「Trend Research by LD Capital」When will the situation for NFTFi reverse, lacking new narratives and new funding?
The NFT market in 2023 can be divided by the launch of Blur on February 14th. Before February 14th, the prices of NFT projects, trading platforms, and lending products were continuously rising. However, after the launch of Blur, the entire NFT market quickly turned bearish, with the NFT floor price continuously declining. The prices of trading platform tokens Looks and X2Y2 have dropped by 80% compared to their peak in February. Lending protocols like Bend and Jpeg have also entered a downward trend in adoption rate, TVL (Total Value Locked), and token prices due to the decrease in NFT collateral prices. How is the development of NFTFi currently? Recently, Blur has announced a new product called Blend, entering the NFT lending race. What impact might it have on the NFT ecosystem?
The current NFT market lacks new narratives and new capital inflows, and high transaction fees lead to a continuous shrinking of funds within the NFT ecosystem. Since the market turned bearish in 2022, the core gameplay of NFTs still focuses on PFP (Profile Picture) projects, and the top projects have remained unchanged. The number of NFT traders continues to decline, and the market as a whole lacks new gameplay and new capital. The high intermediary costs of NFT transactions, including royalties and platform fees, result in a significant amount of funds being extracted by project creators and trading platforms. According to data from NFTGO, the estimated transaction costs of NFTs have reached 24% of the total market value of NFTs. From this perspective, it can partially explain why the listing of Blur provided ample liquidity to the NFT market but led to a rise and fall in the prices of NFT projects (high turnover leading to shrinking funds within the ecosystem; repricing of highly liquid assets). Overall, in the absence of new players entering the market, the continuous shrinkage of existing funds within the NFT ecosystem is one of the main reasons for the continuous decline in NFT prices. The entry of incremental capital, a decline in pseudo-buyer liquidity in the market, or a reduction in transaction costs are the indicators to observe for the stabilization of NFT prices.
Vicious competition among NFT trading platforms has reached the latter stage, but a turning point in the race has yet to be seen, and the concentrated selling pressure resulting from accumulated token deficits is a challenge for Blur. Currently, the NFT trading platform race is still in the stage of fierce competition, with mainstream platforms reducing their transaction fees to zero, reaching the most intense stage. The situation of new comprehensive NFT trading platforms seizing the market has improved significantly, but real trading demand from NFTs has yet to see growth, and the turning point of the overall race has not yet appeared. As for Blur, it has captured a significant market share by effectively incentivizing buyer liquidity, but the anticipated airdrop incentives mask the accumulated token deficits since the product’s launch. If the liquidity incentives of Blur are released in a concentrated manner in the future, it could have a significant impact on its price. According to current information, Blur Season 2 will airdrop over 300 million tokens, accounting for 65% of the current circulating supply. The key focus is whether Blur can launch an effective economic model to avoid massive token sell-offs while maintaining continuous binding with liquidity providers.
In a bear market, lending products lack real demand and await the overall recovery of the NFT market. RWA (Real-World Asset) equity-based NFTs, semi-fungible tokens, AI+NFT, and other directions may become new trends. The launch of Blend has had a significant short-term impact on the prices of Bend and Jpeg, but its impact on their businesses is currently minor. This is mainly because there is a lack of real demand for NFT lending, and the main driving force behind the growth of Blend’s business volume is point incentives. The high interest rate subsidy from Bend DAO and the positive premium of Peth over ETH in Jpegd also confirm the lack of demand for NFT lending. As for Blur, Blend’s lending product is currently an expense for the protocol rather than a revenue stream, and there is a significant valuation gap between the lending race and the trading race, so Blend’s role in boosting Blur’s token price is currently limited. Since the demand for lending products will continue to amplify with leverage in a bull market, the rise in underlying collateral prices and the expansion of collateral scope are important indicators to observe for the breakout of the lending race.
Risks: The increase in on-chain yields of ETH squeezes the demand for NFT lending, the concentrated release of Blur’s liquidity costs affecting prices, team and contract risks.
1. Lack of new capital and high transaction fees leading to the continuous decline in NFT prices
NFT currently lacks new narratives and new capital inflows, and high transaction fees result in a continuous shrinkage of funds within the NFT ecosystem. Since the market turned bearish in 2022, the core gameplay of NFTs still revolves around PFP (Profile Picture) projects, and there has been little change among the top projects. Specifically:
Over the past year, the number of NFT traders has been continuously declining. Since the systemic risk triggered by the collapse of Luna in May last year, the number of NFT sellers has consistently exceeded the number of buyers.
Figure 1: Continuous decline in NFT traders
The high intermediary costs of NFT transactions, including royalties and platform fees, resulting in a significant amount of funds being extracted by project creators and trading platforms. According to data from NFTGO, the total market value of NFTs is 8.8 billion, with a total trading volume of 41.8 billion. In the total market value statistics, 45% is categorized as “Others” (non-mainstream NFTs), many of which lack active trading and are in illiquid states. The calculation excludes wash trading in the total trading volume. Under the condition of overestimated total market value and underestimated total trading volume, assuming a 5% transaction fee, the transaction costs of NFTs have reached 24% of the total market value of NFTs. From this perspective, it can partially explain why the listing of Blur provided sufficient liquidity to the NFT market but led to a rise and fall in the prices of NFT projects (high turnover leading to shrinking funds within the ecosystem; repricing of highly liquid assets). Overall, in the absence of new players entering the market, the continuous shrinkage of existing funds within the NFT ecosystem is one of the main reasons for the continuous decline in NFT prices.
Figure 2: Overall volume and price situation in the NFT market
Figure 3: Rise in volume and fall in prices of NFTs after the launch of Blur
Based on this perspective, the relevant indicators for predicting the turning point of NFT prices are: entry of new capital (new users entering or expansion of funds from existing users), Buyers > Sellers; a decrease in pseudo-buyer liquidity in the market or a reduction in transaction costs.
2.The turning point in the NFT trading platform race has not yet appeared, and the concentrated selling pressure resulting from accumulated token deficits is a challenge for Blur.
The profitability of NFTs is continuously declining, and NFT trading platforms are constantly innovating. In particular, Blur’s entry into the market has intensified the competition among NFT trading platforms. With its zero-fee policy and ample liquidity provided by the Bid Pool, Blur quickly captured the highest trading volume in the market. Even though Opensea swiftly adjusted its fees and optimized its product features, the impact was still unsatisfactory. Looksrare and X2Y2’s market share further declined, with their token prices dropping nearly 80% from their peak in February.
Figure 4: Distribution of trading volume among NFT trading platforms
Currently, the fee structure of mainstream NFT trading platforms is as follows: After Blur rapidly seized the market with its zero-fee policy and high buyer liquidity, Opensea temporarily adjusted its transaction fees to zero and later reinstated them at 2.5%. However, Opensea transformed its original NFT aggregator, Gem, into a new product called Opensea Pro, which implements the same zero-fee policy as Blur and creates a similar frontend interface. Looksrare also adjusted its fee policy from 2% to 0.5% under the influence of Blur. The competition among NFT trading platforms has entered the most intense stage.
Figure 5: Fee structure of mainstream NFT trading platforms
There is currently a significant divergence of opinions regarding Blur, the core subject of focus. Some investors believe that Blur has surpassed Opensea and become the leading NFT trading platform. They have strong confidence in the project team and investment team, and in anticipation of a promising future for the NFT market, they believe that Blur should command a higher valuation premium. On the other hand, some investors believe that Blur’s current zero-fee policy and its economic model based on point incentives are unsustainable. They see significant uncertainty in Blur’s long-term development.
Let’s first examine the differences between Blur and Looksrare, X2Y2 from a product perspective. Apart from the basic trading functions, Blur’s biggest success lies in incentivizing liquidity, particularly buyer liquidity. Looking back at the iterative history of NFT trading platforms, Looksrare was the first to adopt transaction mining to incentivize trading. X2Y2 initially focused on order book mining to incentivize seller liquidity but later switched to the same transaction mining approach as Looksrare. Subsequently, Looksrare began order book mining but incentivized both buyers and sellers, eventually transitioning to primarily incentivizing sellers. Finally, Blur emerged with a primary focus on incentivizing buyer liquidity.
The underlying logic behind this is that in the early stages of the economic model where transaction fees were charged and retained by the platform, designing an economic model that incentivizes transactions allows the team and token holders to earn high income. Looksrare initially generated substantial profits through this approach, but fundamentally, it was a disguised way of selling tokens. X2Y2 initially failed to grasp this point, resulting in minimal income for the team and treasury, and facing an unsustainable development situation. Consequently, they switched to transaction mining. However, transaction mining provides low incentives for genuine users, hindering the construction of network effects for the product. From a developmental perspective, Looksrare started incentivizing liquidity through order book mining, initially with equal incentives for both buyers and sellers. However, due to the nature of NFT trading where sellers pay fees and selling determines the floor price, incentivizing sellers is beneficial for pushing down the floor price. In a market where aggregators have become the entry point for buyers who primarily focus on floor prices, the simultaneous incentivization of both buyers and sellers was less effective than incentivizing sellers alone. As a result, Looksrare adjusted its order book mining model to primarily incentivize sellers.
It wasn’t until Blur launched in mid-February this year that it achieved great success by incentivizing buyer liquidity through the Bid Pool. This success is closely related to the stage of market development. Firstly, NFT trading platforms had already reached a point where they no longer charged fees. If Blur had continued with a transaction mining model that collected NFT transaction fees and provided token subsidies, it would have followed the same path as Looksrare and X2Y2. Of course, Blur’s ability to implement a genuine zero-fee policy is also related to its own resource endowment. The two rounds of funding received by Blur enabled it to forgo short-term team income and accelerate market capture. Secondly, the continued cooling of the entire NFT market shifted the pain point of trading from buying NFTs at low prices to selling them at the highest possible prices. At this stage, there was a significant power disparity between buyers and sellers, with the demand for buyer liquidity far outweighing the demand for seller liquidity. Blur’s incentivization of buyer liquidity perfectly aligned with this pain point. In an order book-based trading system, the level of incentives for both buyers and sellers needs to be adjusted according to the market stage, placing higher demands on Blur’s market sensitivity and agility.
Drawing on the development experience of DEXs and other trading platforms, the core competitiveness of an outstanding platform product capable of spanning cycles lies in its ability to construct cross-side network effects (i.e., multiple parties within the platform having a wide range of counterparties to choose from, thus overshadowing the similar functionalities and experiences of the platform) or forming strong binding interests with asset issuers, users, or liquidity providers, whether by one or multiple parties. From this perspective, in the NFT trading platform space, the construction of cross-side network effects, due to the high liquidity of on-chain users and asset issuers, has yet to materialize. Currently, Blur has bound a group of liquidity providers through point incentives, which is the core reason for its current success, but its sustainability needs to be observed.
From an economic model perspective, the biggest challenge for the core project Blur lies in how to handle the massive token distribution in Season 2. Blur has concealed its liquidity cost expenditure by relying on the expectation of token airdrops instead of traditional community incentives, thereby masking the token-level deficit of the platform since its launch in mid-February. According to current public information, Blur Season 2 will distribute tokens on a scale exceeding 300 million, accounting for 65% of the current circulating supply. If Blur fails to timely adjust its economic model to control token emissions and increase locking mechanisms, its secondary market price may face significant pressure. It is crucial to monitor whether Blur can introduce an effective economic model that avoids large-scale token sell-offs while maintaining continuous binding with liquidity providers. Additionally, it is important to note that on June 14th, there is a significant unlocking of approximately 200 million tokens, accounting for 42% of the current circulating supply. This includes approximately 1.2 billion tokens (26% of the circulating supply) unlocked by the team and approximately 80 million tokens (16% of the circulating supply) unlocked by investors.
Figure 6: On June 14th, Blur faces a large unlock of 200 million tokens.
3.Lack of Real Demand for Borrowing Products in the Bear Market, Waiting for the Overall Recovery of the NFT Market
Since mid-February, the declining prices of NFTs have resulted in a decrease in the adoption rate, Total Value Locked (TVL), and token prices of lending protocols such as Bend dao and Jpegd.
Figure 7: June 14th, Gradual Decline in Business Volume of Mainstream Lending Products Since Mid-February
Paraspace has achieved good results in the NFT lending field despite the downward trend. Its introduction of U-based lending, Ape lending, and automatic compounding have made it a strong competitor to Bend dao. Since mid-February, while the prices of NFTs denominated in USD have been continuously declining, the price of ETH has been rising. This has resulted in users suffering greater losses when borrowing ETH by pledging NFTs compared to borrowing USDT. Previously, Bend dao only offered ETH lending, while Paraspace provides both ETH and USDT lending, capturing a significant amount of TVL with its diversified product structure (Paraspace has recently encountered issues of user fund misappropriation and team control disputes).
It is worth noting that the upgrade of ETH to Ethereum 2.0 has brought about a risk-free yield of approximately 5% on ETH. This is expected to impact the ETH deposit pools of lending products, leading to continuous shrinkage until interest rates reach equilibrium. This is also the unfavorable situation faced by NFT lending products represented by Bend dao. However, Bend dao recently passed a proposal to add a stablecoin lending pool to withstand industry risks and competition in the field.
As a CPD lending protocol, Jpegd is less affected by the increase in risk-free yield on ETH. It reduces the long-term liquidity incentive costs of the protocol by continuously accumulating CVX to gain governance rights over Curve. However, the integration of Jpegd with Curve and the complexity of its product features significantly increase the protocol’s complexity. Additionally, using Jpegd incurs higher gas fees. Currently, Jpegd, through its combination with Curve, has somewhat reduced the long-term operational costs of the protocol but has made the product structure slightly more complex.
Recently, the launch of Blend, the NFT lending product by Blur, has caused ripples in the NFT lending field. Since the launch of Blend, the prices of Bend and Jpeg tokens have experienced significant declines, while the prices of NFTs have started to recover. However, the price performance of Blur itself has been poor. Specifically:
Blend fundamentally differs from the point-to-pool lending model of Bend dao and Jpeg. It is a peer-to-peer lending product with no loan maturity date. It incorporates an innovative refinancing auction mechanism designed under the assumption of rational lenders. It achieves various enhancements in user experience, such as no external oracle feeding, no maturity date, and the ability for lenders to exit at any time while protecting the interests of borrowers.
Due to Blur’s strong influence in the NFT market combined with the multiple innovations of the Blend product, the TVL of Blend has rapidly increased since its launch. From the perspective of outstanding loans, two days after the launch of Blend, the outstanding loans reached $16.58 million, which accounted for 73% of Bend dao’s outstanding loans at that time. As a result, the prices of Bend and Jpeg tokens were impacted and experienced rapid declines. However, it is worth noting that while Blend’s business expanded rapidly, the TVL of Bend Dao, Jpegd, and Paraspace did not decline. From this perspective, Blend’s growth in the NFT lending market is driven by the protocol’s expenditure through incentivizing demand with points, rather than being driven by genuine lending demand to generate profits. Considering the significant valuation gap between the NFT lending and NFT trading platform sectors, from the perspective of MC (Market Capitalization), Blur’s MC is currently $21 million, while the leading NFT lending protocol Bend dao has an MC of only $4.49 million and Jpegd has an MC of only $13.7 million, indicating a significant difference in magnitude. Therefore, at the current stage, Blend has not made a significant contribution to the price increase of Blur.
Regarding the Blend lending product, caution should be exercised as the motivations of most borrowers are to earn Blur points, and the actual volume of funds on the lending side is insufficient. Borrowers’ collateral is frequently subject to refinancing auctions initiated by lenders, resulting in borrowers bearing excessively high borrowing interest rates or losses due to liquidation of their NFTs.
In summary, lending products are essentially tools for taking long positions on asset prices. They can be used for leverage during bull markets and as alternative liquidity exit channels during bear markets. The recovery of NFT prices complements the development of lending products, and the improvement of lending infrastructure helps sustain NFT prices. However, the real driving force behind the NFTFi ecosystem’s prosperity and the demand for lending products comes from the explosion of underlying assets and the amplification of lending product demand. Currently, it is worth paying attention to new directions such as equity-based NFTs driven by RWA, semi-fungible tokens brought by EIP-3525, and new applications of AI+NFT.
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