👍🌊👟Enabling Greater Liquidity For Limited Edition Goods (Digital & Physical)
|Andrew Steinwold||Apr 2, 2020||4|
Note: While the title says “limited edition goods,” this blog will obviously have a heavy focus on non-fungible tokens (NFTs) seeing as they are unique, digital items that are often of limited quantity.
Unique assets will never have greater liquidity than fungible goods: it’s just the nature of the game. There are, however, a few projects that are working on enabling greater liquidity for NFTs in a variety of ways.
NIFTY Gateway was started in 2018 by twin brothers Duncan and Griffin Cock Foster with the goal to allow users to buy NFTs with a credit card. Their company was acquired in 2019 by the cryptocurrency exchange Gemini, which funny enough was also founded by twin brothers Tyler and Cameron Winklevoss. NIFTY Gateway has now evolved to not only be a gateway for purchasing NFTs with credit cards, but also a full-fledged NFT exchange. The main difference between NIFTY Gateway and other NFT exchanges, like OpenSea, is that NIFTY Gateway is centralized. The term “centralized” often has negative connotations in the crypto-community, but centralized exchanges can have numerous benefits over their decentralized counterparts.
Centralized vs. Decentralized
Centralized exchanges offer:
The ability to purchase assets with $USD.
Easy onboarding: Users do not need to deal with web3 wallets, like MetaMask.
Free inter-system transfers: Since all assets are located inside the exchange wallet, user transfers do not happen on-chain and therefore require no gas costs, allowing them to be free.
Custody services: Users no longer have to self-custody (for most users this is a positive).
Easily the biggest downside to a centralized exchange is security: centralized exchanges can indeed get hacked. While a personal wallet can also get hacked, the likelihood of hackers targeting an individual’s wallet is slim since the money value in an individual’s wallet is typically not worth the trouble. On the other hand, exchange wallets can hold millions of dollars in assets, making them major targets. NIFTY Gateway mitigated this risk by integrating its asset custody system with Gemini, which has world-class security.
Decentralized exchanges offer:
Security: Decentralized exchanges require individuals to self-custody their assets, which is the most secure storage method. For example, if hackers want access to an individual's wallet they will need their seed phrase, which is likely inaccessible over the internet.
Customization of the bidding process: (relevant to the Ethereum blockchain only) Users can outcompete other bids by controlling the gas price for a transaction. During an intense auction, a bidder can set the gas price obscenely high to possibly purchase the asset before the other bidder.
Each approach has pros and cons, but any exchange that allows purchases via $USD will likely have a liquidity advantage. To sum it up, centralized exchanges are great for mainstream, less tech-savvy users, while decentralized exchanges are best for security-conscious, tech-focused users.
NIFTEX is pioneering an extremely interesting model of fractionalizing NFTs. Co-founders Joel and Mark started NIFTEX in 2019 to allow users to create “shards” (fractions) of NFTs by locking them into a smart contract and issuing ERC20 tokens.
The fractionalization of NFTs will, in theory, allow for much greater liquidity since shards are much cheaper than the entire NFT, making them more accessible. Most people cannot afford to spend 103.4 ETH on NFTs like this amazing artwork below called First Supper.
But on NIFTEX, the First Supper owner can lock up this asset in a smart contract and issue ERC20 tokens so people can buy and sell shards. This process gives the owner liquidity and enables people to own a small piece of an important large piece. We can think of fractionalized ownership as democratizing access to high-quality assets. Oftentimes the best, and most valued assets are out of reach to the majority of people due to their high cost. For example, if regular people could own a piece of a Banksy painting they would have access to an exceptionally high-quality asset that is typically out of reach.
Another huge advantage of a sharded NFT is that they aid price discovery and allow more advanced trading. NFT price discovery is currently extremely difficult due to their illiquid nature, but having ERC20s trade on a marketplace will massively enhance the natural price discovery mechanism that happens with publicly traded assets. On top of price discovery, people will have access to more advanced trading features, such as the ability to long and short certain NFTs.
Perhaps the most exciting (and hardest to wrap my head around) is Zora. Started in 2019 by Jacob, Zora is a marketplace to buy, sell, and trade limited edition goods. Zora is innovative because all goods, including physical goods, that are launched on its platform are sold as tokens which can then be traded on the Zora marketplace. This immediate liquidity gives rise to a host of benefits, such as:
(Taken directly from the Zora website)
Enabling instant liquidity for limited-edition goods via token can radically transform the current landscape for rare items. Can you imagine if Supreme, the streetwear company, launched products with this method? Even Hermes, the famed luxury designer, could explore a use case with their Birkin bags. Massive brands could create entirely new tradable, liquid markets. The limited-edition asset creator would get benefits such as:
(Also taken directly from the Zora website)
All of the above benefits are exciting, but I specifically love the “community participation” point. Once an artist/creator gains a following and community of collectors they can essentially presell their limited edition goods and use the capital to fund the production of the goods themselves. A great example of this is Zora’s first project called Saint Fame. Saint Fame markets itself as an “internet-owned auction house” because their $FAME tokens are redeemable for 1 Saint Fame Genesis shirt.
(The Saint Fame Genesis shirt)
$FAME tokens were released at $8, but because of demand, the price increased all the way to $250 before the shirts even launched. This is a great method for artists and creators to gauge interest in their goods and pre-fund the production of their products.
Now, let’s recap how each of these platforms could positively impact NFT liquidity:
NIFTY Gateway: Allows the purchase of NFTs with $USD.
NIFTEX: Will enable fractionalized NFT ownership, price discovery and more advanced trading (long/short).
Zora: Will enable fractionalized ownership and access to a built-in marketplace.
All of these platforms offer new and innovative models for the NFT ecosystem. It will be exciting to watch their progress and impact on NFT market dynamics in the coming year.