After the boom of 2021 and the market building in 2022, 2023 is tee’d up to be a defining year for the NFT market. As a founder building in one active area - NFT Finance - I’ll get a front-row seat to watch it unfold, and want to share my best guesses.

2022 has been a race to the bottom for marketplace fees. As of today, Blur is offering traders negative fees net of their airdrop earnings. Although the broad trend is for marketplaces to accept a losing share of the volume in exchange for keeping fees on their strongest segment of flow, marketplaces with significant existing distribution will be forced to look for new revenue streams.

Compared to the spot market for NFTs, moats on DeFi products are much more durable. DeFi tends to be much harder to aggregate and use protocol specific term structures. Liquidity is not trivially portable, deepening that moat.

X2Y2 finished closing out the year by adding NFT lending to its product. Today, they’re not adding fees, but they proved that their distribution can grow a DeFi bolt-on quickly. They’re already the 3rd largest NFT lending protocols, passing over 10 others, and have the highest growth rate in the category (though, this might be partially caused by wash trading).

By the end of the year, I’d expect 3 marketplaces to incorporate DeFi Products.

Migrating to Solana was the initial reaction to high gas costs on ETH, but ETH L2s seem to be driving the second wave of adoption for decreased gas. High-profile NFT drops have to lead to activity and a captive base of high-value assets on these chains. All of the protocols, money, and NFTs can natively convert to EVM-based L2s, meaning that the existing ETH user base understands how they work and the marketplaces like Opensea, and all their distribution, land on these chains. Despite setbacks like losing Quix, an excellent Optimism marketplace, things are looking up.

Early demonstrations of this trend include Good Minds, a project loved by NFT insiders, launching an Arbritrum collection, and even in the last few days yoots announcing they’d bridge to Polygon.

These numbers are already growing - and I expect to see 30k trades/day on L2s by the end of the year.

NFT market making will boom in this next cycle in two key ways: First, a new breed of NFT-native market makers will emerge and win using novel strategies and by winning deals with nft-native orgs. Second, existing fungible market makers will move into the space, bringing their balance sheets and expertise of crypto native opportunities like MEV and investing in projects to win deals. It's not yet clear who will win, but the market norms are transforming to facilitate it.

1/ The decrease in royalties forces projects to look for new revenue sources. Market makers can provide both via investment and yield on treasury tokens (which the market makers use to short). At the same time, lower royalties help market makers trade across venues without fees consuming their margins.

2/ Marketplaces want to collaborate with market makers to help them compete. Higher liquidity is a core driver of marketplace differentiation, and marketplaces based in the US face legal scrutiny if they make trades on their own platforms. Third-party market makers are seen as a “magic bullet” for providing this liquidity. Just like fungible exchanges, NFT marketplaces can offer a fee discount to active market makers.

Core NFT infrastructure providers are creating products to support this, like Reservior’s FWD protocol for more efficient market making and DrBurry’s Soap for RFQ. By the end of the year, more NFTs will be sold to an offer than purchased from the seller’s listing.

All new DeFi protocols face a challenge to source initial liquidity. This is even harder for NFT-focused protocols because of few institutional investors focus on the sector. While institutions may eventually trade NFTs, a new mechanism of utilizing DAOs has emerged.

DAOs like Goblin Sax, Floor DAO, or Jenny Metaverse DAO often start to target a specific NFT protocol, push liquidity into that protocol, and earn premium returns by being early users. Individuals are more willing to take long exposure on NFTs than institutions. Regulatory confusion regarding the designation of NFTs is less of a problem for a DAO than an institution.

By the end of the year, at least 3 more of these DAOs will accumulate over $1m in TVL.

NFT lending has reached the tipping point where borrowing rates should drop. The default rate continues to hold below 10% and blue-chip floor prices have held up despite the broader market decline. As overall yields in DeFi compresses, yield seekers will look for more and more places to deploy capital. Some lenders may also believe that smart-contract-locked NFTs collateralizing a 50% loan-to-value note is safer than undercollateralized lending to market makers.

This year, blue-chip collections like punks and apes should see consistent rates below 10% APY on 50% LTV loans.

Net net: Long NFT finance.

All in, these trends will make 2023 the breakout year for NFT Finance. A growing number of blue-chip NFT holders are participating in the market, people have narrowed in on a liquidity bootstrapping mechanism, market makers are emerging and growing in sophistication, and marketplaces, the NFT businesses with the best distribution, are onboarding users onto financial products.

Which of my predictions do you think are correct? At Hook, we’re excited to plug into a lot of these trends. If you’re excited and want to participate, hop on the waitlist for our new earning product launching at the beginning of the year: app.hook.xyz/earn.

After the boom of 2021 and the market building in 2022, 2023 is tee’d up to be a defining year for the NFT market. As a founder building in one active area - NFT Finance - I’ll get a front-row seat to watch it unfold, and want to share my best guesses.

2022 has been a race to the bottom for marketplace fees. As of today, Blur is offering traders negative fees net of their airdrop earnings. Although the broad trend is for marketplaces to accept a losing share of the volume in exchange for keeping fees on their strongest segment of flow, marketplaces with significant existing distribution will be forced to look for new revenue streams.

Compared to the spot market for NFTs, moats on DeFi products are much more durable. DeFi tends to be much harder to aggregate and use protocol specific term structures. Liquidity is not trivially portable, deepening that moat.

X2Y2 finished closing out the year by adding NFT lending to its product. Today, they’re not adding fees, but they proved that their distribution can grow a DeFi bolt-on quickly. They’re already the 3rd largest NFT lending protocols, passing over 10 others, and have the highest growth rate in the category (though, this might be partially caused by wash trading).

By the end of the year, I’d expect 3 marketplaces to incorporate DeFi Products.

Migrating to Solana was the initial reaction to high gas costs on ETH, but ETH L2s seem to be driving the second wave of adoption for decreased gas. High-profile NFT drops have to lead to activity and a captive base of high-value assets on these chains. All of the protocols, money, and NFTs can natively convert to EVM-based L2s, meaning that the existing ETH user base understands how they work and the marketplaces like Opensea, and all their distribution, land on these chains. Despite setbacks like losing Quix, an excellent Optimism marketplace, things are looking up.

Early demonstrations of this trend include Good Minds, a project loved by NFT insiders, launching an Arbritrum collection, and even in the last few days yoots announcing they’d bridge to Polygon.

These numbers are already growing - and I expect to see 30k trades/day on L2s by the end of the year.

NFT market making will boom in this next cycle in two key ways: First, a new breed of NFT-native market makers will emerge and win using novel strategies and by winning deals with nft-native orgs. Second, existing fungible market makers will move into the space, bringing their balance sheets and expertise of crypto native opportunities like MEV and investing in projects to win deals. It's not yet clear who will win, but the market norms are transforming to facilitate it.

1/ The decrease in royalties forces projects to look for new revenue sources. Market makers can provide both via investment and yield on treasury tokens (which the market makers use to short). At the same time, lower royalties help market makers trade across venues without fees consuming their margins.

2/ Marketplaces want to collaborate with market makers to help them compete. Higher liquidity is a core driver of marketplace differentiation, and marketplaces based in the US face legal scrutiny if they make trades on their own platforms. Third-party market makers are seen as a “magic bullet” for providing this liquidity. Just like fungible exchanges, NFT marketplaces can offer a fee discount to active market makers.

Core NFT infrastructure providers are creating products to support this, like Reservior’s FWD protocol for more efficient market making and DrBurry’s Soap for RFQ. By the end of the year, more NFTs will be sold to an offer than purchased from the seller’s listing.

All new DeFi protocols face a challenge to source initial liquidity. This is even harder for NFT-focused protocols because of few institutional investors focus on the sector. While institutions may eventually trade NFTs, a new mechanism of utilizing DAOs has emerged.

DAOs like Goblin Sax, Floor DAO, or Jenny Metaverse DAO often start to target a specific NFT protocol, push liquidity into that protocol, and earn premium returns by being early users. Individuals are more willing to take long exposure on NFTs than institutions. Regulatory confusion regarding the designation of NFTs is less of a problem for a DAO than an institution.

By the end of the year, at least 3 more of these DAOs will accumulate over $1m in TVL.

NFT lending has reached the tipping point where borrowing rates should drop. The default rate continues to hold below 10% and blue-chip floor prices have held up despite the broader market decline. As overall yields in DeFi compresses, yield seekers will look for more and more places to deploy capital. Some lenders may also believe that smart-contract-locked NFTs collateralizing a 50% loan-to-value note is safer than undercollateralized lending to market makers.

This year, blue-chip collections like punks and apes should see consistent rates below 10% APY on 50% LTV loans.

Net net: Long NFT finance.

All in, these trends will make 2023 the breakout year for NFT Finance. A growing number of blue-chip NFT holders are participating in the market, people have narrowed in on a liquidity bootstrapping mechanism, market makers are emerging and growing in sophistication, and marketplaces, the NFT businesses with the best distribution, are onboarding users onto financial products.

Which of my predictions do you think are correct? At Hook, we’re excited to plug into a lot of these trends. If you’re excited and want to participate, hop on the waitlist for our new earning product launching at the beginning of the year: app.hook.xyz/earn.