Taking the bankruptcy of FTX as a signal, the crypto market as a whole has entered the bottom of the bear market. Compared with DeFi projects, the NFT track does not seem to have stopped.
When it comes to NFT, Opensea is bound to come to mind. As the largest NFT trading market, Opensea’s recent approach has caused an uproar, with mixed reviews from users. On November 8th, Opensea announced the launch of a new tool for enforcing creator royalties on the chain, using smart contracts to enforce royalties.
According to the regulations of Opensea’s new tool, if the NFT project party wants to collect royalties in Opensea, it means that it must use the mandatory royalty tool.
But the tool will block all custom royalty platforms by default. If the project party does not want to block other platforms, it does not need to use the mandatory royalty tool provided by Opensea. The consequence is that it cannot collect royalties in Opensea.
The rules of the NFT trading market are not uniform, and royalties and handling fees are currently the main methods of games between platforms.
As an industry giant, Opensea’s move is undoubtedly to unify industry standards and try to monopolize market transactions.
Opensea occupies a large number of NFT market transactions, and it is delusional to use centralized coercive means to hinder healthy competition from other platforms to consolidate its industry position.
On the surface, it seems to maintain the creator’s copyright benefits, but in fact it hinders the creator’s right to choose independently, which is contrary to the vision of Web3.
Opensea’s move is enough to illustrate the current problems facing the NFT market.
This article mainly analyzes the following four pain points in the NFT market:
- Highly centralized NFT Trading Platform
- LOW NFT utilization rate & Capital Efficiency
- Royalty Delimma
- Insufficient Liquidity
Highly centralized NFT Trading Platform
The mainstream NFT trading market led by Opensea has obvious centralization and high degree of opacity. This type of platform implements the model of placing orders on the chain, matching off the chain, and trading on the chain, resulting in a high degree of centralization of the platform.
Taking Opensea as an example, these seemingly decentralized NFT trading markets are “not decentralized”. When people think that Opensea has no control over users’ on-chain assets, Opensea can freeze your NFT and remove NFT collections. The listing of NFT works needs to be reviewed by Opensea, and only Opensea has the right to formulate the standards and standards for the review.
Everyone knows whether this centralized mechanism is against the spirit of decentralization, but it is ridiculous that Opensea has become synonymous with the NFT trading market.
Fortunately, the era of Opensea’s dominance has passed, and the emergence of more and more NFT trading platforms has made the NFT market gradually healthy. Trading platforms such as X2Y2 and LooksRare are vying for market share. The emergence of NFT trading platforms with a high degree of decentralization such as Sudoswap has further solved the problem of centralization in the NFT trading market.
However, the decentralized NFT trading platform is difficult to operate and the cost of users is high, and Opensea uses centralized control to make the interface simple and the transaction more convenient, so 80% of the users in the market still gather on Opensea for transactions. How to optimize the decentralized trading platform and lower the threshold of use is the key to solving the problem.
LOW NFT utilization rate & Capital Efficiency
Homogeneous tokens can increase the utilization rate of funds through mortgage, leverage, borrowing, etc., while the general utilization rate of NFT is relatively low. Most of the investment income of NFT comes from the arbitrage of buying low and selling high.
In order to improve the utilization rate of NFT, platforms such as NFT lending, NFT leasing, and NFT derivatives have emerged successively to build NFT Lego.
The NFT lending market can mortgage NFT to obtain liquidity without selling NFT, such as BendDao. Similarly, NFT has the risk of being liquidated. NFT leasing enables holders to rent out their NFT to those in need to obtain benefits, such as Double. NFT derivatives, including NFT options, such as Putty; NFT perpetual contracts, such as NFTprep. In addition, the volatility of NFT is too large and it is easy to manipulate. As a result, NFT is prone to liquidation in NFT lending and NFT derivatives platforms, and lenders cannot truly estimate the value of NFT, resulting in the loss of NFT assets.
These projects aim to improve the utilization rate of funds, but they are still immature and need to be explored. It is foreseeable that the use of NFT derivatives has a high threshold and is difficult to master. However, increasing the utilization rate of NFT is the only way, and the market is still in an early stage. This process is full of doubts and difficulties, and needs to be further improved and explored in the mechanism.
As the oracle and quotation model gradually mature and the accuracy gradually improves, perhaps NFT-fi will eventually be recognized by the market.
Royalty Delimma
When the NFT standard was created in 2018, creator fees (sometimes referred to as ‘royalties’) did not exist. Now, on the royalty setting, the NFT trading market is arguing with creators and collectors.
Elimination of royalties, custom royalties, fixed royalties, and more recently mandatory royalties all validate the royalty battle. The value of artworks conflicts with the interests of commodities, and the setting of royalties cannot meet everyone’s needs.
NFT royalties allow creators to conduct secondary or even multiple sales. This model breaks the traditional art model, and allows NFT creators to continuously generate income through their NFT. On the contrary, some NFT trading markets, in order to improve the liquidity of NFT, will choose extremely low royalties or cancel royalties. The polarized “royalty debate” is flooding the web3 world.
Why Zero Royalty
- Reduce transaction costs and improve the liquidity of the NFT market
- Encourage creators or project parties to innovate and diversify the NFT market
SudoSwap pioneered its open-source sudoAMM, which attracted a large number of users by bypassing creator royalties and offering 0% platform fees. Solanart has taken it a step further by permanently waiving its platform fees.
In the NFT market, 8%-15% royalties are the norm. As the market went down, traders became less willing to pay high royalties and opted for more cost-effective alternatives. At the same time, supporters of zero royalties believe that popular NFT project parties can earn a lot of money by relying on royalties, and have no motivation to continue working.
The emergence of zero royalties obviously reduces the cost of traders and effectively increases the volume of NFT transactions. The low-cost environment allows NFT holders to do high-frequency transactions.
At the same time, eliminating royalties encourages creators to innovate further. Losing royalties, creators or NFT project parties will design more profit means to increase revenue, such as Pudgy Penguins brand peripherals. Improve the diversity of the NFT market.
Why Anti-Zero Royalty
- Lack of income sources prevents NFT project parties from continuing to operate
- More Rug Pulls and fake deals.
Zero royalties will indeed bring benefits to the NFT market, but the problem also exists.
For some creators and NFT project parties, royalties are their source of income. And mint sales are as “company equity”.
For these NFT project parties with insufficient funds, creator royalties provide sustainable development opportunities for NFT collections. In the short term, they can only use royalties to maintain short-term obligations. Zero royalties will cause many NFT project parties to be unable to continue operations, and eventually the NFT you hold may become worthless.
And under the low-cost market model, more fake transactions flood the NFT market, exaggerating the transaction volume of their projects. At the same time, under the premise of no continuous income, the price of mint may increase, and there will be more projects that choose rug pull after mint is completed. Ultimately the market will become less healthy.
How to Balance the “Royalty Controversy”
Creator royalties are an incentive game, and the current problem is that the incentives cannot be balanced. There is fierce competition among various platforms for the collection of royalties, and the key point should be on NFT creators. NFT creators should be able to “set the rules of the game” and decide how their creations are used, transferred, or traded. Platforms should not deprive creators of their voice. At the same time, NFT project parties should not only focus on royalties, NFT makes more economic models to balance the interests of creators, collectors and traders.
“Royalty battle” will be a long-standing problem in the NFT market, because it is impossible to satisfy everyone. The collision between art and reality, and the contradiction between ideals and interests make the battle for NFT royalties endless. What is certain is that if NFT wants to become the cornerstone of web3 development, then creator royalties respect the wishes of creators.
Insufficient Liquidity
Liquidity is not only important to the DeFi field, but also to the NFT market. The low liquidity of NFT is the consensus of the industry. Unlike homogeneous tokens, the uniqueness and uniqueness of NFTs lead to a serious lack of liquidity for NFTs. Lack of counterparties, difficulty in valuation, and difficulty in value consensus between both parties are all reasons for low liquidity.
At present, there are many solutions and projects to solve NFT liquidity in the market. The NFT loans, leasing and derivatives mentioned above are all solutions to improve NFT liquidity, but the development is not mature enough. In addition, NFT aggregation platform, NFT fragmentation, and NFT AMM are also the main measures to improve NFT liquidity.
The NFT aggregation platform is more like a collection of front-end entrances. Fragmentation is suitable for the specific needs of a certain NFT, and the AMM solution is more general.
NFT aggregation platform
The NFT aggregation platform can easily bring together originally scattered NFTs to meet the needs of users, such as Genie and Gem.
At the same time, the existence of aggregators can perform “batch” operations, saving time and gas, and reducing transaction fees and costs. Thereby increasing liquidity for the NFT market.
NFT Fragmentation
Definition Essentially, NFT fragmentation is the deployment of contracts to generate multiple ERC-20 tokens associated with an indivisible ERC-721/1155 NFT, such as NFTX.
To put it simply, fragmentation splits NFT through smart contracts, and multiple people share the ownership of NFT, reducing the purchase threshold. Mainly suitable for high-value NFTs.
NFT fragmentation can solve the liquidity problem of some NFTs, but it is not friendly to “long-tail NFTs”, and is more suitable for high-value NFTs. In addition, due to ownership issues, after the NFT was bought out, it was forced to sell the fragments in hand.
At present, the utility of NFT fragmentation is not high.
NFT AMM
NFT AMM is a decentralized alternative to off-chain order book centralized NFT markets such as Opensea, Magic Eden, etc. It mainly utilizes liquidity pools to achieve frictionless and low-cost transactions, such as Sudoswap.
The advantages and disadvantages of NFT AMM are very significant.
Advantage:
- Significantly increase NFT liquidity
- Completely executed by on-chain contracts, highly transparent
- New NFT transaction model, establish NFT liquidity pool
- Lower transaction fees and gas fees
- Batch transactions, more convenient
- arbitrage opportunity
Shortcoming:
- Pricing not broadly applicable to all NFTs
- The value of NFT is highly ignored, and the homogenization of NFT is serious
- Most of the audience users are arbitrageurs
At present, NFT AMM is an effective way to improve the liquidity of NFT. Using market makers to increase the liquidity of NFT, batch transactions save more costs, and trade at the most suitable price through the price curve. However, the shortcomings are also very obvious. NFT AMM is not suitable for blue-chip and expensive NFTs. But thinking about it from another angle, for blue-chip NFTs, users seem to be more willing to collect rather than arbitrage.
Looking back at the growth path of DeFi, it is a complete embryonic form of today that is made up of building blocks. “Trust-free” is the cornerstone of DeFi, and the chain of smart contracts is highly transparent as a premise, so that we can have a high degree of trust, but the traditional NFT trading market cannot do this, which virtually increases the cost of entry. Today, the craze for liquidity mining has faded, but for Lego of DeFi, the evolution of the combination behind it has never stopped, and AMM is an important part of it.
Similarly, NFT AMM has initially emerged, and the transactions on the chain are highly decentralized, which solves the problems faced by the traditional market, but it is not perfect enough to fundamentally solve the liquidity problem. If you want to really improve liquidity, you must let more NFT holders become market makers and establish a liquidity pool. On the basis of the original NFT AMM model, a new incentive model will be established around the “NFT liquidity provider” to encourage more people to provide liquidity for the market and solve the problem from the root.
It is worth affirming that the NFT AMM mechanism has a great impact on the traditional NFT market. After the construction of a new incentive model and token economic model, it will be the biggest driving force to solve NFT liquidity.
The NFT track is still strong
Rapid development in any field is not necessarily a good thing. NFT has grown from being uninterested in the early days of its birth to a popular track in the past two years. The development speed is too fast, causing bubbles to flood the entire NFT field. A simple “avatar” can be sold for several or even dozens of ETHs. The benefits are greater than the vision, and there are inevitably many problems.
For the above four “industry mountains”, we can solve the problem from the following angles:
- Enhance the degree of decentralization and improve the transparency of the NFT industry
- Rationalize the setting of royalties and balance the relationship between the NFT trading market, creators and traders
- Improve the capital efficiency of the NFT market and improve NFT derivatives
- Create a new token economic model around market makers and creators to improve liquidity
The NFT track is still strong, but the current development is too limited, and the project side reproduces the same thing without really realizing the problem.
If the pain points of the industry are solved from the above four points, on the basis of AMM, by learning the way forward of traditional DeFi, build a brand new “NFT Lego”, redesign the incentive method around the “NFT market maker”, and create a new token economic model , then I believe that the NFT market will form a new paradigm!
