The non-fungible tokens (NFT) sector is among the fastest-growing in the crypto space. Its simplicity, the element of fun, and its market depth are allowing the broader NFT space to expand enormously. The growth is even more significant when considering all this happened only in a relatively short time.
Despite all the fanfare, most of the applications and use cases for NFTs are digital artwork, collectibles and gaming. While the market has been eager to see the next breakthrough in the NFT space, allowing NFT to represent ownership of real-world assets in a fractionalized manner could be the next big thing. Not only for the overall development of the NFT market but also could forge a new chapter for the decentralized finance (DeFi) world.
Imagine that anyone who has a valid MetaMask wallet will be able to trade shares of an exotic private investment or private-sale tokens in the form of fractionalized NFT. This development could be truly disruptive, and there is one protocol set to make all this possible.
NFT market: burst bubble or consolidation?
There are a lot of debates about the future of the NFT market and where it’s heading. One of the narratives is that the NFT market was in a bubble, and the bubble just got burst, or at least cooled off, as the prices of digital collectibles have been dropping considerably recently.
Data from Nonfungible.com shows that the average prices of NFT have dipped to below US$1,500 last month, that’s a 70% correction from the US$4,000 peak in February. The trade volume of NFTs also showed a similar pattern, plummeting since peaking in mid-March.
However, we may have another picture when we dig deeper into the data. Although the average price and trade volume is noticeably off from the recent tops, however, both of the numbers are still way above where they were six months ago. In October 2020, the average price of an NFT remained at near US$140. Weekly trade volume also doubled from around 20,000 in 4Q20 to about 40,000 in March, despite the recent drop.
From that perspective, the NFT market seems more like a post-rally consolidation period than a burst bubble. This behavior is just like other sectors in the cryptocurrency space. The crowd rushes into a new market/asset/sector, pushing up the prices significantly. When the market shows signs of cooling off, speculators exit, and prices retreat, and then it repeats. DeFi is an excellent example of this behavior.
Figure 1: Average NFT price and trade volume (USD)
Uptrend remains intact but there are bottlenecks
The broader NFT market may still be in good shape, and the long-term outlook mainly remained positive. However, there could be something that is potentially holding back the development of the NFT market.
For now, almost all of the NFTs in the market are digital art, gaming-related, sport-related, or other digital collectibles that mainly cater to the appetite of collectors, which is a relatively niche market. If NFT maintains its current state of being mostly just for art and collectibles, it will only dampen its scalability and perhaps limit the long-term growth of the broader NFT space.
When private investment meets fractionalized NFT
NFT has much greater potential than just representing art pieces and collectibles digitally. NFT can also mean shares of real-world assets by dividing them into parts. Imagine a protocol that can wrap any form of privately-owned investment into an NFT, fractionalize it, and make these fractionalized NFTs tradeable on an automated market maker (AMM). This approach not only opens up new opportunities for investors and brings diversity into the NFT market but also could be the next major leap of development for the whole NFT space.
SAFT agreements as NFTs
Early-stage crypto project investment has long been a game only for venture capital firms. A meaningful and promising project could bring 50 to 100 times returns to investors. When a VC invests in the early rounds of a crypto project, the firm usually receives a block of pre-sale tokens in SAFT, or “simple agreement for future tokens.”
SAFT is a future tokens agreement commonly used between crypto project developers and their investors. To get the project funded, developers will send blocks of pre-listed tokens at a discount to investors in exchange for funding and investment. SAFT usually comes with a lock-up period, meaning that if the SAFT holder wants to sell their tokens within that period, even after the token is listed, he may need to go through a relatively illiquid OTC market instead of selling through exchanges.
This is where NFT can come into play. The investor who wants to sell his pre-listed tokens can wrap the SAFT as an NFT and then fractionalize it, making these fractionalized NFTs available for trading on AMM. In that way, individual investors will be able to invest in an asset class unavailable to them before. The early-stage crypto project backer will be able to exit the position earlier than it used to be, with more fair pricing.
NFT: a new way of tokenization
SAFT is just one of the many assets that can take advantage of NFT, and almost all kinds of private investment will be able to benefit from turning itself into fractionalized NFTs. The market may see SAFT-turning fractionalized NFT today. We may see other private assets in the near future, such as shares of pre-IPO companies, unicorns that have only been privately traded, loans, bonds, and the list goes on. So, NFT could essentially replace the old security token offering (STO) model and become a new way of tokenizing assets, truly bringing real-world assets into the DeFi space, and also increase NFT’s overall financial attribution.
In this fast-changing NFT space, turning assets like SAFT into fractionalized NFT sounds visionary, but it’s also becoming a reality. From a macro point of view, the inclusion of real-world assets in NFT could break the space’s current bottleneck and drive a new round of growth of the market.