Newman Research: Five Key Areas to Observe as the NFT Landscape Matures

March 3, 2022

Overview

There is no doubt that 2021 was a remarkable year for non-fungible tokens (NFTs), however it appears that things were just starting to heat up. From the rise of blue-chip collections like Bored Ape Yacht Club (BAYC) by Yuga Labs to the explosive trading volume witnessed across marketplaces, it’s clear that fascination with NFTs shows no signs of stopping. Data from Nonfungible.com found that NFT trading volume jumped 200x from US$82.5mm in 2020 to US$17.7bn in 2021. Since the beginning of 2022, the global trading volume of NFTs grew from US$17.7bn to US$55bn – up 222.2% in just four months.

As a leading full-stack proprietary venture capital firm, Newman Capital has built a strong expertise in the world of NFTs. This fast-growing sector in crypto is an area that is maturing exponentially and our team is tracking its developments daily. In this article we’ve highlighted five critical areas that have emerged which we believe will drive growth in the NFT space as the landscape evolves and diversifies.

1. Competition amongst NFT Marketplaces

When it comes to NFT marketplaces, OpenSea currently dominates market share, but there is room for competition. Often misnamed “BrokenSea” on Twitter in user complaints, flaws with the leading NFT marketplace leave space for new entrants and competitors like LooksRare to gain traction if user concerns and needs can be better addressed.

Single-focus NFT marketplaces exist to target niche audiences, however they run into a transactions and trading volume ceiling given limited demand. Some examples include SuperRare and Foundation which cater to high-end digital art. If these platforms do not continue to evolve and grow with their community or reach new audiences, we may see a tapering in activity and trading volume as in the case of NBA Top Shot, the Flow-based closed marketplace which specifically serves basketball fans and those who collect sports memorabilia and moments.

Major centralized exchanges (CEXs) have also entered the chat. Looking to tap into the NFT market and capitalize on their large user bases, CEXs like Binance, OKX, and FTX have expanded their offerings to include NFT verticals. The top exchange to generate noise in the NFT space has been Coinbase, despite the delayed launch of its much anticipated NFT marketplace, which is now available in limited beta as of 20 April 2022. The exchange experienced a slow start in its first week of transactions, however we believe CEXs might still have a place in NFT adoption among new crypto users.

In the meantime, OpenSea continues to preserve its monopoly through expansion to support Polygon, Klatyn, and most recently Solana-based NFTs alongside digital assets on the Ethereum network. Prior to OpenSea’s cross-chain integration, we also saw blockchain-specific platforms emerge including Magic Eden for Solana-based NFTs and Objkt for Tezos-based projects. Moving forward we expect to see multi-chain support become the standard for all NFT marketplaces as competition intensifies.

OpenSea currently outpaces all marketplaces and healthy market competition is needed to push all platforms to continually improve their responsibility to users and range of offerings. Some other competitive advantages to look out for in NFT marketplaces include improved UI/UX, lower platform fees, hybrid payment methods, user rewards, and responsiveness to community feedback.

2. Streamlined Trading through NFT Aggregators

While the NFT marketplace scene seems to be getting more crowded, the demand for NFT marketplace aggregators also appears to be getting higher. NFT aggregators enable users to gain full coverage and transparency with a single interface and browse multiple collections simultaneously. Users can trade NFTs in bulk without checking across various venues and, more importantly, save potential gas fees up to 40%.

Source: Genie.xyz as of 3 May 2022

Currently, top aggregator platforms for NFTs include Genie.xyz, Gem.xyz, and Flip.xyz. In late Apr 2022, Opensea announced the acquisition of Gem.xyz to improve the platform’s user experience.

3. Increasing Interest in On and Off-chain NFT Data Analytics

Source: rarity.tools as of 29 Apr 2022

As the NFT space gets more sophisticated and users are getting more mature, in-depth studies and research of individual projects and the broader market would naturally be the next step.

In the early days, traders could only gauge the market by simple data such as trade volume. However, these data only couldn’t address the rising need to analyze the market and projects in a multidimensional way. That’s where the modern NFT analytic tools come into place. NFT analytic companies feature various aspects, including rankings, rarity, historical stats, floor price by traits, upcoming mints/projects, community/social media tracking, wallet tracking, etc. Some notable names in the field built specifically for NFT analytics include Rarity Tools, Moby, Icy Tools, Trait Sniper, and NFT Bank.

While new NFT users and traders may benefit from these tools, we expect the next generation of NFT analytic platforms to deliver a more streamlined experience while integrating on-chain and off-chain data in a more digestible way. Moreover, whale activity tracking and wallet behavior analysis are expected to be more common and accessible for regular users.

4. Demand for NFT Lending Solutions

NFT lending has been an emerging part of the DeFi lending landscape. As the NFT space continues to expand, the demand for NFT financialization also has been growing. Leveraging NFTs to get liquidity rather than just holding them in wallets is a narrative that is gaining popularity.

NFT lending is the process that involves lending and/or borrowing money by using NFTs as collateral for the loans made. Leading NFT lending platforms include names such as NFTfi, Arcade.xyz, Drops.co, Nexo, JPEG’d, and BendDAO. NFT lending has gained more traction in the market after high-profile borrowing cases arise. For example, in March 2022, the largest-ever NFT-backed loan was executed on the NFTfi platform. A borrower took an $8 million loan collateralized by their collection of 101 CryptoPunks. The loan has an APR of 10% and a 30-day duration. Our team expects to see more NFT collections will be accepted as collateral in the future. At the same time, lending related infrastructures such as effective pricing mechanisms, custody solutions, and insurance will be critical to the development of this space.

A good infrastructure can be explored in three aspects. First, a secured and robust custodian to manage the collateralized NFTs can minimize the smart contract risks from cyber attacks. Second, borrowers are also concerned whether their collateralized NFTs would hinder their rights from joining the upcoming airdrop tokens events and receiving interests. Third, having the best practice for adoption and execution (such as lending price level, LTV ratio, etc.) can motivate NFT lending.

Source: NFT Bank as of 29 Apr 2022

Borrowers also pay attention to the pricing level of the collateralized NFT. People may expect their NFTs to be reasonably priced for higher amounts of loans. However, current market information may not be enough to estimate the NFT pricing fairly. Take BAYC # 2087 as an example. The NFT was estimated for 220 ETH on NFT Bank via machine learning, while it was actually sold for 769 ETH in Sep 2021. The pricing deviation reflects the importance of collective intelligence and accurate pricing in the NFT market.

5. NFT-linked Hedging and Financial Products

NFT derivatives may be a newer concept compared to the above segments, but this sector is definitely emerging with the rising demand from NFT and DeFi players. Products in this space provide the ability to long or short NFT collections at any given amount. And users generally do not need to own or collateralize an NFT in order to trade NFT derivatives.

There are multiple trading mechanisms, including central limit order book, debt pool model (similar to SNX), and virtual AMM (vAMM). FloorWaves, one of the leading derivative markets for NFTs, uses the order book mechanism. On the other hand, another NFT derivative protocol Mimicry uses the synthetic debt pool mechanism. For NFT perpetual platforms like NFTperp and Tribe3, they mostly leverage the vAMM mechanism.

If NFT holders are bearish on the valuation of their NFTs, they can take a short position on the NFT derivative contracts, hedging against the risks of NFT price drop. And if retail traders cannot afford an expensive NFT like the BAYC but they want to bet on the NFT pricing, they can take a long position on the NFT derivative contracts they are bullish on.

Conclusion

NFT is more than just the artwork itself, but an innovative and disruptive technology that brings financial value in the Web 3 world. As a true believer of the Web 3 era, Newman Capital foresees the potential growth and expansion of the NFT market. Since inception, the firm has been investing and incubating multiple NFT projects, covering applications across social media, Gamefi, and Defi. In 2022, Newman Capital will continue being active in the NFT investment space.