2021 was the year non-fungible tokens (NFTs) took flight and became one of the most sought-after digital assets in the world. Ranging from cartoon apes to video clips, 2021 saw the total sales of NFTs reach a staggering $25 billion as the speculative blockchain asset exploded in popularity attracting mainstream brands like Coca-Cola, Gucci, and Meta.

Although NFTs have inherent appeal, they have generally been regarded as illiquid assets in comparison to fungible tokens. While it is relatively easier to instantly liquidate your investment in fungible tokens like ETH and BTC, it might take a longer time to liquidate your NFT assets — it could range from a few hours to several days or weeks. That's not to say NFTs are not lucrative investments, but oftentimes it might take some time to sell them off, maybe longer than you might be willing to wait if you are in dire need of cash.

Most times you might have to accept a much lower bid well below your initial asking price just to make sure you liquidate your asset when needed. This could be frustrating especially if you have to sell below your cost price.

That said, NFT financialization is opening up avenues for people who want to put their assets to use in various ways including the ability to obtain liquidity without selling their NFTs. NFT financialization heralds the emerging use cases for Non-Fungible Tokens (NFTs) in novel forms of crypto-finance. Sit back as we explore some of the various NFT financialization methods.

NFT Financialization Landscape

The NFT financialization landscape is an entirely new sector in a space rife with fast-paced development. There are many ways to financialize NFTs, however, this piece considers the 3 most popular methods that have already taken flight: NFT Rentals, NFT Loans, and NFT Fractionalization.

NFT Rental

A person who owns a certain NFT can rent it out to another person who needs it for a limited amount of time, the rentee then profits from the rental fee. NFT rental marketplaces leverage blockchain smart contract technology to ensure safe transactions and that the NFT is returned to the owner when the rental period expires.

The adoption of NFT rental is currently blowing through the roof, thanks to ERC-4907 — a token standard issued by the team behind Double Protocol and custom-built for NFT rental development and integration. ERC-4907 is an extension to the ERC-721 standard with a Dual-Role and Expiration feature that is key to NFT rental integration.

A prime example of a collateral-less rental platform is Double Protocol, an NFT rental protocol for virtual lands and broader in-game items. Double Protocol allows a far larger spectrum of individuals to rent NFT lands and experiment with ideas for profit, leisure, or practice without taking on the huge risk and financial constraints involved in buying bluechip NFT land assets in popular metaverses, while also enhancing the value proposition of virtual land itself.

In the blockchain gaming space, NFT rental via Double Protocol is turbocharging P2E gaming by providing access to gamers who would otherwise be unable to afford a foot in the door. On the flip side, NFT landlords and lenders are profiting from a constant new source of passive income that doesn't require them to give up ownership of their precious digital assets.

NFT Loan (Lending)

NFT loan protocols like BendDAO offer a method to access funds with your NFTs as collateral without really selling them. A borrower uses an NFT asset as collateral to obtain a loan, which is usually funded by another individual looking for a return on investment from interest on the loan paid.

We may classify the NFT lending methods into two categories. The first is a peer-to-peer lending model in which borrowers and lenders negotiate loan conditions including duration, interest rates, and loan-to-value ratios. The other portion concentrates on the creation of liquidity pools around NFT floor pricing; this enables permissionless loans to be taken against NFTs.

NFT loans allow NFT owners to borrow cash, negotiate and establish terms for a fixed period of time without the intervention of any centralized authority — a concept known as DeFi.

When the loan terms are agreed upon, the NFT asset is locked up in a digital vault while the loan is delivered to the borrower. The borrower can unlock their NFT after repaying the loan within the stipulated time frame. If loans are not returned within the given time frame, the lender may take possession of the NFT.

Borrowers may often obtain a loan that is valued above 50% of the value of the NFT collateral, with interest rates ranging from 20% to 80% depending on the popularity of the NFT. With that said, most lending protocols support a large number of NFT collections, including blue chips such as Bored Ape and CryptoPunks.

NFT Fractionalization

A fractional NFT is just an entire NFT that has been split into smaller halves, allowing many persons to claim ownership of the same NFT. Consider it similar to a cake, where a full cake may be cut to feed numerous people. Given that an NFT is unique and cannot be replicated, fractional NFTs push the limits by allowing ownership to be divided.

The ERC-721 token standard is one of the most often utilized standards for issuing NFTs on the Ethereum network. While the ERC-271 standard may generate distinct non-fungible tokens, the ERC-20 standard is used to create altcoins and other fungible tokens. Because fungible tokens are interchangeable, each unit has the same usefulness and inherent value. You may use a smart contract to issue many ERC-20 tokens that are tied to a single ERC-721 NFT. As a result, everybody who possesses any of the ERC-20 tokens created will own a portion of the associated NFT.

Fractionalization is more useful for blue chip NFTs that are quite expensive and not easily affordable to an average investor. Fractionalization enables a greater part of retail investors to own fractionalized parts of NFTs they obviously wouldn’t have been able to afford.

Concluding Thoughts

With the right use cases, NFT financialization may be a significant catalyst for the NFT market. While the industry has already witnessed significant development; promises of better capital efficiency and utility will almost certainly position the sector for exponential growth. NFT marketplace like OpenSea has already set the stone rolling with a record number of sales, and NFT rental platforms like Double Protocol could lead the next phase of unlocking deeper liquidity in the NFT space.

While many of these protocols are still in their infancy, it will be interesting to observe how the space grows. NFTs have already piqued the interest of most people, thus enhancing their utility will definitely make them much more appealing on the path to mainstream adoption.