This article is compiled and organized by BlockWeeks
In 2020, the full-year sales of NFT were only 59.3 million USD; by 2021, this figure had surpassed 12 billion USD, and almost every corner of the entire crypto industry—from established centralized exchanges to emerging DeFi protocols—was building features around NFT use cases. But NFTs are far more than expensive profile pictures (PFP): they are regarded as the key primitive for opening the metaverse. To date, NFTs have mainly served as avatars and digital identities, and as the ecosystem matures and the user base expands, their uses will significantly exceed such basic scenarios, among which "financialization" is the core key to unlocking additional utility.
This path has already formed an interesting symbiotic relationship: NFTs continuously channel mainstream users into DeFi, while DeFi in turn patches the two biggest shortcomings of NFTs—accurate pricing and sufficient liquidity. At present, the two major obstacles for NFTs entering the DeFi ecosystem are precisely pricing and liquidity, and various protocols are attempting to solve the problem with differing degrees of success.
Five Main Threads of NFT × DeFi
DeFi products built around NFTs can be roughly grouped into five categories: fractionalization, lending markets, investment DAOs, derivatives, and pricing. Such protocols attempt to make NFTs easier to circulate and easier to trade, bringing their functional attributes closer to fungible tokens. At the same time, NFT collections have also begun to introduce DeFi-style token incentive models, with mixed results, and some designs have already exposed hidden risks worth guarding against.
From a risk management perspective, NFT holders face three major difficulties throughout: insufficient liquidity, low capital efficiency, and valuation difficulty. Fractionalization helps improve pricing and liquidity in the NFT market, but its own risks are often not easy for users unfamiliar with the field to perceive.
Valuation Dilemma: A Tweet Falls from 2.9 Million USD to Less Than 14,000
The best example of how difficult NFT pricing is may be Jack Dorsey's first tweet: it sold as an NFT for 2.9 million USD in March 2021, while in a public auction in April this year, the sale price was less than 14,000 USD. The price of an NFT is usually determined jointly by three factors—the community around that NFT, the rarity of its attributes, and overall market conditions.
In addition, new collections are emerging endlessly, breaking the playbook of classic NFT issuance: goblintown has no roadmap, no Discord, and no clear utility, yet it can still maintain a floor price of about 3 ETH.
The "Dark Age" of Infrastructure: From Counterparty to ERC-721
Many people regard Counterparty as the predecessor of NFTs—it was a peer-to-peer platform built on top of the Bitcoin network and was once called "Bitcoin 2.0" before the term "NFT" appeared. Due to native capabilities and available standardized token forms, the attention behind Counterparty subsequently gradually shifted to the Ethereum ecosystem. In August 2015, the first Ethereum NFT project, TerraNullius, launched, allowing smart contract callers to declare a "claim" on the Ethereum blockchain with attached unique information.
Ethereum developers thus noticed this use case and subsequently built the ERC-721 token standard. ERC-721 provides developers with a toolkit: a set of unique, indivisible tokens can be bound to a single smart contract, with on-chain metadata embedded in the contract. Just as the ERC-20 standard drove the 2017 ICO boom, the ERC-721 standard drove the early adoption curve of Ethereum NFTs in 2021.
Since the ERC-721 standard was introduced, more than 100,000 NFT collections have been deployed. IntoTheBlock data shows that more than 50% of existing NFT collections were created in the last 5 months. The explosive growth in 2021 was actually built on years of silence before that—it was precisely during this NFT "dark age" that future giants such as OpenSea were built. Infrastructure developed under the shadow of the overall crypto bear market, which made the frenzy of on-chain NFT activity in 2021 possible. The cumulative on-chain transaction volume of NFT trading has so far reached about 70 billion USD, with trading volume peaking in August 2021 and then clearly cooling down.
Lending Market: The CDP Model and the JPEG’d Sample
The collateralized debt position (CDP) pioneered by MakerDAO constitutes the ultimate form of the NFT-collateralized money market. JPEG’d is a decentralized lending protocol that uses CDPs to let users borrow funds using NFTs as collateral; such positions are called "non-fungible debt positions" (NFDP), and the stablecoin users can borrow is called PUSd.
JPEG’d sets the borrowing limit at 32% of collateral value, which is a relatively conservative low threshold, so when the loan-to-value ratio (LTV) exceeds 33%, the user's position faces liquidation. The protocol charges 2% annualized interest on loan size, as well as a one-time debt fee of 0.5%. Most NFTs are priced through Chainlink oracles, referencing floor prices and recent transaction prices; while the prices of "holy grail" NFTs are hard-coded and can only be adjusted through governance votes—for example, Alien Punks are currently valued at 4000 ETH, and Ape Punks at 2000 ETH.
JPEG’d also issued its own NFT series, JPEG Cards, which have in-protocol utility. Cardholders could initially stake the cards to share 1% of the total JPEG token supply within one month. Among them, 99 Cigarette Cards can be locked to increase credit limits, raising the user's maximum LTV to 40%; but unlocking a Cigarette Card may cause undercollateralized positions to be liquidated. On JPEG’d, liquidation is executed only by the DAO: when a user's debt/collateral ratio exceeds 33% (40% after staking Cigarette), the DAO burns PUSd to repay the user's debt, and the liquidated NFT is retained by the DAO or enters a 24-hour members-only auction. The protocol also introduced an NFT liquidation insurance mechanism, where users can purchase insurance for their CDP at a cost of 5%.
Risk Exposure: Oracles, Liquidation, and Non-Professional Users
Fractionalization improves pricing and liquidity in the NFT market, but its risks are easily underestimated by inexperienced users. The truly successful NFT index funds and investment DAOs are only those teams capable of identifying and quickly executing trends in the NFT landscape, and this itself requires a certain degree of coordination and centralization.
The performance of NFT price prediction markets is relatively limited, especially when used for niche scenarios such as "post-mint price movements." The more fundamental problem is that the entire NFT financialization market is highly dependent on price oracles, which brings new challenges such as manipulation risk and opaque valuation methodologies.
Future Paths: Vertical Integration, Institutional Entry, and "Rent Instead of Buy"
Vertical Integration by Project Teams
CryptoPunks started this trend earliest by building its own marketplace to buy and sell Punks; STEPN built its own DEX and then surpassed Orca to become the largest DEX on Solana. Game developers are best positioned to capture additional revenue from DeFi × NFT products (such as rental markets for game NFTs). Innovation is more likely to come from leading collections that deeply understand user pain points, and they will vertically integrate as many parts of the user experience as possible.
Institutional Lending Enters
Institutions will learn from experiments in the early NFT lending market. The importance of institutional lending for improving overall market liquidity cannot be underestimated. Although institutions have so far been reluctant to lend against NFTs as collateral, as the NFT space grows, they will closely study the structural design of DeFi × NFT; once institutional lending infrastructure is built, institutional funds can flood in through the additional utility unlocked by collateral, and demand for NFTs will rise accordingly.
Token-Gated Events Give Rise to Short-Term Rentals
Rental scenarios will not be limited to games. Offline events gated by NFT ownership will create "test-the-waters" demand: rather than buying a PROOF Collective NFT at a 50 ETH floor price just to attend a party, users may prefer to spend 1 ETH to rent one for a weekend. This not only preserves more liquid capital for other projects, but also creates a new income stream for NFT holders.
Tokenization Drives Protocol Segmentation
As more and more assets and behaviors become tokenized, DeFi × NFT protocols will continue to emerge. At present, NFTs are still at an early stage in terms of utility. When real-world assets, consumer loyalty programs, interpersonal networks, and more are tokenized one after another, DeFi products and primitives highly tailored to specific scenarios will be created. DeFi protocols will follow utility, and it is difficult for a single protocol to serve all differentiated NFT use cases better than multiple specialized protocols.
Conclusion
NFTs are becoming a key infrastructure primitive supporting Web3 applications and the metaverse. The market is still seeking reasonable valuations for this emerging asset class through repeated trial and error, and this is precisely the core proposition that NFT financialization must solve: on one hand, opening up liquidity through fractionalization, lending, derivatives, and oracles; on the other hand, preventing opaque valuations and liquidation risks from spilling over. Whether the two barriers of pricing and liquidity can truly be broken through will determine the speed at which NFTs move from "expensive avatars" to usable financial primitives.
