With the carnival of Defi Summer in 2020 and NFT Summer in 2021 over, more and more people have recently begun to focus on NFTFi, hoping that this track that combines NFT and Defi can bring a new summer to the world of web3.

• Around NFTFi, this article focuses on the following two questions:

• Why is NFTFI needed and what needs does it solve?

How are the current developments of various sub-tracks of NFTFI?

This article will first analyze the birth background and current situation of NFTFi, and then sort out the scenarios from the whole process from user purchase to holding NFT, analyze the core mechanisms of the seven sub-tracks of pricing evaluation, trading, BNPL, lending, derivatives, fragmentation and leasing, and then select the CDP model lending project JPEG'd of the peer-to-pool for key analysis.

The birth of NFTFI is closely related to NFT. The NFT market began to attract attention in February 2021, and then reached a climax in August. It reached its peak in January 2022, with Opensea's transaction volume reaching US$4.8 billion that month. However, as the entire crypto market began to turn downward, the NFT market was inevitably affected, and the transaction volume and transaction volume began to fall rapidly, experiencing a process from skyrocketing to plummeting.

After the bear market, the liquidity problem of NFT became more obvious, causing players who had previously entered the NFT market to fall into trouble, and NFT holders were often forced to hodl. NFTs without the wealth growth effect will give the community a signal of consensus collapse, thereby exacerbating the lack of liquidity and forming a vicious circle.

The core problem of NFT at present is insufficient liquidity. The reasons for insufficient liquidity include the following three points:

The web3 environment has become bearish: the Federal Reserve raised interest rates in the front, and the crypto world frequently broke thunder in the back, and the trust in the crypto world and NFT has dropped significantly.

High threshold: Blue chip projects have high floor prices (such as Boring Ape and Cryptopunks are too expensive for most users), and ordinary projects require a lot of time to study and worry about running away.

Lack of application scenarios: The utilization rate of NFT assets by holders is very low. Most holders still buy low and sell high, and other enabling scenarios have not been widely penetrated.

In order to improve the liquidity of NFT, broaden the application scenarios, and cope with the current situation of high thresholds, NFTFI came into being. There are many definitions of NFTFi. This article believes that NFTFi is essentially a combination of NFT and financial attributes, making the flow of NFT more diverse and efficient, and providing NFT holders with more possibilities for gameplay. Under the NFTFi ecosystem, various products have also been derived, including layer 1 and layer 2 as well as NFT vertical projects.

NFTFi is still in the early stages of development. The market size can be estimated from two aspects: one is the NFT market transaction volume, and the other is the blue-chip valuation of NFT.

a. According to the "NFT Market 2021 Annual" report released by Nonfungible.com, the transaction volume of the NFT market in 2021 was US$17.6 billion, a 210-fold increase from US$82 million in 2020, which is 27% of the global traditional art market sales volume (US$65 billion) in the same year. Track size = 176* 50% (penetration rate) ≈ US$8.8 billion

b. Based on the valuation of blue-chip NFTs, the current track size of NFTFi is estimated. In May 2022, the value of major blue-chip NFTs (based on the floor price and ETH price of 2,000 USD) is: BAYC is about 1.72 billion USD, CryptoPunks is 953 million USD, Moonbirds is 440 million USD, Azuki is 273 million USD, Doddles is 237 million USD, with a total valuation of about 3.587 billion USD. The Sandbox, Arcade and Decentraland of land type are not included because they have obvious rarity rankings and are not suitable for calculation with the floor price. Considering the future growth space, the overall market value of blue-chip NFTs is about 5 billion USD. Track size = 50* 80% (penetration rate) ≈ 4 billion US dollars

Since the current NFT valuation pricing is not yet mature, the market is basically concentrated on blue chip projects & floor price NFTs. In the current track, the second method is more reasonable; in the long run, as NFTFI projects expand from blue chips to cover more NFT projects, the first method can be adopted. But in general, the development of the NFTFI industry is still in its early stages, and the market size is expected to reach the billion-dollar level. The above calculation can only provide a reference in terms of magnitude. The current market size accounts for about 0.5% of the total market value of cryptocurrencies, with a low penetration rate and a large room for improvement.

in each track In order to facilitate readers' understanding, this article will break down the entire process from purchasing to holding NFTs, and divide it into four stages: project evaluation, selecting a trading venue, purchasing and paying, and holding. It involves pricing evaluation, trading, installment, lending, derivatives, fragmentation, and leasing.

1. NFT pricing & valuation NFT pricing and valuation can be said to be the cornerstone of the entire NFTFi. Whether it is lending or leasing, pricing is involved. A good pricing system is very important for the flow of NFTs and can promote the development of the entire NFTFi. Currently, this track includes Abacus, NFTBank, Upshot, Banksea, etc.

Currently, there are two main pricing methods: human pricing (game pricing) and algorithm pricing (oracle)

a. In terms of human pricing, the most prominent product is Abacus, which makes good use of game theory. Abacus adopts two pricing models:

ⅰ. Peer incentive pricing: the essence of price is equal to the group's recognition of price

1. Multiple appraisers pledge a certain deposit and evaluate the price of NFT, and then weight the appraiser's price to get the final price.

2. Evaluate and calculate the appraiser's income. The closer the bidder is to the appraiser, the higher the income. Those with a price difference higher than a certain value will suffer losses. (Generally the dividing line is the price difference is higher than 5%)

ⅱ. Abacus spot pricing: Abacus acts as an intermediary for the price game between appraisers and owners

Appraisers act as validators, guessing the value of NFTs and investing their funds in different valuation levels. In turn, NFT owners are supported by liquidity to use their NFTs as collateral.

1. Example: Xiaohong puts her BAYC with a market value of 60 ETH into the pool to get a loan; then Xiaogang and Xiaoming each put 20 ETH into the pool. At this time, if Xiaohong decides to close the pool (which can be understood as selling BAYC), the BAYC is 55 ETH at this time, then the pool generates a price difference of 15 ETH, and Xiaogang and Xiaoming will share 15 ETH. If the price of BAYC is 30 ETH when Xiaohong closes, Xiaogang and Xiaoming will bear the price difference loss of 10 ETH together. (allocated according to the investment ratio)

2. Since the operations of the appraiser and the verifier are timely (in order to prevent evil, corresponding restrictions will also be generated), a balanced price will eventually be reached in this game, that is, the auction price.

b. In terms of algorithm pricing, it is essentially an oracle. At present, the more mature solutions in this track are Banksea and Upshot, both of which estimate the price of NFT through multi-dimensional data combined with algorithms, such as the market price of Opensea. Among them, in addition to NFT historical data, Banksea also cited community, social media data and other non-directly related data to enrich the data dimension.

• Comparison of the advantages and disadvantages of game pricing and oracle

Game pricing:

a. Advantages: accurate pricing and release of higher liquidity, such as the pledge rate from 30% to 70%;

b. Disadvantages: The pricing process is complicated, and the game mechanism is still imperfect; it is impossible to value multiple projects in large quantities; it is necessary to prevent bid-rigging prices.

Oracle:

a. Advantages: real-time quotation and close follow-up of the market.

b. Disadvantages: Slightly less accurate

At present, oracle algorithm pricing has achieved certain results. From the perspective of market demand, after the continuous accumulation of NFT historical data and further iteration and optimization of the model, algorithm pricing has a broader prospect.

1. NFT Exchange & Aggregator

   Exchanges and aggregators are places where users buy NFTs, and are also the segments with the largest market share, including centralized trading platforms: opensea, looksRare, aggregators Gem, Genie, decentralized trading platforms: sudoswap, etc. As can be seen from the figure below, the main activities in NFTFi projects are still concentrated on centralized trading platforms such as opensea and looksRare

a. Centralized NFT Exchange: NFT transactions on third-party platforms are currently the most mainstream trading method.

b. Aggregator: Through multi-platform price aggregation, on the one hand, it provides better quotes, and on the other hand, one-click sweeping can efficiently save gas fees.

c. Decentralized NFT Exchange: The representative project is Sudoswap, and the logic is similar to dex logic.

ⅰ.Sudoswap's AMM model and liquidity provision are also very similar to Uniswap. In terms of liquidity provision, it can provide one-sided NFTorETH, and it can also provide trading pairs to obtain transaction fee income. ⅱ. However, since NFT is indivisible, it is different from the x*y=k curve. Sudoswap adopts three other curves: including linear curve, exponential curve and XYK curve (newly added). Users can choose

1. Linear curve:

newprice=olderprice+deltabuy_number-deltasell_number

1. Exponential curve: In terms of logic, multiply by delta when buying and divide by delta when selling.

2. The XYK curve was added in September, but it is vaguely written on the official Twitter and white paper, without clear explanation and no discussion heat.

Comparison of the advantages and disadvantages of centralized NFT exchanges and decentralized NFT exchanges, decentralized NFT exchanges (taking Sudoswap as an example):

a. Advantages: timely market matching and pricing can help long-tail projects; no royalties, which is good for buyers; low handling fees;

b. Disadvantages: the difference in rarity is lost, the value of the same series of NFTs converges, which is only suitable for long-tail or highly homogeneous NFTs; no royalties cause dissatisfaction among creators.

Centralized exchanges:

a. Advantages: a large number of NFTs are provided, and the pool for users to choose is large; one NFT has one price

b. Disadvantages: high royalties and high handling fees

From the current comparison of Sudosap and Opensea's daily trading volume, it basically remains at 3% VS 97%, which accounts for a low proportion. Since PFP itself has the uniqueness of each token, it naturally has the characteristics of low liquidity and subjective pricing, which makes it impossible for the turnover frequency to be as high as that of tokens. Sudoswap's advantage of enhancing liquidity has not been fully utilized. This is the gap between Sudoswap and Uniswap.

In the long run, Sudoswap and Gamefi's props NFT (single homogeneous, high-frequency transactions) are a perfect match. In the future, starting with the gamefi ecological cooperation, there may be new breakthroughs. On the other hand, in July this year, the product manager of Uniswap NFT said that Uniswap will integrate Sudoswap for NFT transactions, which is also a big benefit to the future development of Sudoswap.

With the carnival of Defi Summer in 2020 and NFT Summer in 2021 over, more and more people have recently begun to focus on NFTFi, hoping that this track that combines NFT and Defi can bring a new summer to the world of web3.

• Around NFTFi, this article focuses on the following two questions:

• Why is NFTFI needed and what needs does it solve?

How are the current developments of various sub-tracks of NFTFI?

This article will first analyze the birth background and current situation of NFTFi, and then sort out the scenarios from the whole process from user purchase to holding NFT, analyze the core mechanisms of the seven sub-tracks of pricing evaluation, trading, BNPL, lending, derivatives, fragmentation and leasing, and then select the CDP model lending project JPEG'd of the peer-to-pool for key analysis.

The birth of NFTFI is closely related to NFT. The NFT market began to attract attention in February 2021, and then reached a climax in August. It reached its peak in January 2022, with Opensea's transaction volume reaching US$4.8 billion that month. However, as the entire crypto market began to turn downward, the NFT market was inevitably affected, and the transaction volume and transaction volume began to fall rapidly, experiencing a process from skyrocketing to plummeting.

After the bear market, the liquidity problem of NFT became more obvious, causing players who had previously entered the NFT market to fall into trouble, and NFT holders were often forced to hodl. NFTs without the wealth growth effect will give the community a signal of consensus collapse, thereby exacerbating the lack of liquidity and forming a vicious circle.

The core problem of NFT at present is insufficient liquidity. The reasons for insufficient liquidity include the following three points:

The web3 environment has become bearish: the Federal Reserve raised interest rates in the front, and the crypto world frequently broke thunder in the back, and the trust in the crypto world and NFT has dropped significantly.

High threshold: Blue chip projects have high floor prices (such as Boring Ape and Cryptopunks are too expensive for most users), and ordinary projects require a lot of time to study and worry about running away.

Lack of application scenarios: The utilization rate of NFT assets by holders is very low. Most holders still buy low and sell high, and other enabling scenarios have not been widely penetrated.

In order to improve the liquidity of NFT, broaden the application scenarios, and cope with the current situation of high thresholds, NFTFI came into being. There are many definitions of NFTFi. This article believes that NFTFi is essentially a combination of NFT and financial attributes, making the flow of NFT more diverse and efficient, and providing NFT holders with more possibilities for gameplay. Under the NFTFi ecosystem, various products have also been derived, including layer 1 and layer 2 as well as NFT vertical projects.

NFTFi is still in the early stages of development. The market size can be estimated from two aspects: one is the NFT market transaction volume, and the other is the blue-chip valuation of NFT.

a. According to the "NFT Market 2021 Annual" report released by Nonfungible.com, the transaction volume of the NFT market in 2021 was US$17.6 billion, a 210-fold increase from US$82 million in 2020, which is 27% of the global traditional art market sales volume (US$65 billion) in the same year. Track size = 176* 50% (penetration rate) ≈ US$8.8 billion

b. Based on the valuation of blue-chip NFTs, the current track size of NFTFi is estimated. In May 2022, the value of major blue-chip NFTs (based on the floor price and ETH price of 2,000 USD) is: BAYC is about 1.72 billion USD, CryptoPunks is 953 million USD, Moonbirds is 440 million USD, Azuki is 273 million USD, Doddles is 237 million USD, with a total valuation of about 3.587 billion USD. The Sandbox, Arcade and Decentraland of land type are not included because they have obvious rarity rankings and are not suitable for calculation with the floor price. Considering the future growth space, the overall market value of blue-chip NFTs is about 5 billion USD. Track size = 50* 80% (penetration rate) ≈ 4 billion US dollars

Since the current NFT valuation pricing is not yet mature, the market is basically concentrated on blue chip projects & floor price NFTs. In the current track, the second method is more reasonable; in the long run, as NFTFI projects expand from blue chips to cover more NFT projects, the first method can be adopted. But in general, the development of the NFTFI industry is still in its early stages, and the market size is expected to reach the billion-dollar level. The above calculation can only provide a reference in terms of magnitude. The current market size accounts for about 0.5% of the total market value of cryptocurrencies, with a low penetration rate and a large room for improvement.

in each track In order to facilitate readers' understanding, this article will break down the entire process from purchasing to holding NFTs, and divide it into four stages: project evaluation, selecting a trading venue, purchasing and paying, and holding. It involves pricing evaluation, trading, installment, lending, derivatives, fragmentation, and leasing.

1. NFT pricing & valuation NFT pricing and valuation can be said to be the cornerstone of the entire NFTFi. Whether it is lending or leasing, pricing is involved. A good pricing system is very important for the flow of NFTs and can promote the development of the entire NFTFi. Currently, this track includes Abacus, NFTBank, Upshot, Banksea, etc.

Currently, there are two main pricing methods: human pricing (game pricing) and algorithm pricing (oracle)

a. In terms of human pricing, the most prominent product is Abacus, which makes good use of game theory. Abacus adopts two pricing models:

ⅰ. Peer incentive pricing: the essence of price is equal to the group's recognition of price

1. Multiple appraisers pledge a certain deposit and evaluate the price of NFT, and then weight the appraiser's price to get the final price.

2. Evaluate and calculate the appraiser's income. The closer the bidder is to the appraiser, the higher the income. Those with a price difference higher than a certain value will suffer losses. (Generally the dividing line is the price difference is higher than 5%)

ⅱ. Abacus spot pricing: Abacus acts as an intermediary for the price game between appraisers and owners

Appraisers act as validators, guessing the value of NFTs and investing their funds in different valuation levels. In turn, NFT owners are supported by liquidity to use their NFTs as collateral.

1. Example: Xiaohong puts her BAYC with a market value of 60 ETH into the pool to get a loan; then Xiaogang and Xiaoming each put 20 ETH into the pool. At this time, if Xiaohong decides to close the pool (which can be understood as selling BAYC), the BAYC is 55 ETH at this time, then the pool generates a price difference of 15 ETH, and Xiaogang and Xiaoming will share 15 ETH. If the price of BAYC is 30 ETH when Xiaohong closes, Xiaogang and Xiaoming will bear the price difference loss of 10 ETH together. (allocated according to the investment ratio)

2. Since the operations of the appraiser and the verifier are timely (in order to prevent evil, corresponding restrictions will also be generated), a balanced price will eventually be reached in this game, that is, the auction price.

b. In terms of algorithm pricing, it is essentially an oracle. At present, the more mature solutions in this track are Banksea and Upshot, both of which estimate the price of NFT through multi-dimensional data combined with algorithms, such as the market price of Opensea. Among them, in addition to NFT historical data, Banksea also cited community, social media data and other non-directly related data to enrich the data dimension.

• Comparison of the advantages and disadvantages of game pricing and oracle

Game pricing:

a. Advantages: accurate pricing and release of higher liquidity, such as the pledge rate from 30% to 70%;

b. Disadvantages: The pricing process is complicated, and the game mechanism is still imperfect; it is impossible to value multiple projects in large quantities; it is necessary to prevent bid-rigging prices.

Oracle:

a. Advantages: real-time quotation and close follow-up of the market.

b. Disadvantages: Slightly less accurate

At present, oracle algorithm pricing has achieved certain results. From the perspective of market demand, after the continuous accumulation of NFT historical data and further iteration and optimization of the model, algorithm pricing has a broader prospect.

1. NFT Exchange & Aggregator

   Exchanges and aggregators are places where users buy NFTs, and are also the segments with the largest market share, including centralized trading platforms: opensea, looksRare, aggregators Gem, Genie, decentralized trading platforms: sudoswap, etc. As can be seen from the figure below, the main activities in NFTFi projects are still concentrated on centralized trading platforms such as opensea and looksRare

a. Centralized NFT Exchange: NFT transactions on third-party platforms are currently the most mainstream trading method.

b. Aggregator: Through multi-platform price aggregation, on the one hand, it provides better quotes, and on the other hand, one-click sweeping can efficiently save gas fees.

c. Decentralized NFT Exchange: The representative project is Sudoswap, and the logic is similar to dex logic.

ⅰ.Sudoswap's AMM model and liquidity provision are also very similar to Uniswap. In terms of liquidity provision, it can provide one-sided NFTorETH, and it can also provide trading pairs to obtain transaction fee income. ⅱ. However, since NFT is indivisible, it is different from the x*y=k curve. Sudoswap adopts three other curves: including linear curve, exponential curve and XYK curve (newly added). Users can choose

1. Linear curve:

newprice=olderprice+deltabuy_number-deltasell_number

1. Exponential curve: In terms of logic, multiply by delta when buying and divide by delta when selling.

2. The XYK curve was added in September, but it is vaguely written on the official Twitter and white paper, without clear explanation and no discussion heat.

Comparison of the advantages and disadvantages of centralized NFT exchanges and decentralized NFT exchanges, decentralized NFT exchanges (taking Sudoswap as an example):

a. Advantages: timely market matching and pricing can help long-tail projects; no royalties, which is good for buyers; low handling fees;

b. Disadvantages: the difference in rarity is lost, the value of the same series of NFTs converges, which is only suitable for long-tail or highly homogeneous NFTs; no royalties cause dissatisfaction among creators.

Centralized exchanges:

a. Advantages: a large number of NFTs are provided, and the pool for users to choose is large; one NFT has one price

b. Disadvantages: high royalties and high handling fees

From the current comparison of Sudosap and Opensea's daily trading volume, it basically remains at 3% VS 97%, which accounts for a low proportion. Since PFP itself has the uniqueness of each token, it naturally has the characteristics of low liquidity and subjective pricing, which makes it impossible for the turnover frequency to be as high as that of tokens. Sudoswap's advantage of enhancing liquidity has not been fully utilized. This is the gap between Sudoswap and Uniswap.

In the long run, Sudoswap and Gamefi's props NFT (single homogeneous, high-frequency transactions) are a perfect match. In the future, starting with the gamefi ecological cooperation, there may be new breakthroughs. On the other hand, in July this year, the product manager of Uniswap NFT said that Uniswap will integrate Sudoswap for NFT transactions, which is also a big benefit to the future development of Sudoswap.