Financialization of NFTs: How can holders maximize their benefits?

While NFTs have been around since 2017, they were originally used for a fringe use case (collecting CryptoKitties) within the crypto community. Yet four years later, we've seen artists, designers, game developers, musicians, and writers adopt the technology.

Before DeFi, the only way for users to acquire cryptocurrencies was through ICOs, over-the-counter transactions, or centralized exchanges with strict listing requirements. For most of the fungible tokens (ERC-20) launched in the 1C0 craze, the market is illiquid. DeFi protocols followed and reduced the time for these tokens to gain liquidity, which led to the vibrant trading, lending and leverage activity we see in crypto markets today.

Just like fungible tokens in the past, we can expect DeFi protocols to unlock liquidity for NFTs as well. We previously wrote about why the financialization of NFTs matters and outlined early protocols that crossed NFTs with DeFi. Less than a year later, a suite of financialization protocols is already available in the NFT market. More importantly, we can now also develop a framework for evaluating each liquidity mechanism for different "types" of NFTs.

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Each liquidity mechanism requires trade-offs that make it more suitable for NFTs with certain properties. The unique and diverse nature of NFTs brings new challenges to finding liquidity. Some have practical uses, some are just "status symbols". Some are "rare" items, some are completely unique. When evaluating how best to find liquidity for a particular NFT, it is worth defining attributes under which different NFTs are categorized and matching those attributes with the most meaningful liquidity methods.

The pricing properties of an NFT and its price tier provide more insight into the appropriate liquidity approach than the NFT “category” to which it belongs. A common way of classifying NFTs, such as virtual land, PFP, game assets, domain names, music, and artwork. However, when evaluating liquidity methods, categories can be relatively single.

In this article, I will:

Mapping the current NFT financialization landscape
Discuss the strengths and limitations of existing NFT liquidity approaches
Define NFT price tiers, and typical characteristics of those tiers
How can users maximize the benefits of the NFT they hold?
Existing approaches to NFT liquidity and their tradeoffs
market
NFT marketplaces allow users to find buyers and sellers through order books and a simple sale or auction mechanism. They can be generalized (Opensea, Rarible) or specialized (eg SuperRare for art, Catalog for music, Pracel for virtual land). The NFT market has a large number of buy and sell lists and bid orders, which is the most intuitive way for users to trade NFTs. However, without active participants, the market will eventually become illiquid.