NFT Financialisation and Utility: An Overview

As NFT utility grows, so does the potential to make money from them. NFT financialisation could help to achieve greater liquidity and unlock the value of NFTs.

Nov 01, 2022
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Key Takeaways

  • The utility of NFTs is growing, with use cases expanding into industries such as, but not limited to, the metaverse, gaming, fashion, entertainment, and DeFi. This results in an increased potential to make money from NFTs. 
  • However, the illiquidity of NFTs is a significant obstacle to people being able to unlock the value of their NFTs.
  • NFT financialisation could potentially achieve greater liquidity. The current landscape comprises fractionalisation, lending, rental, pricing, and aggregators.
    • Fractionalisation: Splitting an NFT into smaller fungible and identical pieces.
    • Lending: Using NFTs as collateral for taking out loans.
    • Rental: Lenders rent out their NFTs and receive income, while renters get to use these NFTs without actually owning them.
    • Pricing: This supports all liquidity solutions by trying to enable accurate and continuous pricing for NFTs. 
    • Aggregators: These facilitate easier comparison of NFT prices across different marketplaces and potentially lower gas fees by combining multiple trades into one transaction.

The NFT Liquidity Problem

Expanding NFT Use Cases

  • Although NFTs (non-fungible tokens) have not been immune to the current crypto winter, as seen in the 98% drop in trading volume YTD, some observers are optimistic about the industry’s growth potential. For instance, a report from Nansen cites expectations of a 33.7% compound annual growth rate in total market cap over the next eight years to US$230B, driven by expanding use cases (i.e., utility) of NFTs across multiple industries. 
  • A common misconception is that NFT is just digital art. However, NFTs have a much broader scope in utility than that, extending to sectors such as, but not limited to, the metaverse, DeFi, gaming, fashion, and entertainment (e.g. music).

  • Art and collectibles: CryptoPunks and Bored Apes are well-known examples of collectible NFTs. Some NFT collectibles come with membership pass utility, such as Loaded Lions, the very first platform-owned PFP (profile picture) project launched in the NFT space. Each NFT serves as a key to The Mane Net, an exclusive membership for Loaded Lions collectors, and grants holders access and benefits from both the Cronos and ecosystems. Cronos Cruisers is an NFT collection of 8,000 utility-enabled algorithmically generated PFPs created in collaboration with Cronos Labs. It is currently listed on Minted, a decentralised NFT platform for items native to Ethereum and Cronos.
  • Metaverse and gaming: People can own and trade NFTs as in-game assets (which are NFTs) in play-to-earn games like Axie Infinity (AXS). NFTs also allow people to own assets in the metaverse, such as virtual real estate in The Sandbox (SAND) and Decentraland (MANA), or access to exclusive social spaces. This includes the Bored Ape Yacht Club (APE) communities.
  • Fashion and music: NFTs could drive the growth of digital fashion applications, including virtual fashion shows, exclusive shopping experiences, and fashion for game avatars. Music can be turned into NFTs as well. Copyright issues could be tackled with NFTs, given their fundamental ability to carry proof of ownership and proof of provenance. Opulous is an example of a platform allowing users to own a share of music copyrights and receive royalty revenues.
  • DeFi: An example of this would be liquidity providers on decentralised exchanges like Uniswap (UNI) receiving tokens (which are NFTs) to represent their positions in liquidity pools. These tokens can in turn be traded on NFT marketplaces such as OpenSea.
  • Web3 identity: Soulbound tokens, for example, are NFTs tied to an individual or entity. They aim to represent the holder’s social identity by containing their commitments, credentials, and affiliations. This is similar to how a  resume works.

Read more in our report: NFT Utility: A Multifaceted Overview and Use Cases

Read more about NFTs in “Gaining Traction – Study of NFTs and Success Factors”

NFT Financialisation

  • As NFT use cases continue to grow, so does the potential to make money from them. Posing a significant challenge to this is the illiquidity of NFTs, which non-fungibility is a major contributor to. Liquidity can be defined as the ease with which people can unlock the value of their assets and therefore, make money from them.
  • Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) can be traded almost instantly, making them very liquid assets. However, the NFT market has historically been illiquid – it could take months for someone to buy your NFT for example, and you had to sell your entire NFT. 
  • Fractionalisation of NFTs was one of the first steps toward achieving greater liquidity. However, people often want to keep the entirety of their NFTs and be able to profit from them. In other words, they want to obtain liquidity without selling all or even part of their NFT.
  • NFT financialisation refers to the emerging technologies that aim to achieve greater liquidity. It can thus be viewed as the use of protocols to enable NFT holders to unlock the financial value of their NFTs to a greater extent. The current NFT financialisation landscape comprises fractionalisation, rental, lending, pricing, and aggregators.

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Read the full report: NFT Financialisation and Utility: An Overview

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