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While the new asset class has captured chiefly the art and collectible market, unique on-chain assets are set to rapidly expand beyond profile pictures of punks and apes.
Investors are rushing into the new sector with fast-growing online communities and a burgeoning creator economy. An impressive one million users joined the waitlist for Coinbase’s NFT platform the first day it opened up.
As participants of the broader market familiarize themselves with the technology, we will start to see more utility and real-world integration, boosting the value of the already massive NFT market and further extending the paradigm shift from physical, to scarce digital goods.
It should come as no surprise that institutional capital is pouring into the space. However, despite representing one of the most culturally transformative technologies and a market capitalization in the billions, NFTs are highly illiquid. Credit markets are starting to form, though, creating a new source of yield for a yield-starved economy.
Investors can benefit from their NFT holdings in more ways than a simple store of value. NFTs represent unique on-chain assets providing provenance and digital scarcity. As the world begins to move on-chain and the metaverse economy becomes commonplace, reliable infrastructure needs to follow along with it.
For a new asset class with a total addressable market (TAM) in the trillions, mark to market pricing, valuations and credit markets become a vital part of the space moving forward.
People are making a lot of money trading these collectibles, and the combination of market activity and high-profile sales of what many still see as a simple ‘jpeg’ has everyone looking for the next golden ape or alien eight-bit avatar. In fact, some ‘blue chip’ collections like Bored Ape Yacht Club and Crypto Punks are becoming digital country clubsand everyone wants to be a member.
Some profile picture collections and digital art pieces are commanding prices rivaling tangible works from Picasso, Monet and Van Gogh. But despite an active marketplace worth billions of dollars, there is no way to unlock any of that value other than selling the piece in question – therefore, losing whatever perks came along with owning that asset.
To solve this issue and take advantage of the massive market caps behind some projects, the NFT marketplace as a whole needs to mature. The tech behind NFTs and interacting with the market can still confuse most, especially those who aren’t familiar with decentralized apps. Onboarding needs to be easier for all, regardless of technical know-how.
Another issue holding the NFT industry back is the lack of a standardized authority on rarity rankings for collections. While there are currently a handful of websites NFT enthusiasts can garner insight from, investors and creators alike would benefit from a universally accepted way of appraising these valuable digital assets, especially with something as crucial as ranking.
Once a standard has been formed for appraising the ranking of collections, the perceived value of the asset in question can be validated, providing lenders with the confidence they need to grant loans based on said value.
Unlocking the liquidity of high-value NFTs also allows holders who have amassed a substantial portfolio to fully take advantage of their collection as collateral for other investment opportunities without parting with itsimilar to how they could with a physical collection in the traditional art world.
A marketplace for the future
Unlike tangible collectibles, some of these digital assets also have utility for their holders. Owning a certain NFT could grant access to exclusive events or opportunities for passive income opportunities, such as token yields or play-to-earn games.
As the metaverse begins to expand, plots of land are already being sold for massive amounts, and owning virtual real estate could very soon be a lucrative means of income via leasing.
With only 20% of Americans active in the NFT space, we are just getting started. Now that household names like Coinbase and FTX are deploying their own NFT platforms, the market will see a massive influx of new investors. With the financialization of NFTs, this burgeoning market begins to more closely resemble modern art marketsand that in turn will help to onboard even more people.
Integrating some of these protocols should ideally be the next step for the NFT industry and will benefit not only creators and holders but also the marketplaces they interact with.
Robert Masiello, co-founder of Arcade, was the former director of blockchain investments at Industry Capital ($3.1 billion PE firm), where he remains an advisor. Robert was also founder of Riverblock.ai, a cryptocurrency analytics startup with intellectual property sold to Industry Capital. Additionally, Robert led big data analytics and digital strategy transformation projects at EY Digital and Booz Allen Hamilton.
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