Is Financial NFT a better investment than art?
There has been exploration of Financial NFTs in the market.This article is sourced from Solv Finance.
$189 million in transactions over 30 days, the NFT market is attracting strong capital
After two years of dormancy, the NFT market has jumped on the fast train of the current cryptocurrency market, becoming a main force in the explosive growth linked with DeFi. According to the "NFT 2020 Annual Report" published by NonFungible, the valuation of the NFT market increased from $40 million in 2018 to $338 million in 2020, a growth of 725%.
NFT Market Capitalization (2018 to 2020)
It is worth mentioning that this report was released in February of this year. Additionally, according to the NonFungible official website, the transaction volume of the NFT market has reached $189 million in the past 30 days. This shows that the capital aggregation effect and appreciation potential of the NFT market should not be underestimated.
Focusing on the segmented market, the report shows that NFT assets are mainly composed of virtual worlds (25%), artworks (24%), collectibles (11%), games (23%), sports (13%), and tools (4%). Although the author does not agree with the report's classification of NFT assets, it does not hinder our insight into the landscape of the NFT market.
In fact, representative projects in the virtual world, such as Decentraland, The Sandbox, and Axie Infinity, integrate elements of art, gaming, and social interaction, while the most famous sports NFT project, NBA Top Shot, also uses player card collections as a means. Therefore, broadly speaking, art + collectibles are currently the absolute mainstream of the NFT market.
Collectible NFTs are just the vanguard, future share may drop to 1%
In summary, we are facing an NFT market with enormous potential but relatively singular investment categories. As the vanguard, art collectibles NFTs have begun their journey to break into the mainstream entertainment circle. But does this simply mean that the core value of NFTs should be attributed solely to crypto art? The author has doubts about this.
A more accurate understanding is that in the dynamic interplay between the real world and the digital metaverse, NFTs exist as containers of a new world, carrying a diverse commodity market, with artworks being just one of them, and their proportion should not differ significantly from that of assets in the real world. Since art investment is niche in the real world, it should be similarly so in the digital metaverse.
Of course, this does not mean that art NFTs are overly inflated; rather, it indicates another overlooked blue ocean market.
What exactly does this blue ocean market refer to? Heifeng Li, a partner at SeeDApp.org, provided his answer in "61 Thoughts on NFTs": "Currently, the asset types of NFTs are too singular, with 99% of NFTs being artworks. In the future, 99% of NFTs should be financial assets, digital identities, or data rights, etc., with the proportion of artworks and collectibles being below 1%, which is reasonable."
The author agrees with Heifeng Li's basic judgment that "99% of NFTs in the future should be financial assets, digital identities, or data rights, etc." However, I believe that the historical experience of Dapps has confirmed that regardless of whether the project takes the form of gaming, sports, art, or others, endowing its core assets with financial attributes and creating conditions for circulation can give them stronger momentum. Therefore, Financial NFTs may be the next rising wave.
An overlooked blue ocean market, the prologue of Financial NFTs has begun
Currently, there are already explorations of Financial NFTs in the market, such as 88MPH, Aavegotchi, DODO, and Solv.
88MPH is a fixed interest lending protocol that mimics the "tranche fund" of traditional financial markets. It can be understood as follows: User A deposits a certain amount of ERC20 tokens and receives a fixed-term deposit NFT (ERC721), and the system subsequently generates a corresponding floating interest bond NFT (ERC721) for User B to subscribe, effectively forming a bet between User A and User B. 88MPH is the closest to the product logic of Financial NFTs, as both the fixed-term deposit and floating interest bond can be traded on NFT platforms. However, due to the limitations of the ERC721 protocol itself, these deposits cannot be split or merged, resulting in fragmented contracts scattered in the art NFT market, which is its biggest pain point.
Aavegotchi is a financial-enhanced collectible NFT application. Its value comes from two parts, which can be understood as an NFT (ERC721) box containing aToken (ERC20) collateral. The intrinsic value is determined by the price of atokens (aDai, aUSDT, aLINK, etc.) and the yield from the Aave lending pool, while the external value is determined by the NFT itself, endowing it with gameplay similar to CryptoKitties + DAO.
The design of Aavegotchi is quite clever, but it seems to lean more towards gaming rather than finance, with its NFT value several times higher than its intrinsic value. Apart from providing a locking pool for Aave's aToken, it is almost impossible to find its connection with DeFi.
Additionally, the decentralized exchange DODO has also launched an NFT platform. Compared to Aavegotchi, DODO takes the opposite approach by putting art NFTs (ERC721) into an ERC20 box and then fragmenting this box, giving it trading attributes. It is a reverse solution for Financial NFTs.
Another noteworthy new project is Solv IC Market, which may be the first true Financial NFT application. It can also be understood as a box containing various assets, which can be ERC20 or ERC721. Solv supports customizing the unlocking rules for this box and also supports splitting, transferring, merging, and extracting, thereby endowing NFTs with the ability to truly describe complex financial information.
Solv IC Market is not yet open to end users, but from the testnet, it has opened up a new market—the "financial note market."
The author believes that the biggest difference between Solv and 88MPH, Aavegotchi, and DODO lies in the protocol layer. While both ERC20 and ERC721 are great protocols and the foundation for the prosperity of the DeFi and NFT markets, they do not perfectly match this new asset class of Financial NFTs. The Solv team has created the vNFT token standard, which is an enhanced version of the NFT protocol specifically designed to describe financial notes.
Based on the vNFT protocol, the functionality and freedom of Financial NFTs have been improved. The author predicts that IC Market is just the beginning, and the real power will come from various Financial NFT applications based on the vNFT protocol in the future.
According to media reports, Solv IC Market has officially been deployed to the Ethereum mainnet today, and the prologue of Financial NFTs has begun. The topic of Financial NFTs should be understood from both the application layer and the protocol layer. Due to the limited length of this article, the author will elaborate on this topic in subsequent articles in this series.
