tl;dr: an ecosystem emerges to discover and leverage value of Non-Fungible Tokens

I was reading Jake Brukhman’s post, Appraisal games and the NFT liquidity problem which describes the problem of “how do you know the value of a one-of-a-kind asset?

In the post, he explains how prices of NFTs are currently discoverd.

• sale
• auction
• fractionlization

One of the terms he uses a lot and which I hear about frequently is “capital efficiency.” That is, how well is your capital working for you.

So, for example, if you have to put up $150 of Ether via MakerDAO to get a $100 DAI loan, your capital is only 66% efficient.

Jake explains that the sale mechanism is 100% capital efficient because only the purchaser of the items is deploying his/her capital and everyone else who looked, but didn’t buy hasn’t been hurt.

An auction, on the other hand, requires people to “tie up” capital by committing it to the auction process (think ‘auction ends in 3 days) while it works itself out. During that time, that money, by definition can’t be ‘double spent.”

The fractionalization of NFTs, where you own a slice of someone else’s NFT, which is what Niftex does, helps with price discovery because as soon as I buy 10% of an NFT, everyone else knows what its current value is. However, that doesn’t necessarily mean that the value is truly representative of the total price of the NFT, since I may be perceive it much higher than everyone for whatever reason (e.g. emotional).

From there he asks the question of whether and how this challenge of discovering the price of an NFT can be improved.

He outlines 4 new ways to do so.

• price computation (e.g. AI/machine learning)…e.g. NFTBank.ai (covered here previously)
• expert networks (decentralized assessors)
• peer prediction oracles (e.g. Upshot)
• derivative implied pricing

Each of them has, like anything, their pros and cons, but the one that got me most intrigued was the “derivative implied pricing.”

I had touched on this, albeit in a different angle, back in February in “Fractional NFT Ownership”, but I went back with a fresh eye as we are much further down the path of the great NFT-ization of the world.

The service that got me excited was NFTX.

At NFTX, it’s possible to create an “Index” of NFTs which, collectively become something that can be valued in a more liquid and fluid way.

Although this analogy is probably the worst possible one I could make, it sounds a bit like mortgage-backed securities.

While each mortgage is unique (one house, own owner, etc.), collectively, they have a total amount of value based on a variety of factors (payments, credit levels, etc.). That is the “vault.”

So the owner of an NFT within a class, say CryptoPunks or CryptoKitties can deposit their NFT into a vault, along with other owners and get a fungible token (a PUNK or a KITTY) which can then be used in a liquid form.

In other words, if you put your CryptoPunk 3453 into a vault and get 1.05 PUNK in return (see here), I will take it as payment from you, not because I want #3453, but because I can then, if I want, choose to redeem the 1.05 PUNK for ANY of the 119 CryptoPunks within the vault, thus giving me more flexibility.

So now, we’ve gone from fungible to non-fungible, back to fungible.

And, as we do so, the asset, which was non-fungible, becomes much more capital efficient since its value can be leveraged and unlocked to do other things. It’s like using a Picasso to secure a loan to buy a house….all within minutes.