While we wait for Altair to secure its parachain slot I would like to discuss some points that will need to be addressed before providing liquidity to crypto native NFTs like Cryptopunks.
I think that this is a great idea for various reasons. The aspect of providing liquidity to NFT owners actually gives another use case for the said NFTs. With the said ability NFTs are actually transitioning from being ‘overpriced jpegs’ to assets that can used to finance other activities. Another reason is that Altair would be the first to break that barrier and offer NFT owners liquidity.
Said venture isn’t risk free and it comes with its own problems that need to be solved.
First mayor problem would be pricing of the assets. As we all know NFT prices are skyrocketing and this can be attributed to a few factors. That kind of price action attracted alot of market participants to the NFT market in the hopes that they will be able to acquire and flip NFTs with profit which results with growing the NFT bubble out of proportions. Another problem is artificialy inflating the value of the NFT that are being traded between a few accounts while the owner of all of the accounts is the same. In this circumstances it’s hard to price a NFT with a fair price and we can’t rely on market value.
Another point from value perspective would be subjective value of the NFT. This is best explained with an art example, if a buyer is willing to overpay an art piece of an author, then that art piece will set a benchmark for other art pieces from that author. I believe that this characteristic is also true for NFTs and that it may cause problems.
Lastly NFTs are highly illiquid assets and this begs the question how to liquidate an NFT when the borrower defaults.
My two cents on your blog post: the current NFT-craze is definitely at the top of its hypecycle and many NFTs floating around will lose value again. For sure there always will be traders who are willing to pay exorbitant prices for a single piece of digital art without a tangible value but in my opinion in the mid- to long term only legit NFT-projects with real use cases can maintain its value and will be able to stay.
Bear in mind we are in the middle (and more closer to the end) of the 4-year-cycle in crypto and the next bear market will come sooner or later. On these grounds projects who are able to distance themselves from the (isolated) crypto space and find a bridge to the real world will do well in the next bear cycle and beyond that.
I am looking forward to NFTs with real world use cases which cover ordinary needs: for example I would like to see fractionalisation of a Taxi, bus or a UBER car (or in the larger scale a taxi fleet, a bus company or dozens of UBER cars) where these means of transport are wrapped into NFTs and every investor owns a piece of it and earns the profits made with the vehicles driving around.
I think the key issue is less the valuation of the NFTs (https://upshot.io/) but more that they don’t (yet) act as capital assets. So to make token holders whole, you’re banking on asset appreciation. There are no cash flows associated, because punks cannot yet be rented, whether for advertising or otherwise.
But I think the broader point is a good one. Assets like Music NFTs with royalties attached (Royal) or Axies with play-to-earn cash flows attached are more suitable for a “RWA” lending protocol. Further, in both the aforementioned cases, assets live completely on-chain. So not only would liquidations be simpler, but remittance of payments could be completely automated.
With more musicians creating “NFT albums” I think we’ll one day see an album financed with DeFi and interest repaid using royalties generated like you said. This could open up a new avenue for producers and other musical artists to receive capital to fund projects
Yield Guild Games is already providing a banking (and education) layer to the Axie economy via their scholarship program, so these facilities are already in the works. And artist 3LAU, founder of Royal, plans to retroactively encode his Album NFTs with royalties. It is definitely all happening. Just up to the CFG team if they want to stay “pure” with meatspace assets or take on a hybrid model.
It may dilute the vision a little bit but would certain help with the friction of onboarding and with moving towards automation.
Maybe instead of liquidating the NFT in the case of ‘default’, the owner’s interest rate increases, so when/if the NFT returns to its previous value, the owner is paying the initial interest agreed for the loan + additional interest as penalty in return for their default. So that way they keep the asset in the hope it recovers (better for both borrower and lender) but pay an additional fee for holding an asset that is so volatile.
Have been thinking about how there are so many interesting experiments it would be cool to try out with Altair. Here’s some brainstorming
'Floor perpetuals give NFT holders access to liquidity and protection against fluctuations in the floor price without requiring them to give up ownership of their NFTs.’
Could building/integrating a floor perps type functionality on Altair could be a way to limit artificial price inflation?
To build on their model:
Say you have 2 Punks and decide to use them as collateral to create and sell a Punks ‘floor’.
Just to use ETH for the example, say the Punk floor is currently at 60 ETH, and your Punks are worth an average of 80 ETH each, you’d have a total portfolio value of 2 * 80 = 160 ETH.
You’d mint floor perps on Altair for your Punks, you receive Punk perps and maybe you could lock this in a punk perps tinlake pool— this punk perps pool could have an adapter to Acala on Karura and mint kUSD and allow you to use your liquidity.
The possibilities are quite endless for what we could dream up. Would love to hear others’ scheming…
Agreed. Most of NFTs on the market are worth nothing. In the end it is just another form of JPEG. Liquidation for those NFTs are putting the funds in great risk.
