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1、1C|2Research and InsightsAndrew Ho,CFASenior Research Analyst(Investment Strategy)Published on 1 Nov 2022C|3RESEARCH DISCLAIMERThe information in this report is provided as general commentary by C and itsaffiliates,and does not constitute any financial,investment,legal,tax,or any otheradvice.This re
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9、n 1 Nov 2022C|4ContentsKey Takeaways51.The NFT Liquidity Problem61.1 Expanding NFT Use Cases61.2 NFT Financialisation82.NFT Financialisation Landscape92.1 NFT Fractionalisation112.2 NFT Lending122.3 NFT Rental132.4 NFT Pricing142.5 NFT Aggregators153.Conclusion15References16Published on 1 Nov 2022C|
10、5Key TakeawaysThe utility of NFTs is growing,with use cases expanding into industries such as,but not limited to,the metaverse,gaming,fashion,entertainment,and DeFi.Thisresults in an increased potential to make money from NFTs.However,the illiquidity of NFTs is a significant obstacle to people being
11、 able tounlock the value of their NFTs.NFT financialisation could potentially achieve greater liquidity.The currentlandscape comprises fractionalisation,lending,rental,pricing,and aggregators.Fractionalisation:Splitting an NFT into smaller fungible and identicalpieces.Lending:Using NFTs as collatera
12、l for taking out loans.Rental:Lenders rent out their NFTs and receive income,while renters getto use these NFTs without actually owning them.Pricing:This supports all liquidity solutions by trying to enable accurateand continuous pricing for NFTs.Aggregators:These facilitate easier comparison of NFT
13、 prices acrossdifferent marketplaces and potentially lower gas fees by combiningmultiple trades into one transaction.Published on 1 Nov 2022C|61.The NFT Liquidity Problem1.1 Expanding NFT Use CasesAlthough NFTs(non-fungible tokens)have not been immune to the current cryptowinter,as seen in the 98%dr
14、op in trading volume YTD,some observers areoptimistic about the industrys growth potential.For instance,a report fromNansen cites expectations of a 33.7%compound annual growth rate in totalmarket cap over the next eight years to US$230B,driven by expanding use cases(i.e.,utility)of NFTs across multi
15、ple industries.The word fungible means replaceable by another identical item or mutuallyinterchangeable.A non-fungible token is a unique and non-interchangeableunit of data stored on the blockchain.A common misconception is that NFT is just digital art.However,NFTs have amuch broader scope in utilit
16、y than that,extending to sectors such as,but notlimited to,the metaverse,DeFi,gaming,fashion,and entertainment(e.g.music).Art and collectibles:CryptoPunks and Bored Apes are well-knownexamples of collectible NFTs.Some NFT collectibles come withmembership pass utility,such as Loaded Lions,the very fi
17、rstplatform-owned PFP(profile picture)project launched in the NFT space.Published on 1 Nov 2022C|7Each NFT serves as a key to The Mane Net,an exclusive membership forLoaded Lions collectors,and grants holders access and benefits fromboth the Cronos and C ecosystems.Cronos Cruisers is an NFTcollectio
18、n of 8,000 utility-enabled algorithmically generated PFPs createdin collaboration with Cronos Labs.It is currently listed on Minted,adecentralised NFT platform for items native to Ethereum and Cronos.Metaverse and gaming:People can own and trade NFTs as in-gameassets(which are NFTs)in play-to-earn g
19、ames like Axie Infinity(AXS).NFTsalso allow people to own assets in the metaverse,such as virtual realestate in The Sandbox(SAND)and Decentraland(MANA),or access toexclusive social spaces.This includes the Bored Ape Yacht Club(APE)communities.Fashion and music:NFTs could drive the growth of digital
20、fashionapplications,including virtual fashion shows,exclusive shoppingexperiences,and fashion for game avatars.Music can be turned into NFTsas well.Copyright issues could be tackled with NFTs,given theirfundamental ability to carry proof of ownership and proof of provenance.Opulous is an example of
21、a platform allowing users to own a share ofmusic copyrights and receive royalty revenues.DeFi:An example of this would be liquidity providers on decentralisedexchanges like Uniswap(UNI)receiving tokens(which are NFTs)torepresent their positions in liquidity pools.These tokens can in turn betraded on
22、 NFT marketplaces such as OpenSea.Web 3 identity:Soulbound tokens,for example,are NFTs tied to anindividual or entity.They aim to represent the holders social identity bycontaining their commitments,credentials,and affiliations.This is similarto how a resume works.Published on 1 Nov 2022C|8Read more
23、 in our report:NFT Utility:A Multifaceted Overview and Use CasesRead more about NFTs in“Gaining Traction-Study of NFTs and Success Factors”1.2 NFT FinancialisationAs NFT use cases continue to grow,so does the potential to make money fromthem.Posing a significant challenge to this is the illiquidity
24、of NFTs,whichnon-fungibility is a major contributor to.Liquidity can be defined as the ease withwhich people can unlock the value of their assets and therefore,make moneyfrom them.Cryptocurrencies like Bitcoin(BTC)and Ethereum(ETH)can be traded almostinstantly,making them very liquid assets.However,
25、the NFT market has historicallybeen illiquid-it could take months for someone to buy your NFT for example,andyou had to sell your entire NFT.Fractionalisation of NFTs was one of the first steps toward achieving greaterliquidity.However,people often want to keep the entirety of their NFTs and beable
26、to profit from them.In other words,they want to obtain liquidity withoutselling all or even part of their NFT.NFT financialisation refers to the emerging technologies that aim to achievegreater liquidity.It can thus be viewed as the use of protocols to enable NFTholders to unlock the financial value
27、 of their NFTs to a greater extent.ThePublished on 1 Nov 2022C|9current NFT financialisation landscape comprises fractionalisation,rental,lending,pricing,and aggregators.Become a VIP member and get access to our exclusive NFT Liquidity Solutions reportPublished on 1 Nov 2022C|102.NFT Financialisatio
28、n LandscapeNFT FinancialisationSolutionsKey FeaturesChallengesLiquidityFraction-alisationSplits a NFT into smaller fungiblepieces.Every piece is identical to eachother.Opens up the market to moreparticipants,as investors with a smallerbudget can gain access.This makesNFTs more tradeable.Facilitates
29、price discovery for NFTs,asmore people bid for them.Partial NFT may not have the same utility asthe whole.It could also be difficult toreconstitute the NFT(i.e.,buy back all of thesplit pieces and make whole)if the variousowners lose their NFT fractions or refuse tosell them.Fractional pieces of the
30、 NFT could varygreatly in price compared to the actualunderlying NFT.Liquidity is limited for thosewho want to maintain fullownership and utility of theirNFT.LendingUses NFT as collateral for loans.Peer-to-peer lending allows forcustomisable loan terms betweenlender and borrower.Peer-to-protocol len
31、ding typically hasmore standardised loan terms.Relies on finding a lender willing to acceptthe NFT as compensation in the event of aloan default.Lenders and borrowers in peer-to-peerlending have to wait for an agreement onterms before they can access the NFT orloan.Borrowers may default on purpose i
32、f theNFT value falls below the loan value.Peer-to-protocol lending islikely more liquid thanpeer-to-peer lending.Published on 1 Nov 2022C|11RentalRenters get to use an NFT that theymight not be able to afford or dontwant to own outright.Lenders receive income from theirotherwise idle NFTs.The main t
33、ypes are collateral rentingand collateral-free renting.In collateral renting,renters may not havesufficient collateral,preventing them fromparticipating altogether.NFTs could be transferred to the renterswallet in collateral renting,so there is a riskthey wont return it.Collateral-free renting islik
34、ely more liquid thancollateral renting.AggregatorsPotentially lower gas fees by combiningmultiple trades into one transaction.Facilitates easier comparison of NFTprices across different marketplaces.May not cover all existing marketplaces.May not offer the trading rewards of aspecific marketplace.Do
35、es not have a directimpact on liquidity.Currently,limited to digital artmarketplaces.Price discoveryis also mostly limited tohighl-value NFTs.PricingSupports other solutions by trying toenable accurate and continuous pricingof NFTs.The main methods are TWAP,machinelearning and statistics,and peerapp
36、raisal.The inherent nature of NFTs,such asnon-fungibility,illiquidity,highly volatileprices,and having very specific features(e.g.rarities and traits),makes pricingdifficult.Each method has its own pros and cons.Critical to achieving greaterliquidity across all solutions.As of 25 Oct 2022Sources:C R
37、esearch,MPublished on 1 Nov 2022C|122.1 NFT FractionalisationNFT fractionalisation(also known as tokenisation)was one of the first steps tomake NFTs more liquid.The process involves using a smart contract to split anon-fungible(ERC721 standard)NFT into smaller fungible pieces(i.e.tokens)thatuse the
38、ERC20 standard.Each piece represents partial ownership of the NFT.The key benefits of fractionalisation are that it opens up the market to a muchlarger pool of participants and the tokens can also be traded more easily.Investors and collectors with a smaller budget can gain exposure to astronomicall
39、ypriced NFTs that were previously only accessible to those with deep pockets.Theresult is a more liquid market overall.Some examples of marketplaces where people can go to create,buy,and sellfractionalised NFTs are Fractional,NFT20,and Unic.ly.Fractional:This platform allows NFT owners to fractional
40、ise bothindividual collectibles and a basket of NFTs into fungible ERC20 tokens.Owners who lock up their NFTs earn curator fees annually.Holders of thefractionalised tokens vote to set the reserve price for the whole NFT,which is then auctioned.This gives fractionalised token holders thechance to li
41、quidate their assets on a prorated basis.NFT20:Here,users can deposit their NFTs into various pools and receivefungible tokens in return.These tokens can then be used for otherpurposes on the platform,including exchanging for tokens in other poolsand bidding for NFTs in auctions.The tokens can also
42、be used for tradingor providing liquidity on platforms like Uniswap(UNI).Unic.ly:In this marketplace,users can lock up their ERC721 NFTs inexchange for fungible ERC20 tokens called u-tokens.For example,youcould deposit a CryptoPunk and receive a u-punk token in return.Thistoken would represent your
43、share of the entire u-punks collection.Youcould also trade your u-punk for other u-tokens.One of the key challenges with fractionalised NFTs is reconstitution.The utilityof a fractional piece of an NFT could be different as compared to when it iswhole.For example,if you only have a small piece of an
44、 in-game asset,you maynot be allowed to use it for its intended purpose in the game that youre playing.The NFT can be made whole(i.e.reconstituted)by purchasing all the fractions,but other difficulties could emerge if the owners lose their pieces or refuse to sellthem.Some fractionalisation protocol
45、s are attempting to solve this problem withbuyout auctions.Published on 1 Nov 2022C|13Read more in our Research Wizard article:What Are Fractionalised NFTs?2.3 NFT LendingThe current NFT lending sector comprises mainly peer-to-peer lending andpeer-to-protocol lending.Peer-to-peer NFT lending:This wo
46、rks the same way as a traditionallending marketplace i.e.matching lenders with borrowers.NFTfiis oneplatform that offers this.On NFTfi,borrowers can list their NFT ascollateral and receive loans from lenders wallets in Wrapped Ether(WETH)or MakerDAOs DAI.The NFT is stored in an escrow smart contract
47、for the duration of the loan and the borrower gets it back when theyrepay the loan(plus interest)on time.If the borrower fails to repay theloan,the lender will receive the NFT.In peer-to-peer lending,lenders andborrowers agree on the terms of the loan(e.g.interest rate,loanduration,loan-to-value rat
48、io)among themselves.Peer-to-protocol lending:Borrowers take up a loan directly from theprotocol.Similar to DeFi lending,liquidity providers add crypto funds intopools and borrowers would take up loans from these pools.Borrowershave to put up their NFTs as collateral by locking them in smart contract
49、sknown as digital vaults.BendDAO(BEND)is one of the platforms doingpeer-to-protocol lending.Because the floor price of NFTs change inreal-time,if a borrowers one falls below a certain threshold,BendDAOwill liquidate it and use the proceeds to help pay down the loan.However,a recent liquidity crisis
50、at BendDAO highlights some of the risks thesenascent lending platforms currently face.Some key issues are that given the typically high price volatility of NFTs,lenderscould find it difficult to value an NFT properly.Therefore,this makes itchallenging to come up with loan terms(e.g.loan-to-value rat
51、ios).Sharp drops inNFT prices might also incentivise borrowers to default on purpose,particularly if the NFT value goes below the loan value.In peer-to-peer lending,the process of agreeing to loan terms before being able to access the NFT or loancould pose challenges to liquidity and scalability.Pub
52、lished on 1 Nov 2022C|142.2 NFT RentalThe NFT rental market is where people can rent out their NFTs to receive income.Meanwhile,renters can rent NFTs to use but without owning them.NFT rentingemerged because NFTs have utility-rent an NFT and you also get whatever utilitythat comes with it.NFT rental
53、 could also be viewed as a type of NFT lending.For renters,also referred to as borrowers,the advantage is that they getto use an NFT that they cannot otherwise afford to buy or perhaps dontwant to own outright.For the NFT holders who rent their assets out,also referred to as lenders,the main benefit
54、 is they can receive income for their NFTs that mightotherwise be sitting idle in a wallet.Currently,NFT renting can be categorised into collateral renting andcollateral-free renting:Collateral NFT renting means that the renter has to put up collateral torent the NFT to use,hence the name.One exampl
55、e would be reNFT,whose investors include Animoca Brands(parent company of TheSandbox).reNFTs protocol transfers the NFT to the wallet of the renter,but they have to put up some collateral(e.g.funds in the form ofcryptocurrency),which the lender can claim if the NFT is not returned atthe end of the r
56、ent period.However,there are some potentialdownsides to collateral renting.Firstly,the renter may not have sufficientfunds to put up as collateral,so they might not even be able toparticipate.Secondly,because the NFT gets transferred to the renterswallet,theres the risk that they dont return it,and
57、even the collateralmay be a poor consolation for the stolen NFT from the lendersperspective.Collateral-free NFT renting means renters dont need to put up anycollateral.It aims to solve some of the issues with collateral NFT renting.For example,IQ Protocols(which counts C Capital as one of itsbackers
58、)collateral-free renting protocol aims to create wrapped versionsof NFTs to rent out.In this way,the original NFT is not actually transferredto the renter.Published on 1 Nov 2022C|152.4 NFT PricingNFTs are notoriously difficult to price because they are non-fungible,illiquid,volatile in price,and ha
59、ve very specific features(e.g.rarities and traits).However,greater liquidity can only be achieved if this problem is overcome.How can you,for example,buy or sell NFTs,and use them as collateral for loans or rental,if youcant easily find out what price they are at any given point in time?Fortunately,
60、there are several projects that aim to solve this problem.Time-weighted-average-price(TWAP):This essentially is an averageprice derived from multiple prices during a particular length of time.Theprices used could be sourced on-chain from oracle protocols such asChainlink(LINK).However,one of the mai
61、n disadvantages of TWAP is thatit only works well with enough data,which are typically NFTs that have anactive market and large transaction volumes.Unfortunately,these alsotend to attract oracle attacks and price manipulation.Machine learning and statistical methods:These use computeralgorithms to e
62、xtrapolate the price based on past sales data andcorresponding NFT traits.Algorithms try to determine what traits affectthe price of NFTs based on historical data and then predict the value of aparticular NFT given the traits it has.Upshot is an example of a platformexperimenting with this.Peer appr
63、aisal:Market participants(e.g.NFT collectors and collectorDAOs)submit their own appraisal of the price of an NFT.The final pricecould then,for example,be decided by a vote.One issue with this,however,is that the appraisal could turn out to be a lengthy process,andthus be unable to provide real-time,
64、updated prices.Taker is one platformthat has adopted crowd appraisal,while Abacus aims to combine peerappraisal with liquidity pools to come up with valuations for NFTs.Published on 1 Nov 2022C|162.5 NFT AggregatorsSince there are many different marketplaces that list NFTs,it could be a hassle forpe
65、ople to go through all of them to trade and compare prices.Aggregatorsattempt to solve this problem by combining inventories from multiple NFTmarketplaces into one place.Trades can be made on just one aggregatedplatform,making it more convenient for both buyers and sellers.The key benefits are poten
66、tially lower gas fees by combining multipletrades into one transaction,better price discovery,and ease of trading.Allof these could contribute to improved liquidity.Two examples of NFT aggregator platforms are Gem and Genie.Each ofthem cover multiple individual NFT marketplaces,including OpenSea,Loo
67、ksRare,NFTX,and X2Y2.They also claim to be able to save up to 40%on gas fees compared to using individual marketplaces directly.However,not all aggregators have the same features and they may notcover all existing marketplaces.They may also be missing the tradingrewards and perks that specific indiv
68、idual marketplaces offer.Aggregators do not have a direct impact on liquidity.Currently,they aremostly limited to the digital art marketplaces,and price discovery alsolimited to high-value NFTs.3.ConclusionAs the use cases of NFTs grow,so does the potential to make money from them.However,the lack o
69、f liquidity is the main obstacle to this.NFT financialisation iskey to achieving greater liquidity,enabling market participants to unlock the valueof their NFTs.Although there are many innovations emerging in the NFTfinancialisation landscape,most of the technologies are still in their infancy.Publi
70、shed on 1 Nov 2022C|17References“NFT Financialization:Trends and Opportunities.”M,https:/ 18 October 2022.“What Are Fractionalised NFTs?.”C 18 October 2022.“Gaining Traction-Study of NFTs and Success Factors.”C 18 October2022.“What Is NFT Lending?.”C,https:/ 18 October 2022.“NFT Statistics 2022:Sales,Trends,and More.”Nansen.ai,https:/www.nansen.ai/guides/nft-statistics-2022.Accessed 19 October 2022.Published on 1 Nov 2022C|2022 C.For more information,please visit C.Published on 1 Nov 2022