Overview:

1. Futures (“perps”) trading dominates: At the time of writing, cryptocurrency futures trading holds a dominant position, accounting for over 60% of total trading volume compared to spot trading. This phenomenon is not unique to cryptocurrencies and is also observed in traditional financial markets.
2. NFT 1.0 trading is predominantly spot-based: Initially, NFT trading was primarily driven by spot trading, resulting in significant trading volumes exceeding $20 billion. However, it has led to inefficiencies: only allowing long positions, making it difficult or limited for small to medium collectors to access high-value collections.
3. The NFT community is a culture-driven organization: NFT collections successfully gather users with shared interests, ideas, and values, creating a social structure shared by people worldwide. These cultural elements are reinforced in virtual or real-world activities globally, similar to what other communities (such as anime) have done for decades.
4. NFT futures are expected to address the inefficiencies of current spot NFT trading: NFT perpetual futures (“NFT Perps”) address the inefficiencies of spot NFT trading. They allow for trades of almost any scale, both long and short positions, and leveraged trading.
5. Spot trading will still be significant but will undergo changes: We expect spot trading and collecting itself to remain significant, especially for accessing NFT-related utilities, community, and digital identity layers. Collectors seeking NFT utilities and community engagement may purchase them on the spot market. Meanwhile, the futures market is available for other types of participants and collectors seeking hedging or pursuing different trading strategies.

Futures dominate the market

For a significant period in the early history of cryptocurrencies, the market only had spot trading, where users exchanged fiat currency, other cryptocurrencies, or stablecoins for any other token. This led to some inefficiencies:

Long-only positions: In spot trading, users can only take long positions (profit only when prices rise). This hindered market participants from hedging losses or profiting from price declines.

Limited leverage: Relying solely on spot trading, investors had limited leverage. Although short positions could be established by borrowing assets and then selling them, hoping to buy back at a lower price, this method was inefficient in terms of capital (requiring collateral) and might be challenging or costly for illiquid tokens (due to high borrowing rates).

However, the introduction of perpetual futures markets (“Perps”) by BitMEX and the launch of the first BTC futures by the Chicago Mercantile Exchange (CME) in December 2017 changed everything: perpetual futures markets began to dominate. As of the writing of this article, perpetual futures have been dominating cryptocurrency trading activity. For BTC and ETH, spot trading volume only accounts for a small portion of the perpetual futures market: BTC ranges from 20% to 70%, and ETH ranges from 16% to 44%.

Source: The Block

NFT Market: History Repeats Itself

2021 Was The Beginning Of The NFT Bull Market. During This Period, NFT Technology Began To Gain Attention And Adoption Worldwide. NFTs Were Used Not Only For Generating Art And Photography Use Cases, But Also As Credentials For Accessing Communities, And As Key Components Of Our Digital Identities In The Form Of Profile Pictures. They Were Also Used In Many Other Aspects.

All These Use Cases Helped Propel The Web3 Space Into The Spotlight: Attracting A Large Number Of Users, Builders, Collectors, As Well As Speculators And Traders. A Significant Amount Of Capital Flowed Into The NFT Ecosystem, With On-Chain NFT Trading Volume Totalling Over $21 Billion In 2021 (Year-On-Year Growth Of 20,000%), According To Data From Dune Analytics And DappRadar. In 2022, It Reached $24.7 Billion (Year-On-Year Growth Of 17%). This Growth Was Driven By Various Factors, Including The Launch Of Popular NFT Projects Such As Otherside, Metaverse, Azukis, And Moonbirds.

Source: Dune

Despite the influx of significant funds, the non-fungible nature of NFTs and the lack of infrastructure at the time only allowed for individual spot trading of NFTs. This created friction and prevented collectors from easily entering or exiting positions. Collectors had to wait for someone to accept their listing price or match the current asking price. Additionally, as the value of collections increased, it reduced the opportunity for small investors to acquire high-value collections. Furthermore, similar to the market for fungible tokens in 2017, it only allowed for long positions.

During the bear market of 2022-2023, the NFT ecosystem saw many innovations and new participants, including Blur (with its incentivized bidding pools and lending feature Blend) and NFT AMMs (such as Sudoswap). These platforms all strive to create a seamless trading experience and improve liquidity. However, as we will see later, these models still cannot achieve seamless short positions or solve capital efficiency issues.

It is worth noting that this does not mean that NFT AMMs or lending do not have strong value propositions. In our view, NFT AMMs are fully capable of helping collectors build and incentivize community-owned trading venues, benefiting the entire collector ecosystem by creating an economic cycle: transaction fees go back to collectors, creating value for holders, and managing their relationships.

History Doesn’t Repeat Itself, But It Often Similar: NFT 2.0

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, with the difference being that their prices track NFT collections. NFT Perpetual Futures offer several advantages over the traditional NFT spot market, enhancing the trading experience:

Quick Access: NFT futures allow investors to enter and exit positions immediately without needing to purchase the underlying assets or list NFTs on NFT markets, aggregators, or NFT automated market makers (AMMs). This is advantageous as it reduces the effort of storing or transferring NFTs.

Hedging Opportunities and Both Long and Short Markets: So far, NFT investors could only “go long” in the NFT market. By using NFT perpetual futures, investors can establish “market-neutral” positions by shorting perpetual contracts while still benefiting from the utility, community, and other advantages of NFTs. Additionally, it allows them to profit from negative catalysts affecting collections.

Leverage: So far, NFT investors can only use leverage by borrowing NFTs on NFT lending platforms (such as Arcade or Paraspace). However, besides creating friction (users must deploy borrowed funds into other trading activities), NFT lending may lack capital efficiency in some cases, as it requires existing complete NFT assets in inventory to obtain leverage.

Scalability: NFT perpetual futures allow users to obtain the desired NFT collections at any scale without needing to acquire specific NFTs and pay their asking prices. In this way, users can trade BAYC for 100 ETH or 0.1 ETH, for example. This enables smallholders to access NFT collections that they would not be able to obtain through spot trading. Additionally, it allows institutions and large collectors to trade at a larger scale without affecting prices by sweeping the floor price.

Introducing New Users: The aforementioned availability at a small scale may attract more retail collectors and traders to the space, who can then be brought into the entire blockchain ecosystem.

As mentioned earlier, the “bear market” of 2023 brought innovations to the NFT space, and some may believe that other vertical industries and participants can address the above issues. Let’s delve into this:

On-chain NFT options: They address hedging possibilities, directional NFT market risks, and can offer different contract scales. However, options are a more complex product than perpetual contracts and are well-known for their popularity in centralized venues. Additionally, different strike prices or expiration dates may lack liquidity, causing friction.

Fractionalized NFTs: Fractionalizing NFTs lowers the barrier to entry for high-value collections and allows trading at any scale. However, fractionalization has the following pitfalls:

Inefficient capital: The fractionalization process requires users to purchase NFTs and then lock them in contracts to initiate the fractionalization process, leading to inefficient capital use.

Limitations in substitutability: One NFT’s fraction is not equal to another NFT’s fraction, even if they are from the same collection.

Limited liquidity and scale: As mentioned earlier, building liquid trading pools interested in specific NFTs may be challenging.

Governance and redemption issues: NFT redemptions may encounter friction as they require consensus among holders.

NFT AMM: NFT Automated Market Makers (AMMs) address liquidity incentive issues, create a more liquid market, and support trading NFT collections at any scale. However, they are still affected by low capital efficiency as they require NFTs to be deposited into pools. Additionally, NFT AMMs do not allow shorting.

NFT Perpetual Agreement

nftperp: Pioneer

Established Year: 2022 | Stage: Private Alpha Stage | Fundraising: $4.7 million

nftperp is a pioneer in the vertical of NFT perpetual protocols. The platform offers a seamless trading experience integrated into a simple and well-thought-out user interface. At the time of writing, the protocol is currently rolling out v2, allowing users to trade collections such as Miladies and Pudgy Penguins, all of which are running on DApps on Arbitrum to reduce gas fees.

According to nftperp’s Dune dashboard, the protocol’s trading volume exceeded $8.3 million at the time of the v1 release, covering over 800 traders (whitelisted users).

Source: Dune

Tribe3: Gamification and Social Trading

Established Year: 2022 | Stage: v2 Testnet | Fundraising: $2.1 million

Tribe3 is an NFT futures DEX that integrates social and gamified elements into its trading platform. In addition to NFT futures trading, users can engage in battles with others (community vs. community trading) and earn in-game items based on their trading behavior. The platform allows users to trade multiple NFT collections with leverage of up to 5x.

The platform completed its v1 public testing, with a trading volume of $71 million and over 840 active traders. At the time of writing, the platform is testing updated protocol designs on the v2 testnet.

Wasabi: A complete and popular NFT derivatives platform

Established Year: N/A | Stage: Public | Fundraising: N/A

Wasabi has built a comprehensive suite of derivative products for NFTs. The protocol initially offered put-and-call options for specific NFT collections, allowing users to go long or short before a specific date without the risk of liquidation.

To expand its product range, Wasabi has introduced:

BNPL (Buy Now, Pay Later): Wasabi collaborates with various NFT lending protocols, allowing users to seamlessly purchase NFTs on a “buy now, pay later” basis.

Perpetual Contracts: Recently, Wasabi partnered with Flooring Protocol to launch an index-based perpetual contract product, allowing users to trade any whitelisted NFT collection with leverage of up to 5x.

According to Wasabi’s Dune dashboard, the nominal value of the options traded on the protocol has reached $6.1 million, with liquidity providers earning $300,000 in fees.

Source: Dune

The trading volume of perpetual futures products has exceeded $40 million, with approximately 470 active traders.

Source: Dune

Conclusion

NFT futures apply the concept of perpetual trading to NFTs, unlocking a more accessible and bidirectional trading experience that was previously unavailable in the NFT spot market. While it’s still early to conclude, the potential value proposition offered by NFT futures has strong growth potential in the NFT market.

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