NFT 101: What Is NFT Perps Trading?
Tags: nft, web3
Published: 2024-04-29 06:28:47

Background
If you are an experienced NFT player, have you ever faced this dilemma? A blue-chip NFT that you like has seen a significant increase in value in a short time, and you want to lock in the profits, but you don’t want to sell the NFT you own, especially if it has rarity, and you don’t want to sell it for below market value. In this case, you have the opportunity to use NFT perp trading to profit.

In the hype of 2021, we witnessed a significant rise in the popularity and adoption of NFT technology. This innovative technology garnered attention globally and was utilized for a variety of purposes, including art creation, photography, community access, and digital identity components such as profile pictures. NFTs were integrated into various aspects of our digital lives, showcasing their versatility and potential impact on the way we interact with digital assets. According to data from NFTScan and DappRadar, the total NFT transaction volume on-chain in 2021 exceeded $21 billion.


NFTScan Data
NFT Perps
NFT Perpetual Futures (NFT Perps) is a new type of derivative that allows investors to trade NFTs with better liquidity. NFT perpetual futures are similar to traditional cryptocurrency perpetual futures, except that their prices track NFT collections. NFT perpetual futures offer several advantages over traditional NFT spot markets, enhancing the trading experience:

Quick Access: NFT futures allow investors to enter and exit positions instantly without having to purchase the underlying asset or list NFTs on NFT markets, aggregators, or NFT automated market makers. This is beneficial as it reduces the workload of storing or transferring NFTs.

Hedging Opportunities and Two-Way Markets: Until now, NFT investors could only go “long” on NFT markets. By using NFT perpetual futures, investors can establish “market-neutral” positions by shorting the perpetual contracts while still enjoying the utility, community, and other benefits that NFTs provide. Additionally, it allows them to profit from negative catalysts for collections.

Leverage: So far, NFT investors can only use leverage by borrowing NFTs on NFT lending platforms. However, apart from causing friction (users must deploy borrowed funds into other trading activities), NFT lending may sometimes lack capital efficiency as it requires having complete NFT assets in inventory to obtain leverage.

Flexible Scale: NFT perpetual futures allow users to gain exposure to desired NFT collections at any scale, as there is no need to acquire specific NFTs and pay their ask prices. Through this approach, users can trade $100 ETH worth of BAYC or $0.1 ETH worth of BAYC. This enables smaller holders to gain exposure to NFT collections they otherwise couldn’t access through spot trading. Additionally, it allows institutions and large collectors to trade at higher scales without impacting prices by sweeping the floor.

Introducing New Users: The aforementioned small-scale accessibility may attract more retail collectors and traders to the space, which could then onboard them into the broader blockchain ecosystem.

Innovative NFT Trading Solutions
During the bear market period of 2022–2023, the NFT ecosystem witnessed several innovative developments:

On-chain NFT Options: These address hedging possibilities, and directional NFT market risks, and can provide contracts of varying sizes. However, options are a more complex product compared to the widely adopted perpetual contracts on centralized platforms. Furthermore, a lack of liquidity across different strike prices or expiration dates can cause friction.

Fractional NFTs: Fractional NFTs lower the barrier to entry for high-priced collectibles and enable trading in any desired fraction. Nevertheless, fractionalization comes with the following drawbacks:

Inefficient Capital Utilization: The fractionalization process requires users to purchase NFTs and lock them in a contract, leading to inefficient capital allocation.
Limited Substitutability: One NFT fraction is not equal to another, even if they belong to the same collection.
Restricted Liquidity and Scale: Building a liquid trading pool for a specific NFT may prove challenging, as mentioned earlier.
Governance and Redemption Complexities: NFT redemption may encounter friction as it requires consensus among holders.
NFT Automated Market Makers (AMMs): NFT AMMs address liquidity incentives, create more liquid markets, and support trading NFT collections in any size. However, they are still impacted by capital inefficiency as they require depositing NFTs into the pool. Additionally, NFT AMMs do not facilitate short selling.

The Transformative Impact of NFT Perps:
Increased Liquidity
NFT futures allow investors to enter and exit positions immediately without actually owning the NFTs. This can greatly increase the liquidity of the NFT market, attracting more institutional investors and traders to participate, and injecting more capital into the entire NFT ecosystem.

Enabling Short-Selling Opportunities
Traditional NFT spot markets only offer long positions. NFT futures provide investors with the ability to take short positions, creating a two-way market, which is conducive to more efficient price discovery and hedging.

Driving Innovation and Development
The development of the futures market may bring more financial innovations, such as NFT options and other derivatives, providing NFT investors with more trading strategies and risk management tools, propelling the faster development of the entire NFT market.

Accelerating Institutionalization
Futures markets operate in a more standardized manner, which is beneficial for the involvement of institutional investors. The inflow of institutional funds will bring more liquidity providers to the NFT market, pushing the market towards greater maturity and professionalism.

Overall, NFT perps introduce many advanced trading tools and mechanisms from traditional financial markets to the NFT market, significantly enhancing the depth and development potential of the NFT market.


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