expressing creativity, but NFTs are proving to be the means of choice for both amateur and established artists, with the biggest reasons being that the NFT format is relevant in the increasingly tech-integrated world and that it is an ever-evolving creative landscape. Via NFTs, creators are finally being paid. NFTs create grounds for creativity to thrive.
Contemporary artist Krista Kim recently sold an NFT-minted digital house (a metaverse) for 288 ether, valued at over $500,000. The metaverse is an informal term used to describe a collaborative and immersive virtual world. Augmented and virtual reality are fundamental to providing a more immersive experience for these worlds.
As augmented and virtual-reality tech matures, people are going to spend more of their time, and therefore money, in virtual environments. People currently express themselves through art, fashion and tattoos. In the near future, people are also going to express themselves with digital assets and decorative pieces and collectibles, fashion, accessories — through virtual real estate in the form of NFTs — a digital identity. Therefore, NFTs are a foundational block of the emerging virtual economy and might play a pivotal role in the development of immersive virtual worlds as the AR lifestyle progresses.
Conclusion:
In 2017, Samyakth Capital took an early bet on Koinex — India’s largest & most advanced digital assets exchange. We have always believed that the next wave of internet business models will come from crypto, and we have seen this in NFTs.
NFTs began in 2016(?) but went quiet soon after. In 2021, they are back and ready for their second wave. Different use-cases with different business models have emerged and we are excited to see which ones emerge as winners.
A few years ago, they were too early, too messy.
But here we are. Imagine what’s next.
Written by Sonali Goel who is a part of the Investment Team at Samyakth Capital.
