The NFT market is cold, rethinking lending and trading

Author: ryanciz

Although there have been a lot of discussions about Azuki recently, and I hold Azuki, this thread has nothing to do with Azuki, but to think about the topic of "NFT liquidity" in a larger dimension.

The Crypto community is highly emotional. There is no cooling-off period in the 7*24 market. The so-called "culture" is only the consensus of the community. Panic and Fomo may be infinitely magnified. For the current types of NFT collectibles, the quantity is very limited (easy to manipulate), coupled with discontinuous liquidity, transaction costs and frictions are higher than those of the FT market, and from the perspective of the price curve, the volatility is much higher than other assets.

In this context, for this type of PFP/NFT collectibles (most of the time, these PFPs are combined with scarcity design and community communication, which is closer to the logic of art and luxury goods), there may be more for enhancing the liquidity of NFT collectibles It is a false proposition. Let's talk about some ideas, welcome to correct me.

Asset Type

Discussing transactions, liquidity, and pricing starts with a clear distinction between asset types. I talked about several new projects related to NFTFi, but I found that everyone did not understand what NFT is and what type of assets it represents.

What is the transaction is not clear what pricing?

To reiterate, NFT is just a technical form of asset representation, what needs to be "defined" behind it, and it can even be in a form close to FT, further distinguishing from the perspective of assets:

• Homogeneous NFT - close to FT, but the smallest unit is 1 (in fact, the token has 18 decimal points, that is, 10^18 is issued), BTC is technically also an NFT, and the UTXO model is more like cash. Grandpa and other Mao grandpas have at least different numbers, but they are used in the same way. More, such as tickets, such as various passes, the difference between each NFT unit is only the number.
• Semi-homogeneous NFT - such as game props, have the same function, or are different in value; but the functions and attributes represented are the same. For example, in the game, every novice brings a small wooden sword when he is born.
• Non-homogeneity - such as PFP, artwork, each art block is completely different.

From the perspective of asset trading, the first two types can be studied together, which is closer to the FT trading model. The third category is actually not effectively priced. In the real world, especially for high-end products, there are even only auctions: Based on a small number of people, there is no clear consensus on the price of discontinuous bidding, and even many times the final price of the auction Much depends instead on the auctioneer and other auction participants. (so-called "auction techniques")

Most of the NFTs currently on the market, or NFTs in the context of most CT communities, are the third category.

Price is an abstract consensus on the exchange of items and a short-term value consensus. The more frequent the transaction, the easier it is to achieve pricing. Therefore, the floor is relatively easy to price, and it can be barely classified into the same category without any special attributes, and the exchange is more frequent.

But the key lies in this scarcity, how to price the scarcity? This is a submarket of NFT collectibles, with lower transaction frequency, poorer liquidity and more difficult pricing; moreover, scarcity is not based on a set of formulas, but comes from "community likes", a derived value consensus.

This kind of consensus will change with internal and external factors, such as community preferences, such as the empowerment of different attributes, etc. (remember the red hoodie Azuki of Jaylenge, and the golden skateboard).

Some NFT AMM/lending hope to have a scarcity pricing curve, but the definition of scarcity itself is dynamic, and arbitrarily defining a scarcity curve for pricing will only lead to arbitrage behavior.

Transaction Level - How to design transaction and derivatives scenarios for non-homogeneous NFT

Price is the margin of the transaction, and pricing is the basis for subsequent derivatives (here, let’s not kill all derivatives, at least for the floor, it is achievable, it is only a sub-market in a small market, and the liquidity is even worse).

With the current infrastructure, the emergence of Blur allows NFT to actually have an Orderbook model, and the NFT list (usually the floor) is the sales order above. The better the liquidity, the more frequent the transactions, and the more effective the pricing. Blur has indeed achieved the pricing of general NFTs very well. On this basis, the realization of derivatives based on handicap prices has better liquidity than before the appearance of Blur. (Blur has been criticized for its point design, sacrificing price and handling fees to earn points for airdrops, which actually makes the market go down.)

Of course, we should also pay attention to a kind of transaction behavior, especially for PFP, part of the purchase order is still purchased at a premium, such as anthropomorphic avatars such as Azuki, many collectors buy their favorites above the floor price. It can be seen intuitively that the floor is all black skin, which may be a skin color that Asian users do not like.

Combined with the discussion on the scarcity of NFT in the previous paragraph, for the NFT type of collection, from a personal perspective, the ideal transaction design is to cut the collection again, the floor belongs to the floor, and derivatives are made based on the floor (although the volume will still be small). Considering the situation of sharp price fluctuations, stricter risk control is required. Individuals may be more optimistic about the point-to-point design, which will be discussed in the next part.

From a personal point of view, the pricing of scarce goods can be temporarily abandoned, and do not go beyond the boundaries; it is better to do price reduction auctions directly: the same is true for luxury goods transactions, ordinary direct second-hand markets, and high-end auctions.

Even, do scarce goods need high liquidity? The better the liquidity, the more transparent the pricing, and the more scarce something is, the less likely it is to be reasonably priced.

In addition to the transaction (taker) level and the liquidity (maker) level, who should the liquidity provider be? This is for NFT AMM. If it is collectibles, it is difficult for three-party perspectives:

• The project party itself: self trade (in fact, it is easy to be considered as market manipulation)
• Community: Manipulate the market, or lose money, especially with Gas, Loyalty and platform fees.
• Professional market makers: the market is small, the assets are small, and the volatility is too high, so they look down on this market

The above discussion focuses on the third category, which is non-homogeneous NFTs. If you consider homogeneous/semi-homogeneous NFT, there are actually not so many problems. Derivatives, loans, and NFT AMM will all be easier to implement. Therefore, individuals are more optimistic about the NFTFi platform of the first two types of NFT assets at this stage, at least their risks will be easier to control. Here at @doubleprotocol, a project made by a good friend, I thought about it clearly from the beginning.

About NFT Lending

The main financial scenarios, lending and trading, and other derivatives can be realized based on these two, and the following discusses lending.

As mentioned above, for the third category, non-homogeneous NFT, it may be more suitable for splitting. But because they are better spread, in the era when there is no scarcity of content on social networking sites, the scarcity and value representation brought by NFT allows everyone to have the moment of "wearing limited edition AJs in high school to attract everyone's attention". So for their derivatives platform appeared earlier, but earlier! = The direction is right.

For the first two categories, homogeneous/semi-homogeneous NFT can actually have better liquidity, which means better pricing, and it is easier to make derivatives based on pricing.

Taken together, NFT lending has two designs, whether it is Lending or derivatives:

• Peer-to-peer: Lack of liquidity but strong horizontal scalability, lower platform risk control requirements, suitable for the third type of non-homogeneous NFT. Unlimited supply can be realized, and all desired assets can be realized. As long as there is demand, even FTX bonds have been NFTized recently to realize loans.
• Peer-to-pool: better liquidity, but higher requirements for risk control. Bend almost went bad with Azuki FUD. Paraspace has also frozen Azuki-related functions recently. For (semi) homogeneous NFT (such as game props), due to more convenient pricing and better liquidity, it is suitable for point-to-pool design, such as the double mentioned above.