Source: AdobeStock / Jose Stephen Young, Founder & CEO, NFTfi , an NFT collateralized loan marketplace.
There is so much hype around Art and Collectibles (A&C) in the NFT space that you would be forgiven for thinking NFTs begin and end there. Certainly, the vast majority – although not all – of NFT projects to date have been concentrated in A&C. Quarterly studies released by NonFungible paint an interesting picture: by volume, A&C accounted for 91% of the market in Q1 of 2021, down to 85% in Q3. This simultaneously shows the dominance of A&C, while also pointing to the expanding presence of other NFT verticals.
As NFT use cases expand and diversify, the market grows (surpassing USD 40bn in 2021, per Chainalysis ), and the technology’s benefits are increasingly recognized, two questions, therefore, remain: what is holding NFTs back from mass adoption and how can we get there?
In a recent article for Cryptonews.com on this topic, Kiril Nikolov suggests that the holdup is partly the low levels of global crypto adoption (only an estimated 106 million people hold cryptoassets), but primarily the lack of utility and services that can make NFTs accessible and useful in people’s everyday lives. One of the key services Nikolov mentions is the development of financial tools. Motivated by the importance of developing this new frontier, this article proposes that such financial tools can be defined and grouped under the term ‘NFT Finance’. In the following sections, I will break down what NFT Finance entails, suggest a framework for understanding existing and future financial products, and demonstrate how it can enhance an incredibly diverse range of global industries. Most importantly, I will argue that NFT Finance is the key to mainstream NFT adoption and expanding the liquidity and growth of NFT markets, within and beyond A&C. What is NFT Finance and why does it matter?
First and foremost, let’s look at what NFT Finance entails. In the first article published in the collaborative research series between CadLabs and NFTfi titled ‘ The Advent of NFT Finance’ , NFT Finance was defined as ‘the Web3 infrastructure and set of markets for NFT-based financial products and services.’ To understand what this means in practice, it is helpful to draw comparisons with the traditional finance (TradFi), A&C, and real estate industries.
In TradFi, the services that take place outside of the main banking system, or that service niche assets, are termed Specialty Finance. In the world of A&C, the financial services that have developed in recent decades, from art investment vehicles to loan providers and securitization platforms, are therefore considered a form of Specialty Finance. The existence of these financial products enables more activity in the A&C market as players free up capital, conduct more complex transactions and participate in new ways beyond a straightforward artwork purchase or sale, particularly in the secondary market. In a similar fashion, the Financialization of real estate in the 1990s, with the creation of mortgage-based products and derivatives and the securitization of loans, was crucial to that industry’s boom. These comparisons help us to envisage what NFT Finance can offer for NFTs, by creating liquidity and new markets based on NFTs that would hugely broaden the opportunities and scope for investment, value creation, trading, and other forms of market participation. At this early stage of development and innovation, it is important to think as broadly as possible and, crucially, to consider how NFT Finance can facilitate and enhance the use of NFTs in industries beyond A&C. To do this, however, we first need to establish the suitability and likelihood of such widespread NFT adoption. The suitability of NFTs for widespread adoption
NFTs can be anything. Any economic activity built around distinct units could therefore benefit from these units existing on a blockchain as NFTs. These benefits, to name a few, include greater transparency, accountability, traceability, efficiency, reliability, and composability. Which industries in particular stand to benefit? To begin with, any that have non-fungible items at their core. Here are a few examples:
Supply chain management : NFTs can authenticate products and ensure quality standards. Thanks to the traceability of NFTs, the origin of products can be verified and their movements can be tracked at each stage of transport and production. This would be a major advantage for any business reliant on supply chains, from food to fashion and pharmaceuticals. The potential impact of enhanced supply chain management across the globe cannot be underestimated.
Patents & intellectual property: NFTs can be used to transfer […]
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