NFTs exploded onto the crypto scene in 2017 with the launch of CryptoPunks and Crypto Kitties. These pioneering NFT projects introduced the concept of digital scarcity and true ownership of unique digital assets.

Since then, NFTs have evolved beyond just profile picture collections into assets with real world utility. NFTs are being used for things like event tickets, access passes, gaming items, financial instruments, and even fractional ownership of physical assets like real estate.

As NFTs mature and gain more practical use cases, an entirely new field of decentralised finance for NFTs known as NFTFi. NFTFi refers to the ecosystem of decentralised protocols and applications aiming to bring financial utility to NFTs.

Just as DeFi introduced concepts like lending, borrowing, and earning yield to cryptocurrencies, NFTFi aims to bring those same benefits to NFT markets. The goal is to unlock additional value and liquidity for NFT owners and projects.

In this article, we'll explore some of the most impactful NFTFi applications to understand how this movement is shaping the future of NFTs - from lending platforms, to fractionalising high-value NFTs, and even creating prediction markets to bet on NFT prices.

What is NFTFI?

NFTs exploded in popularity over the last couple of years. From profile picture collections to in-game assets, NFTs provide digital ownership and provable scarcity for unique assets. However, as the market continues to mature, some key challenges have emerged.

One of the biggest problems with NFTs is a lack of liquidity. With such scarce assets, it can be difficult to find buyers willing to pay the asking price. The challenge is not raising capital for NFT projects, but rather unlocking it after the initial sale. The lack of liquidity in the secondary market makes it difficult for individual holders to access capital tied to their NFTs.

Luckily NFTFi helps combat these issues. Just like DeFi unlocked greater liquidity, yield, and interoperability for crypto, NFTFi aims to do the same for NFTs. Bringing financial flexibility and utility to your digital assets.

NFTFi also presents unique opportunities for real world asset (RWA) NFTs, which are NFTs representing ownership of off-chain assets like real estate or financial instruments. In the future, protocols like 0xprop will allow investors to take out efficient loans collateralised by their RWA NFTs.

The market potential for NFTFi is impressive. The broader NFT market is valued at $22 billion and growing over 34% annually (CoinMarketCap). Early data shows significant traction for NFTFi as well. This month one of the biggest NFT loans was taken out for $1M for 18 months on a Crypto Punk (Source). The monthly average NFTFi loan size is $7,166 (Dune), and in Q1 2023, the market saw $25 million in NFT lending volume (CoinMarketCap).

As the market matures even more, expect NFTFi to unlock greater capital efficiency and liquidity for NFT owners and projects alike.

3 NFTFI Applications

Lending & Borrowing

One of the most popular NFTFi applications is lending and borrowing. This allows NFT holders to unlock liquidity from their NFT assets without having to sell them. Let's break down how it works.

NFT lending and borrowing enables NFT owners to use their NFTs as collateral to take out crypto loans. For example, an NFT holder could put up a Bored Ape as collateral to borrow Ethereum. As long as they repay the loan plus interest, they get their Bored Ape back. If they default, the lender can claim the NFT.

This unlocks liquidity for NFT holders in a capital efficient way. Say James owns a Bored Ape worth 10 ETH. He needs funds for a new business venture but doesn't want to sell his Ape. NFT lending allows James to access capital without relinquishing the asset itself.

Here's how NFT lending works:

• James posts his Bored Ape on a lending platform like Blur, setting loan terms like duration and interest rate.

• Lenders browse NFTs on the platform and propose loan offers to James based on their assessment of his Ape's value.

• James reviews the offers and accepts one for 5 ETH at 5% interest over 6 months.

• His Bored Ape is locked in a smart contract until James repays the 5 ETH loan plus interest.

This allows James to unlock 50% of his NFT's value in capital while maintaining ownership. It's a win-win for borrowers and lenders!

Case Study: Blur

Blur is an NFT marketplace that has expanded into the NFT lending space with its platform called Blend on May 1st. The launch of Blend was aimed at providing liquidity solutions to NFT holders and tapping into the NFTFi market. It offers a way for NFT owners to leverage their assets for liquidity while still maintaining ownership unless they default on the loan.

Within 3 hours of the platform's launch, Blend's trading volume doubled from 5,175 ETH to over 11,000 ETH (BlockWorks). Blur now has over 300,000 total users and over $7B total GMV (Blur). NFT lending solutions like Blur are just one way NFTFi is enhancing capital efficiency and unlocking value in the NFT market.

Fractionalisation

Fractionalisation NFTs is another NFTFi application unlocking new opportunities in the market. Fractionalisation refers to splitting an NFT into smaller fungible tokens representing shared ownership. For example, fractionalising a $10,000 NFT could result in 10 tokens worth $1,000 each. This makes high value NFTs more accessible by reducing the upfront investment required. Fractionalised NFTs also benefit from increased liquidity compared to whole NFTs.

Here’s how it works:

• An NFT owner deposits their asset into a smart contract on platforms like Unicly.

• They set the number of fractions and price per fraction.

• The platform mints ERC20 tokens representing fractions of the NFT.

• These fractional tokens can then be freely traded by investors on exchanges.

Case Study: Unicly

Unicly is a platform that facilitates the fractionalisation of NFTs, allowing users to combine, fractionalise, and trade NFTs. Unicly was developed to solve liquidity issues for NFT owners and to lower the barrier to entry for investors interested in the NFT market. Unicly uses smart contracts and automated market makers (AMMs) to enable combining NFT’s, fractionalise NFTs and trade uTokens.

Fractionalisation protocols like Unicly are opening up the world of NFT investment and trading.

NFT Prediction Markets / Derivatives

Prediction markets are another emerging NFTFi innovation creating excitement in the space. NFT prediction markets allow users to bet on the future price movements of NFT collections without needing to own the NFTs themselves. They provide a way to profit from or hedge against NFT price volatility. Prediction markers also increase NFT trading depth without actually requiring direct ownership

Platforms like PlotX allow decentralised markets where users can wager ETH on whether an NFT floor price will go up or down in a set timeframe. Based on the outcome, winners earn payouts.

Case Study: Floor Protocol

Floor Protocol created an index token called $FLC that tracks top NFT projects. $FLC aggregates the value of blue chip NFTs into one index token. Its value mirrors the performance of top collections. Floor Protocols token offers easy exposure to NFTs without needing to buy each one individually. $FLC provides a simple window into the NFT market. $FLC works by including NFTs that meet metrics like volume, holders, and ROI. As its underlying NFTs gain value, so does $FLC. Floor Protocol takes things further with their perpetual leverage features. They let you trade fractionalised NFT tokens (long or short) with increased potential returns (and risks) (Floor Protocol).

Future Market Outlook

The NFT and NFTFi spaces are constantly changing.

The current market sentiment around NFTs is becoming more bullish, with a shift in focus towards the intrinsic community value and utility of NFTs, rather than just the initial hype that surrounded them. There’s growing interest around NFTs that offer tangible benefits like RWA NFTs. The days of selling NFTs based on hype alone are slowly going away.

Platforms like Blur’s lending protocol are taking off. The platform facilitated over $300 million in loans in just over 20 days of its month’s launch (DappRadar). Blur’s protocol has shown strong demand for NFTFi lending. As more owners leverage their NFTs for liquidity, adoption of defi based NFT services is accelerating.

Tokenising real world assets via NFTs is expected to boom in 2024 as it provides a hedge against volatility. The ability to fractionalised and trade real estate or securities via NFTs opens up new opportunities. Combining NFTs with decentralised finance instruments like derivatives also brings more mature financial tools to the space.

The NFT market cap could exceed $200 billion by 2030, with the U.S NFT growth projected to hit over 30% CAGR (CoinMarketCap). NFTFi lending and fractionalisation services will likely play a key role in the adoption by enhancing capital efficiency. As cryptocurrencies mature and integrate into traditional finance, expect NFTFi to have even more potential.

The NFTFi movement is still gaining momentum. But as innovation accelerates, the market is positioned for an exciting future driven by real utility.

Conclusion

NFTFi is opening up exciting new opportunities in the NFT space. As we've seen, this emerging field aims to bring financial utility to NFTs through decentralised services like lending, fractionalisation, and prediction markets. NFTFi provides solutions to issues like illiquidity that have setback NFT markets.

The market outlook remains positive as more value added utility emerges around NFTs and integration with decentralised finance accelerates. Though still in its early days, rapid innovation in the NFTFi niche promises to help NFTs reach their full potential by unlocking greater liquidity and capital efficiency.

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