The NFTfi Explosion

24 Jan 2024

The NFTfi Explosion

The Emergence of NFTFi

NFTFi heralds a significant shift in the digital asset landscape, marrying the uniqueness and collectibility of NFTs with the fluidity of financial markets. This rapidly expanding sector redefines asset ownership and investment strategies in the NFT space.

Early Innovations in NFTFi

NFTFi has already showcased groundbreaking developments:

  • NFT Lending: The NFT lending ecosystem has been the most promising use case thus far in the early history of NFT Finance. There have been many attempted iterations to push forward the space, some that have worked and some that haven’t, but the ecosystem has continued to find success.

Currently, there is $120 million of outstanding debt in the Ethereum ecosystem across all NFT lending platforms. The all-time high for outstanding debt was ~$180 million in June earlier this year. NFT lending plays an integral role in capital efficiency and cross-vertical yield generation within the NFTFi ecosystem.

Figure 1: Outstanding Debt by Platform Over Time (USD)

Yield-Generating Mechanisms: Projects across the ecosystem have started to revolutionize NFT ownership and yield-generating opportunities for NFT holders. Applying DeFi principles to NFTs has not come without its headaches, but there is a lot of promise in the present NFTFi ecosystem.

To highlight a few promising outputs:

  • Flooring Protocol has increased accessibility to blue-chip NFT ownership by enabling fractionalization of NFTs into fungible tokens (µTokens). This process injects liquidity into the market, provides an easier access point to multiple NFT collections for retail traders, and allows NFT holders to earn yields across the platform.

Figure 2: Flooring Protocol µTokens

  • Metastreet has capitalized on the progress of NFT lending and LSDFi and created the market’s first NFT-backed LSD. Taking the sought-after desirability and stable market of CryptoPunks and integrating it with the stackable yields that COULD exist between NFT lending and staked ETH, the team has created mstETH. This mstETH pool provides CryptoPunk holders with instant loan liquidity while giving NFT lenders the opportunity to stack stETH yields on top of lending against CryptoPunks, producing a 10%-17% yield, all while allowing lenders to exit their positions via secondary markets for mstETH.

  • JPEG’d, a peer-to-protocol lending platform, has become a key player in the NFTFi landscape. Its system allows users to take collateral debt positions against high-value NFTs, offering the ability to borrow PUSd and pETH at attractive rates. These borrowed funds can be actively utilized in the JPEG'd Curve Finance pools, effectively converting idle NFTs into sources of significant yield, historically reaching up to 86% APY. JPEG'd's strategic use of its voting power in Curve Finance governance maximizes rewards for its pools. Currently, the platform supports a range of blue-chip NFT collections and boasts over 570 NFTs in its vault, with a total value locked exceeding $26 million.

Composability: Crafting the Financial Web of NFTs

NFTFi's true power lies in composability—the seamless integration of various financial services—spawning multifaceted products. A prime example is the recent interaction of a loan on the peer-to-peer marketplace NFTfi. The borrower wrapped their yield-generating SudoSwap (AMM) pool into an ERC721 and took a loan out on the bundle of assets

While the loan was rather small, it just shows the opportunity for composability in this ecosystem. Borrowers can engage in yield-generating activities while their NFTs serve as collateral for loans, showcasing the novel use cases and flexibility of NFTs as financial assets.

Now, this is where a protocol that sits on top of the entire NFT Finance infrastructure, like Protectorate Protocol, can take advantage of idle capital that sits in NFTs and inject that liquidity into the multiple instances for yield-generation that occur on a daily basis.

Projecting NFTFi's Ascendancy

NFTFi's growth trajectory is characterized by user-friendly platforms, integration across markets, and the creation of comprehensive aggregators that simplify access to yield-generating opportunities. 

While NFT lending has been the early gateway to NFTFi, its success is anticipated to spill over into derivatives, automated market makers, and beyond. The sector's expansion is both additive and multiplicative, as success in one vertical fosters innovation and adoption in others.

As the ecosystem streamlines the process of unlocking liquidity and competitive yields for NFT holders, the viability and desirability of NFT financialization will continue to increase. The infrastructure for an expansive NFTFi ecosystem has been built, and we are beginning to see the potential of NFTs to be more than art or digital collectibles but robust yield-generating assets.