Some of my explorations can be found here:

https://github.com/mehranhydary/party-blend/

NFTs attract two types of audiences. One is speculative (people who are betting on the price of NFTs going up / down), and the other is more along the line of “we genuinely like the art”. Over the past few months, we have seen new products hit the crypto space that are focused on the speculative audience that remains in the NFT space. With these products, we are seeing NFTs unlock new forms of risk, capital, and strategies. Some of it makes a lot of sense, and a lot of it has traders spinning on their heads in ways that were previously unheard of. In this article, I will explore what’s out there, what I think will persist through the test of time, and what is needed to further complete the “financializing” NFTs thesis.

A lot of my learning is based on jumping into Solidity files and creating simple hacks. Recently, my goal was to figure out how Blend and Caviar work under the hood. To solidify my learning, what I usually do is create a simple smart contract that can hold some type of asset. Once the asset(s) are in the contract, I write functions to do what I would normally do through a UI. Examples listed below:

1. Caviar: Provide double-sided liquidity into a NFT x ETH pool

2. Blend: Take out a loan against an NFT of buy now pay later

A lot of the financialization that is being siphoned into the NFT space is based on traditional and decentralized finance. Products include:

1. Borrowing and lending

   1. Lenders can deposit assets and have other people borrow (in return for fees + interest)

   2. Borrowers can borrow assets and do whatever (earn fees, increase position on assets, buy meme coin, etc.)

2. Exchanges - asset trading platforms that enables traders to move from one asset to another

3. Derivatives - financial instrument based on valuation of an underlying asset

4. Stablecoins - digital asset that has value pegged to another asset to reduce volatility (e.g. US Dollar, Bitcoin)

By focusing on Blend and Caviar there are elements of traditional and decentralized finance that I was able to explore without diving into more than I needed to.

Note: Stablecoins that are based on NFTs have not been worked on (yet).

To build out the things that exist in traditional and decentralized finance for NFTs, the protocols I explored took approaches that were founded in the existing industry. In the next few sections, I will summarize the protocol, talk about the current state, and what’s needed for this to truly flourish.

As of May 23, Caviar has two protocols V1 and V2. The section reviews V1 only.

Caviar is a fork (kind of) of Uniswap V2. The idea is as follows:

1. There is a pool for NFTs (e.g. Miladys)

2. Trader wants to earn fees on every trade that occurs with Miladys (this is difficult to do via marketplaces because typically you need the underlying asset or be a market maker (own a ton of ETH / NFT)

3. Trader can take any amount of ETH and deposit into the NFT pool

   1. Half the ETH stays as ETH

   2. The other half buys “fractional Milady NFT tokens” (note that if you have 1 fractional Milady NFT token, you can exchange it for a Milady in the pool)

   3. The ETH + fractional Milady NFT token(s) is deposited and the user becomes an LP

   4. Now, someone buys or sells Milady from the pool, they’ll earn a trading fee

Why is this cool?

• Trader does not need an entire Milady to earn fees on Miladys being traded against ETH (i.e. trader can enter with 0.001 ETH or 10000 ETH)

• Trader can speculate on a Caviar token airdrop while keeping liquidity in the pool

• Caviar uses an on-chain oracle to filter out NFTs that have been flagged on OpenSea (for redeeming fractional tokens for NFTs or when traders buy from the pool)

Growth areas

• Since NFTs aren’t very liquid, as NFTs are bought and sold from the pool, the price will swing a lot (more than 1%) every time a sale occurs (LPs will incur impermanent loss)

• NFT teams that have created collections that solicit sentimental value for their owners (via community, art, etc.) may find a hard time convincing their users to pool their assets on protocols like Caviar

• Owners of rarer NFTs find it harder to use products like this because once your NFT is in the pool, it’s not guaranteed you’ll get the same NFT back

I wrote an article about how Blend works here. Most of my findings are there, but after diving into the Solidity, I found a few more things that I’ll share here.

Summary of Blend

1. Borrow ETH against an NFT that they own

2. Buy an NFT without paying the entire cost up front

Why is this cool?

1. NFTs that were just “jpegs” in your crypto wallet can now unlock additional ETH without you having to sell the asset

2. Two sided market (lenders can earn interest from borrowers, borrowers can increase their position in the NFT they borrowed against or speculate on other assets)

Growth areas

1. Not usable by smart contracts or smart contract wallets (not ideal for traders that value security)

2. Order creation for buying, selling, loans, repaying, etc. is not fully decentralized these are inputs that are required for their smart contracts but is currently not available through an API (paid / free)

3. Paying back a part of your loan to keep the loan going instead of getting the NFT seized from you

With protocols like Blend and Caviar, we’re seeing “lego blocks” be formed for the next wave of NFT innovation. If we consider the products we mentioned for traditional and decentralized finance, we’re seeing these exist in some capacity for NFTs:

1. Exchange (AMMs (Caviar, Sudoswap, NFTx), NFT marketplaces (Blur, OpenSea))

2. Borrowing and lending (Blend, x2y2, NFT-fi, Bend)

3. Derivatives (NFTx fractional tokens, Caviar fractional tokens)

With these components, builders can now leverage this unlocked liquidity to innovate further:

1. Perpetuals for NFTs that allow users to bet (with leverage) on prices going up and down (nftperp is doing a fine job with this, but I see markets moving faster, being more response, etc. as NFTs continue to become more liquid) (we’re yet to see Miladys be up for leverage on Binance)

2. UIs that aggregate AMMs and NFT marketplaces (kind of working with OpenSea Pro but can better (slippage between AMMs and marketplaces still not great, can’t do cross AMM / marketplace bidding, etc.)

3. NFT builders launching collections through AMMs (ETH x NFT pool) (incentivize ETH x NFT pools with products like Baton)

4. Existing NFT collections increasing liquidity on AMM and borrowing and lending protocols (instead of having their collectors doing it on their behalf)

5. Oracles for L1 NFT prices becoming more robust so projects can do the “financialization” of NFTs on fast and cheap L2s (e.g. build out GMX for NFTs)

6. NFT backed stablecoins (via crvUSD)

7. NFT roadmaps that deviate away from “real life merch” and push the edges of financial innovation instead

8. Aggregation of borrowing and lending platforms (see Triple A)

With crypto being powered by software, the rules for NFTs don’t have to stop at PFPs and NFT marketplaces. Once we can create the right building blocks, NFTs become pillars for the future of finance. Simple ideas like “NFT-backed” stablecoins can let you long ETH and also speculate on culture. Teams that are embracing the financialization of NFTs are the ones that will continue to thrive for years to come.