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Problem
#1 — Liquidity
Currently, the emergence of NFT’s and their popularity in the market represents a paradox of value. This value exists in a quantum state, as the technology behind NFTs is immensely promising, with NFTs being the “killer app” many in crypto were hoping to see after the creation of bitcoin and smart contract layers (such as ethereum). Just as the next iteration of gold should naturally embody the properties and technology of bitcoin, art should also have properties of NFTs (providence, verifiable authenticity & ease of ownership transfer). Most other crypto projects/verticals (apart from DeFi) utilise distributed ledger technology to create products that should ideally be built around a centralised database.
However, the opposing truth that co-exists with this notion of NFT value is evident on virtually all NFT marketplaces. Illiquidity. Given the nature of art, and the lack of established reputations for most NFT artists, NFTs as an asset class suffers from wide disparities in terms of what buyers & sellers believe to be the fair market value of a piece of art to be(which is evident in wide bid-ask spreads on most pieces). We believe the abstraction being, these NFT’s value proposition appeals at the individual level, but not at the community level (aside from the few popular projects, such as Ape, NFTs/NBA topshots etc.).
Illiquidity- A Feature of Non-fungibility
As mentioned previously, most NFT’s & NFT marketplaces tend to suffer from illiquidity. If you venture onto OpenSea, Rarible and dozens of other NFT marketplaces, you will notice that most pieces listed have 1–3, if not 0, bids. It is virtually a seller’s market (aside from the minority of famous artists/projects).
The nature of non-fungibility gives rise to this illiquidity problem, as bespoke pieces/products generally target a narrow customer/investor base of individuals with specific interests, rather than a collection of investors coming together around a central vision/project/ fungible token/investment, which as a by-product, creates liquidity.
Suppose you take a step back and think about it. In that case, the buyers/sellers, lenders & borrowers of NFTs on a platform such as a Strip are, in essence, the same entity, just on different sides of the “financial ledger” momentarily to achieve other ends. At the end of the day, a borrower (receives a loan against their NFT) and the lender (collateralises and loans out money against the NFT) should both find the acquisition of the NFT a desirable outcome(borrower buys due to their own interest, the lender acquires it should liquidation occur). The end goal here is to attract highly desirable NFTs to the platform, and as a result, liquidity.
#2- Price Discovery
As mentioned previously, the lack of price discovery in the non-fungible token market (mainly most art pieces) and subsequent illiquidity is a feature, not a bug of this asset class. However, price discovery naturally becomes a challenge given this feature, as illiquidity begets opacity in asset pricing.
One of the primaries given this feature reasons for the illiquidity lies in the limitation of most NFTs to the Art Collectibles vertical. Given the subjective nature of art, determining the price of most pieces is a significant challenge.
Keeping this in mind, the Strip platform will actively seek (with the help of partners) NFTs, both art & financial-based, that can attract a wider community of investors interested in buying/selling the pieces. For art NFTs, these pieces would entail works by famous artists and projects with a history of creating highly liquid and sought after NFTs. For financial NFTs, the platform would list pieces that are derivatives of project tokens, LP tokens, vested contracts, or other yield-bearing assets. The advantage of having financial NFTs on the Strip platform lies in the ability to “mark-to-market” these pieces and reasonably determine a fair market value & risk assessment when underwriting loans.
Additionally, Strip Finance will curate NFT launches/offerings that provide transparency and data for consumers (lenders) to make informed decisions when underwriting risk and deploying capital to enhance the price discovery process for NFTs on the platform.
Last modified 9mo ago
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