The Financialization of NFTs

The NFT space has enjoyed renewed growth and interest since 2022 as new protocols seek to explore the financial layer of the market to extract more value from these digital assets. Widely known as NFTFi, these projects effectively seek to act as a bridge between the DeFi and NFT worlds by introducing unique models to unlock liquidity for NFTs.

NFT marketplaces, which have been largely dominated by the incumbents such as OpenSea, have witnessed a paradigm change with the rise of emerging projects such as nftperp and SudoSwap. They introduce the notions of leveraged trading and Automated Market Makers (“AMMs”), respectively. We shed insights into their mechanism, alongside key statistics, to evaluate their relevance.

Another vertical, NFT lending, has also seen massive developments in the space and it can be largely segregated into 3 categories - Peer to Peer (“P2P”), Peer to Pool (“P2Pool”), and Peer to Protocol (“P2Protocol”). Notably, P2Pool projects such as BendDAO have visibly outshone their competitors. Yet, NFT lending has also faced its fair share of challenges along the way, as it is an uphill battle for capital markets to effectively fix a fair value to these rather unconventional assets.

As we enter this next phase of maturity, we posit that the industry is ripe for growth and will require new financial primitives to draw interest and volume from institutions. We conclude with some factors of consideration and closing thoughts to ensure sustainable growth.