The NFT-Fi Trilemma
The phrase “Blockchain Trilemma” was created by Vitalik Buterin. It is a list of difficulties that decentralization, security, and scalability are expected to provide to most blockchain developers. According to Buterin, it is exceedingly difficult to overcome all three pain points, and most of the time, blockchain engineers can only accomplish two of the three.
The NFT-Fi Trilemma is a new dilemma that has arisen as a result of DeFi and NFT Financialization. The more NFT collections we accumulated, the higher liquidity the market required.
NFTs alter how people learn about the creative economy, and traditional creators are drawn to it because of this certainty. What route will NFTs take? Let us first address the NFT-Fi trilemma to find an answer to this.
What is the NFT-Fi Trilemma?
The scale of NFT financialization was constrained by the trilemma of NFT pricing, capital utilization, and risk management.
- NFT pricing: the fair price of NFT is more difficult to value and calculate than traditional financial assets for these three reasons: non-homogeneous properties, the unpredictable relationship between attributes and prices, and extremely volatile prices.
- Capital utilization: the NFT market is constrained by low capital utilization. NFTs have no means to be used as collateral, pledged or leveraged, like fungible tokens. On top of that, non-NFT holders face exorbitantly high entry barriers to the NFT marketplaces.
- Risk management: many NFTfi projects sacrifice this for the first two points by failing to implement corresponding risk management, which greatly tilts toward borrowers and could result in bad debts.
Usually, only two of the three objectives can be met at the same time, and the third must be sacrificed to some extent. Some projects focus on applying the AMM mechanism to the price of all NFTs and swapping to reduce the risk posed by the volatility of the NFT price, which results in some capital utilization scarification.
Similarly, certain projects have a tendency to be more conservative with capital utilization and risk management by leveraging their blue-chip NFTs to borrow and lend the other tokens, but they are compelled to compromise on the pricing model and choose the average floor price for all NFT collections rather than the true value of NFTs.
There are also projects that offer a reasonable price for NFTs and enhance capital usage through financialization, only to provide maturity loans for borrowers, which would balance the price brought on by volatility but raise the risk of bad debt.
NFT financialization’s ability to scale up is severely constrained by the trilemma, but the market demand for protocols that can strike a balance between these qualities has never subsided. That’s why we are looking for a solution to this trilemma.
Solving the NFT-Fi Trilemma
For NFT financialization to truly take off, we must consider what the NFT-fi might be in the future. The diagram below depicts the current situation as well as what might happen in the future.
As the solution to the NFT-Fi trilemma, we’ve now developed Furion, an all-in-one NFT liquidity platform that creates separate and aggregated liquidity pools.
We provide these solutions for our users:
- Liquidity Improvement: AMM solution for NFT swap, and peer-to-pool mechanism for borrowing & lending
- Barrier Free: permissionless listing for NFT projects under isolated risk, fractional trading to attract retail buyers
- Efficient Price Oracle: introducing the model of Cumulative Distribution Function to resist price manipulation
- Superior Risk Management: introducing a three-tier system for asset borrowing and lending
Overall, Furion is dedicated to build and create the NFT market and create a new ecosystem for all NFT projects and holders. To find out more about our project, follow us on Twitter!
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