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The DeFi protocol that can realize asset pricing in a decentralized manner may change the rules of the game in the NFT field.
Written by: David Lighton, co-founder of Lithium Finance Compiler: Perry Wang
If the summer of 2020 is a DeFi carnival, there is no doubt that this summer is the world of NFT. As the transaction prices of heavyweight NFTs have repeatedly hit record highs, pictures of apes, penguins and other animals have grabbed global headlines. Even for people who have never been exposed to encryption or DeFi, NFT may now be like a thunder for them, and traditional investment tycoons and international auction houses have also begun to participate in this carnival feast. Although many people believe that high-priced NFTs such as Bored Apes Yacht Club (BAYC) may be reasonable investments with considerable returns, the lack of an effective pricing mechanism for NFTs may seriously hinder the long-term development of this field. The lack of reference pricing may be a major obstacle for investors to enter the market.
BAYC has always been one of the most compelling NFT projects in this field, and it is also the main driving force of the entire NFT market in terms of price momentum and investment sentiment. According to data provided by Dun Analytics, BAYC’s floor price reached a record high of 44.05 ETH in late August 2021, which is equivalent to more than $171,000, an increase of 5800% since the beginning of June. Although its floor prices have been adjusted recently, the overall trend and market demand seem to remain strong.
Figure 1a: BAYC image floor price trend, source: Dune Analytics
Figure 1b: Active BAYC holders, source: Dune Analytics
Most importantly, the diversification of BAYC holders also seems to have become increasingly complex over time. For example, in mid-April, there were less than 100 wallet addresses holding at least one BAYC NFT, but in less than 6 months, the number of wallets increased exponentially, soaring to more than 5,400, and this trend It didn’t stop there; we later witnessed further growth.
Although many people think that BAYC is one of the blue-chip assets in the NFT world, as more investors stud, a major problem has surfaced. How do we price BAYC NFT correctly? Many people may refer to the open market. But this may even cause more confusion. Coupled with the impact of NFT volatility, the market is already chaotic.
Just recently, BAYC #3749 (also known as the “Captain”) was sold to The Sandbox platform on OpenSea for 740 ETH, and the transaction price in US dollars was close to 3 million US dollars. The buyer claimed that #3749 is the 27th rarest Ape NFT and hopes to include it in the company’s NFT collection.
Figure 2: BAYC #3749 “Captain”, source: Twitter
This case may be a good example of the crypto/NFT community’s perception of the market, accurately reflecting their positive sentiment. In the past, similar high-exposure transactions may become the price benchmark for BAYC NFT, and at least in the short term will drive the price of the rarest Ape in the market to follow suit. But this time it doesn’t seem to have caused too many waves. Mainstream social buyers and their views on NFT may be the reason behind this calm wave.
Price misalignment or risk-adjusted price: Sotheby’s case
Compared with the overall market structure, the “Captain” case may be just one of the scenery. The international auction house giant Sotheby’s will hold a BAYC online auction; this auction event has been one of the most widely debated topics between BAYC holders and many potential BAYC buyers.
Picture 3: Sotheby’s Stud! Online auction, source: Sotheby’s official website Sothebys.com
The Sotheby’s BAYC lottery package includes a total of 107 NFTs, including 101 Ape, 3 M1 and 3 M2 mutant sera. As of this writing, after 44 bidding rounds, bids have reached US$19 million. Although the auctions seem to be very popular so far, and the bids have been higher than estimated, if you learn more about this number, you will find that each Ape in this round of auctions only cost less than 55 ETH. This figure does not include the price of mutant serum.
It is worth noting that this lot includes two golden fur Ape (#5809 and #7940). If you have been paying close attention to the BAYC market, it is not difficult to find that the golden fur is one of the most valuable and easiest features to sell at a high price, just like the “Captain”.
No matter which party has greater market influence, if the current market price of “Captain” is 740 ETH, and someone can buy an Ape with golden fur similar to “Captain” for less than 55 ETH, the BAYC market will appear. Huge valuation difference.
From the perspective of potential BAYC investors, due to the huge differences in pricing and valuation, it is difficult to obtain fair pricing only by observing the market. Although there are platforms like rarity.tools that can help buyers filter out some of the most common Ape and help buyers focus on products with unique features, it cannot help buyers judge whether the price of Ape is overvalued or undervalued. . In addition, there are more and more speculative activities in this field, and the intrinsic value of Ape is not easy to be defined, leading to a very challenging valuation problem before us.
The decentralized method of pricing Ape may promote the value of BAYC and NFT to a higher level
Although the market seems to lack an appropriate pricing mechanism to price NFTs such as BAYC, there may be solutions in DeFi, and the Lithium Finance agreement is one of the representatives. Lithium Finance is a decentralized pricing oracle solution that focuses on unlisted and non-current assets. NFT is a part of it.
There are two stakeholder groups in the Lithium ecosystem, Wisdom Node and Wisdom Seeker. Smart nodes have expertise in pricing specific assets, and smart explorers are people who want to obtain pricing information.
Figure 3: Lithium Finance smart node dashboard icon, digital collectibles highlighted, source: Lithium Finance
Wisdom seekers can post questions about pricing information about a specific unlisted asset (in this case, Ape) and provide a bounty. Smart nodes will give answers accordingly and pledge LITH tokens to their answers to show their confidence in the answers.
Therefore, you can imagine hundreds of Ape holders, NFT enthusiasts, as well as traditional art collectors, auction house appraisers, etc., as smart nodes, participating in the Lithium agreement to set prices for NFTs such as BAYC. Buyers and investors can therefore obtain fairer pricing information on these NFTs, avoiding the situation where there is a world of difference in valuation between 740 ETH and 55 ETH.
Lithium is likely to be the missing link in the NFT field. It can help long-term investors and traditional art collectors enter the NFT field, truly making valuable NFTs such as BAYC and CryptoPunks become the target of mainstream buyers and promote them to real asset classes. .
The undeniable fact is that NFT, like DeFi, will continue to exist and will always exist. Although we cannot know from the crystal ball: which project will be the next top stream in the NFT field, or whether BAYC and CryptoPunks will maintain the current trend, the long-term upward trend of NFT will continue. Of course, the road ahead is full of bumps and thorns. . However, NFT’s own flexibility makes it highly adaptable and easy to commercialize it for the general public and even non-encrypted natives. Although NFT enjoys all these advantages, the reality of lack of an appropriate pricing mechanism may become a barrier to higher levels in this field and may hinder the future growth of the entire NFT market. DeFi agreements such as Lithium Finance may change the rules of the game in the NFT field. Lithium uses group wisdom to help set prices for unpriced assets, uses analytical methods to refine group wisdom, and assists in the establishment of reference prices for auctions, making settlement easier on the basis of greater predictability.
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