LD Capital: NFTFi lacks new narratives and new funds. When will the dilemma be reversed?

At present, the new directions worthy of attention include the equity NFT spawned by RWA, the semi-homogeneous tokens brought by EIP-3525, and the new gameplay of Ai+NFT.

Written by: Yuuki Yang, LD Capital Research

Introduction:

The NFT market in 2023 can be marked by the launch of Blur on February 14th. Before February 14th, the prices of the three core transaction targets of NFT projects, trading platforms, and lending products continued to rise; after Blur went online, the entire NFT market quickly turned from bullish to bearish, and the floor price of NFT kept falling. Compared with X2Y2, the trading platform token Looks 2 The monthly price peak has fallen by 80%. Lending agreements such as Bend and Jpeg have also entered a downward channel due to the decline in the adoption rate of NFT collateral prices, TVL and currency prices. How is NFTFi currently developing? Recently, Blur has released a new product Blend to enter the NFT lending track. What impact may it have on the NFT ecology?

Summary:

**NFT currently lacks new narratives and new funds to enter the market, and the high transaction margin has made the funds in the NFT market continue to shrink. **After the market turns from bull to bear in 2022, the core gameplay of NFT still focuses on PFP, and the top projects have not been changed. The number of NFT transactions continues to decline, and the market as a whole lacks new gameplay and new funds. The high intermediate fees (royalty + trading platform fee) of NFT transactions make NFT a large amount of funds withdrawn by project parties and trading platforms during the transaction process; according to NFTGO data, it is estimated that the transaction cost of NFT has reached 24% of the total market value of NFT; From this perspective, it can also partly explain why Blur provided sufficient liquidity for the NFT market after its listing, but caused the increase in the volume of NFT projects and the decline in prices (high turnover caused the funds on the market to shrink; prices of highly liquid assets were repriced). In general, in the context of the lack of new players entering the market, the shrinking stock funds in the NFT market have become one of the main reasons for the current decline in NFT prices; the entry of incremental funds, the decline in the liquidity of pseudo-buyers in the market or The reduction in transaction costs is an observation indicator for NFT price stabilization.

**The vicious competition of NFT trading platforms has reached the second half, but the inflection point of the track has not yet appeared. The concentrated selling pressure brought about by the accumulated token deficit is a problem facing Blur. **At present, the NFT trading platform track is still in the stage of vicious competition, and the transaction fee rate of mainstream platforms has dropped to 0, which has reached the most intense stage. The situation of the new comprehensive NFT trading platform seizing the market has improved significantly, but the demand for real transactions from NFT has not yet seen growth, and the turning point of the overall track has not yet appeared. As for Blur, it has seized most of the current market share through effective incentives for buyer liquidity, but the expected incentive method of airdrops conceals the deficit accumulated at the token level since the product was launched. If Blur’s liquidity incentive costs are concentrated in the future The release may have a greater impact on its price; according to current information, Blur Season 2 will airdrop over 300 million tokens, accounting for 65% of the current liquidity. The core needs to focus on whether Blur can launch an effective economic model to achieve continuous binding to liquidity providers while avoiding a large number of token sell-offs.

**Under the bear market, there is a lack of real demand for lending products. Waiting for the overall recovery of the NFT market, RWA equity NFT, semi-homogeneous tokens, Ai+NFT, etc. may become new directions. **The launch of Blend will have a great impact on the prices of Bend and Jpeg in the short term, but the current impact on its business is relatively small; mainly due to the lack of real demand for NFT loans at present, the main reason driving the increase in Blend's business volume is point incentives, and Bend dao is high The amount of interest rate subsidies and the positive premium of Peth to eth in Jpegd also prove the lack of demand for NFT loans. As for Blur, the essence of Blend’s lending products is agreement expenses rather than income. At the same time, there is an order of magnitude gap between the valuation of the lending track and the valuation of the trading track. Therefore, Blend’s current role in boosting Blur’s currency price is limited. Since the demand for loan products will continue to increase in the bull market and leverage, the rise in the underlying collateral price and the expansion of the scope of collateral are important observation indicators for the outbreak of the lending market.

Risks: The increase in the rate of return on the ETH chain squeezes the demand for NFT loans, and the centralized release of Blur's liquidity costs affects prices, team and contract risks.

1. Lack of new funds and high transaction margins lead to continuous decline in NFT prices

NFT currently lacks new narratives and new funds to enter the market, and the high transaction margin has made the funds in the NFT market continue to shrink. Since the market turned from bull to bear in 2022, the core gameplay of NFT still focuses on PFP, and the top projects have not been changed. The number of NFT transactions continues to decline, and the market as a whole lacks new gameplay and new funds. Specifically:

In the past year, NFT Traders have been declining. Since the collapse of Luna in May last year triggered the overall systemic risk of the market, Sellers in the NFT market have continued to be greater than Buyers.

Chart 1: The number of NFT transactions continues to decline, source: NFTGo, LD Capital

The high intermediate fees of NFT transactions (royalty + trading platform fees) make NFT a large amount of funds withdrawn by project parties and trading platforms during the transaction; according to NFTGO data, the total market value of NFT is 8.8 billion, and the total transaction volume is 41.8 billion. There are 45% of "Others" (non-mainstream NFTs) in the statistics of market value. A large number of NFTs lack active transactions and are in a state of price and no market; brush volume transactions are removed from the statistics of total transaction volume; In the case of underestimation of the total trading volume, the transaction cost of NFT has reached 24% of the total market value of NFT based on a 5% pump estimate; from this perspective, it can also partly explain why Blur provided sufficient liquidity for the NFT market after listing but caused NFT project volume rises and prices fall (high turnover leads to shrinking funds on the market; prices of highly liquid assets are re-priced). In general, in the context of the lack of new players entering the market, the shrinking stock funds in the NFT market has become one of the main reasons for the current decline in NFT prices.

Chart 2: The overall volume and price of the NFT market, source: NFTGo, LD Capital

Chart 3: After the launch of Blur, the volume of NFT has increased and the price has fallen. Source: NFTGo, LD Capital

Relevant indicators for predicting the emergence of NFT price inflection points from this perspective: the entry of new funds (entry of new users or the expansion of existing user funds), Buyers>Sellers; the decline in liquidity of pseudo-buyers in the market or the reduction of transaction costs.

2. The inflection point of the NFT trading platform track has not yet appeared, and the concentrated selling pressure brought about by the accumulated token deficit is a problem facing Blur

The profit-making effect of NFT continues to decline, and NFT trading platforms continue to introduce new ones, especially the disruption of Blur, which pushes the competition of NFT trading platforms to the most intense stage. Due to the 0 fee policy implemented by Blur and the sufficient liquidity provided by Bid Pool, it quickly grabbed the highest trading volume in the market. Even if Opensea quickly adopted a series of measures such as adjusting the fee and optimizing product functions, the effect was still not good. Looksrare and X2Y2 The market share has shrunk further, and from the perspective of currency price performance, it has fallen by nearly 80% from the February high.

Chart 4: Volume distribution of NFT trading platforms, source: Dune, LD Capital

The current charging situation of the mainstream NFT trading market: After Blur quickly seized the market with 0 handling fees and high buyer liquidity, Opensea once adjusted the trading handling fees to 0 in stages, and then restored to 2.5%, but built the original NFT aggregator Gem into The new product Opensea pro implements the same zero handling fee as Blur, creating a front-end interface similar to Blur; Looksrare also adjusted the original 2% handling fee policy to 0.5% due to it; the competition in the NFT trading market has entered the most intense stage .

Chart 5: Handling fees in mainstream NFT trading markets, source: LD Capital

Pay attention to Blur, the core target. Currently, there are big differences on Blur in the market. Some investors believe that Blur has surpassed Opensea to become the leader of the NFT trading platform. At the same time, they have strong confidence in the project team and investment team. They believe that Blur should enjoy a higher valuation premium when they are optimistic about the future NFT market; It is believed that Blur's current 0 fee policy and the economic model of point incentives are unsustainable, and Blur faces great uncertainty if it wants to achieve long-term development.

Let’s look at the difference between Blur and Looksrare and X2Y2 from the product point of view: apart from the basic trading functions, Blur’s greatest success at present lies in the incentives for liquidity, especially the incentive for buyer liquidity. Looking back at the iteration history of the NFT trading platform: the platform that issued Tokens, Looksrare first adopted the form of transaction mining to stimulate transactions. X2Y2 started with pending order mining to mainly stimulate seller liquidity, and then turned to the same transaction mining as Looksrare. Timeline Later, Looksrare began to mine with pending orders but encouraged buyers and sellers, and then switched to mainly incentivizing sellers, and finally Blur mainly incentivized buyer liquidity.

The logical line behind this is: under the economic model of charging fees in the early stage and the fees belong to the platform, the economic model design of incentive transactions can allow the team and token holders to obtain high income. Looksrare made a lot of profits through this move in the early days, but the essence is to sell coins in a disguised form; X2Y2 failed to grasp this at the beginning, the team and the treasury had almost no income, and faced a situation where development was unsustainable, so it was also adjusted to trading later. mining. However, the incentive effect of transaction mining on real users is very low, which is not conducive to the construction of network effects for products. Based on the dimension of development, Looksrare subsequently began to encourage liquidity by placing orders for mining. At first, the incentives for both sides of buying and selling were the same; but due to the transaction mode of NFT It is the seller who pays the handling fee and sells one at the same time to determine the floor price, which is conducive to lowering the floor price as an incentive for the seller; therefore, in a market where the aggregator has become the traffic entrance and buyers focus on the floor price at that time, the incentive effect of synchronizing both sides of buying and selling is not as good as just Incentivize sellers, and then saw that Looksrare adjusted the model of pending order mining as the main incentive for sellers; until the launch of Blur in mid-February this year, its incentives for buyer liquidity through Bid pool were a great success, which is actually closely related to the stage of market development. One is that at this stage, the NFT trading platform has been introverted to the point that it does not charge fees. If Blur still adopts the transaction mining model of charging NFT transaction fees and token subsidies, it will not be able to escape the old development path of Looksrare and X2Y2; of course, Blur can implement The true 0 fee policy is also related to its own resource endowment. The two rounds of financing obtained by Blur allow it to give up short-term team income to accelerate market preemption. The second is that the continuous cooling of the entire NFT market has changed the trading pain point from buying low-priced NFTs to selling NFTs at as high a price as possible (there is a clear gap between the power of buyers and sellers, and the seller’s demand for buyer’s liquidity is much greater than The buyer’s liquidity demand for the seller), and at this time, Blur’s incentives for buyer’s liquidity just fit this pain point; in the order book-style trading system, the incentives for buyers and sellers need to be adjusted according to the market stage, which also affects Blur The market sensitivity and mobility of the team put forward higher requirements.

Referring to the development experience of DEX and other trading platforms, the core competitiveness of an excellent platform-based product capable of spanning cycles is reflected in the construction of its cross-border network effect (that is, multiple parties using the platform are based on a large number of counterparties in the platform. options, downplaying the similar functions and experiences of the platform) or forming a strong bond of interests on one or more parties of asset issuers, users or market makers. From this perspective, in the NFT trading platform track, due to the high liquidity of users and asset issuers on the chain, the construction of cross-border network effects has not yet been seen. At present, Blur has bound a group of liquidity providers in the form of point incentives, which is the core reason for its success at the current stage, but its sustainability must be observed.

From the perspective of the economic model, the biggest problem for Blur, the core target, is how to digest the huge amount of airdrops in Season 2. Blur conceals the liquidity cost expenditure of the platform through airdrop expectations rather than the linear release of traditional community incentives. Since its launch in mid-February, it has not yet exposed its deficit at the token level. According to the current public information, Blur Senson2 will issue more than 300 million tokens, accounting for 65% of the current circulation. If Blur cannot timely adjust the economic model to control emissions and increase lock-in, its secondary market price may face a relatively high price by then. huge pressure. The core here is to focus on whether Blur can launch an effective economic model to achieve continuous binding to liquidity providers while avoiding a large number of token sell-offs. Another point to note is that on June 14th, Blur investors and the team had a large amount of unlocked about 200 million pieces, accounting for 42% of the current circulation, of which the team unlocked about 120 million pieces, accounting for 26% of the current circulation; People unlock about 80 million pieces, accounting for 16% of the current circulation.

Chart 6: On June 14, Blur faced a large unlock of 200 million pieces

3. There is a lack of real demand for lending products in a bear market, waiting for the overall recovery of the NFT market

Due to the continuous decline in NFT prices since mid-February, the adoption rate, TVL and currency prices of lending agreements such as Bend dao and Jpegd have also entered a downward channel.

Source: Dune, LD Capital

Chart 7: On June 14, the business volume of mainstream lending products gradually declined after mid-February

Since the launch of Paraspace, due to the launch of its U-based lending function, Ape lending and automatic compound interest, it has achieved good results under the downward trend of the NFT lending track, and has become a strong competitor of Benddao. Since mid-February, the price of NFT U standard has been falling, but the price of ETH has been rising, which makes users mortgage NFT to lend ETH to bear a greater loss than lending USDT; Bend dao previously only provided ETH loans, while While Paraspace provides ETH loans, it also provides USDT loans. The diversified product structure has captured a large amount of TVL for it in the current market environment (Paraspace has recently encountered problems of embezzlement of user funds and competition for team control).

What still needs attention is that the upgrade of ETH Shanghai has brought about 5% ETH standard risk-free rate of return to the chain. The ETH deposit pool of lending products is expected to shrink due to this impact until the interest rate equalizes. This is also represented by Bend dao The unfavorable situation faced by NFT lending products. However, recently Bend dao passed the proposal of adding a stable currency loan pool to resist competition from industry risks and tracks.

As a CPD lending agreement, Jpegd is less impacted by the rise of the ETH standard risk-free rate of return on the chain. It obtains the governance rights of Crv through the continuous accumulation of CVX to reduce the liquidity incentive cost of the long-term development of the agreement. However, due to its product functions and Curve The combination makes the product complexity greatly increased compared with Bend dao and Paraspace, and the use of Jpegd will also generate higher gas fees. At present, the combination of Jpegd and Curve has reduced the long-term operating cost of the protocol to a certain extent, but it has made the product structure slightly complicated.

Recently, Blur's launch of the Blend NFT lending product has caused many waves in the NFT lending track like a throwing stone in Pinghu. After Blend was launched, the price of Bend and Jpeg fell sharply, and the price of NFT began to rise, but the price of Blur itself did not perform well. Specifically:

Blend is essentially different from the peer-to-pool lending model of Bend dao and Jpeg. It is a peer-to-peer lending product with no loan maturity date. It designs an innovative refinancing auction mechanism under the assumption of rational lenders, and realizes many functions that enhance user experience, such as no external oracle machine price feed, no maturity date, allowing lenders to withdraw at any time while protecting the interests of borrowers.

Due to Blur's strong influence in the NFT market combined with Blend's many innovations, the TVL of Blend products has risen rapidly since its launch. From the perspective of outstanding loans, two days after Blend launched, the outstanding loans have reached 16.58 million US dollars, reaching Bend dao's then 73%, the prices of Bend and Jpeg fell rapidly under the impact. But what needs to be paid attention to is that the TVL of Bend Dao, Jpegd and Paraspace has not declined while Blend's business is expanding so rapidly. From this point of view, Blend’s role in the NFT lending market is that Blend creates demand through point incentives, which is essentially an agreement expenditure, rather than promoting Blend’s business development based on real lending needs to generate profits for it. Combined with the current valuation gap between the NFT lending track and the NFT trading platform track, from the perspective of MC: the current Blur MC is 210 million, while the previous leading NFT lending agreement Bend dao MC is only 4.49 million, and Jpegd MC is only 13.7 million. There is an order of magnitude gap, so at the current stage Blend has not made much contribution to the increase of Blur currency price.

For Blend lending products, we must be wary of the current motivation of most lenders to earn Blur points. The real amount of funds on the lending side is insufficient, and the borrower's collateral is frequently initiated by the lender for refinancing auctions, resulting in the borrower's real borrowing rate being too high , or NFT is liquidated to generate losses.

Summarize

In general, the essence of loan products is a tool for long asset prices. Bull market plus leverage, and bear market can also be used as an alternative liquidity exit channel. Lending products and the recovery of NFT prices complement each other. The improvement of lending infrastructure is conducive to the growth of NFT prices. Sustained but the real driving force comes from the explosion of underlying assets, which amplifies the demand for lending products and promotes the prosperity of the entire NFTFi ecosystem. At present, the new directions worthy of attention include the equity NFT spawned by RWA, the semi-homogeneous tokens brought by EIP-3525, and the new gameplay of Ai+NFT.