Are NFT’s Financial Instruments?
The future looks non-fungible– NFTs & Open-finance.
Unique Assets with Provable Origin
An NFT — Non-fungible token is an ERC721 token representing the unique ownership of a digital asset. They can be mintable, burnable and importantly limited in supply.
NFT’s that represent a value such as a commodity reserve, art or antiques set baselines for monetary values via the speculators. Financial instruments can be created with these baselines when utilizing custody parameters, escrow contracts, wrappers and supply control.
Indexing NFT’s
Recently there has been an increased awareness of NFT’s. The notion of using NFT’s as financial tools seems more relevant than ever before. Beeple’s recent drop on December 9th raked in a whopping 3.5 million in first market sales and a ton more in secondary sales. As an astonishing figure for digital collectibles. The future looks sweet for NFT’s.
The Proof of NFTs — $3.5M Beeple Drop by: Loop
But what if that value was captured for small fishes and people who are more risk-averse. Indexes and commodity-backed composites have long performed well and withstood the test of time and volatility of markets. Passive investors are less likely to participate in volatile markets for the sake of preserving their capital for more clear investments.
A recent Twitter post by a user named Xemurai highlights the capabilities of bundling NFT’s.
Breakdown of Xemurai’s Assembled Crypto Art Piece
NFT’s— Composite Assets of the Future
Three NFT’s were bundled together using Emblem, a platform that combines different tokens to create a unique single asset. If you took the same procedure and abstracted it across any token type, asset class or another digital derivative, then any index can be established to encompass a composite. Creating a more fluid market and a clear reflection of price across assets.
NFTX is another platform that bundles digital collectibles and creates an ERC20 token that represents this collateral. Since art inherently finds users and speculators seek to profit from the appreciation of art. Tradeable assets backed by art is a no-brainer. One of the most limiting things in life is the high valued art appraised by fancy auction houses. More people are left out of investments for the same reason they never make them.
To begin with, they have little money to spend. Nor would the average person risk years’ worth of work to buy a painting or an antique no matter how much they would appreciate owning it. Fine art is far too out of reach for the average person. Causing trickle downs for artists who would otherwise love to sell their art. The same can be said for farmers who cannot find honest buyers of their products and small businesses that suffer at the hands of unfair monopolies.
It’s possible to reverse this narrative & create financial vehicles for all to travel in.
Art-based NFT’s as Composite Assets— Art Index Token
The process of bundling art NFT’s can be abstracted. Bundles do not have to exclusively be art. Creating endless possibilities for composite assets. Composite assets are more inclusive and useful for people gauging the value of assets across a broad market. People have the choice of holding a fraction of an asset class. Options to purchase a bundle of valuable assets present limited exposure to pure market volatility. More on-ramps for market participants are established. Peace of mind for risk-averse people.
Composite Tokens
A few options for combining tokens would be a crypto token backed by reserves or a tokenized community pool of assets. Any financial strategy can be broken down and tokenized. Any commodity reserve, any tokenized asset with stable value would be ideal as a composite. Bundled composite tokens form a firm basis for an ETF (exchange-traded fund) or an index fund.
Interchangeable assets sorted by value, market cap, volume or other indicators establish a sturdy basket of value. By aggregating oracle data, accurate price feeds can be reflected across asset bases. Indices can then be created with the price feeds from the oracles.
Liquidity pools created with the composite token/stable coin pairs allows for smooth exchange of equity value.
Ex; The value of the composite token changes. The exchange rate of tokens and stable coins adapts to reflect the price of the basket.
Decentralized exchanges (DEX’s) or Centralized exchanges (CEX’s) allow the composite tokens to be listed and traded freely by any party.
Ex; Composite assets listed on an exchange like Uniswap, 1inch, Binance or Huobi allow swaps between standard ERC-20 tokens & composite ERC-20 tokens.
Non-Fungible Token Baskets
Bundling assets with Emblem vaults or creating treasury reserves/contracts allows advanced fund managers to swap entire asset classes — organizing productive baskets. As time goes on, more data accumulates. Active market participants can make more accurate judgements by buying baskets that perform well over time. Rather than transacting with a large number of crypto assets, they only purchase one.
A composite token basket is a standalone ERC-20 token comprised of a bundled selection of digital assets. Similar to Set Protocols TokenSets. An ERC-20 that embodies a fully collateralized portfolio of assets such as;
- Bitcoin (WBTC)
- Ethereum (WETH)
- Stable Coins (DAI)
Sets automatically rebalance. Executing any portfolio strategy is made simple by holding a single asset. Using Sets eliminates efforts around the manual management of a portfolio containing multiple cryptocurrencies.
Set Protocols: TokenSets, NFTX: NFT Index Funds and Circuit of Values: Emblem Vaults already highlight achievements for the financial capabilities of NFT’s. Further lending credibility to NFT’s as legitimate financial instruments in the new age of finance.
Composite Baskets— Precursor to a Crypto S&P
A Composite basket is a versatile bundle of potentially hundreds of assets or several financial strategies compiled into a single ERC-20 token. The composite basket aims to oscillate between alpha and beta market performance. Sometimes a basket performs better, mostly performing at baseline but rarely breaking the peg or going below average market returns across sectors. A precise selection of composite baskets encompassing more than one digital asset sector would reflect an accurate crypto index.
Organizing the crypto space into a few categories as an example;
- Small-Cap Tokens/Coins
- Large-Cap Tokens/Coins
- Non-Fungible Token Sector– Art, Land Rights, Copyrights etc.
- Fungible Token Sector– WBTC/ETH, Commodity Tokens, Options etc.
Composite token baskets bundled into an index fund — a crypto composite index. A precursor to a crypto S&P. Active investors who spend a lot of time managing and seeking the highest returns or alpha can diversify with ease via mutual funds. Passive investors who prefer a beta return do not wish to chase the market in hopes of outperforming the average joe. Those investors can settle for index focused/exchange-traded funds.
Conclusion
Indices allow both types of investors to participate in the market, both the active and the passive, mutual funds for the more active managers and investors, ETF’s for passive investors and managers. Markets rarely function efficiently without both. The same as buy pressure must have sufficient sell pressure.
No bull survives without fear of the bear, and no bear lives very long without a bull to chase.
Index investing has long been purported by value investors and active investors alike. One tool in a financial strategy is diversification. Index funds are the easiest way to diversify across a sector and hedge your capital against market risks. Cryptocurrency has long been known to be volatile. As is the case with newer assets and commodities still going through price discovery.
Composite baskets present a unique opportunity to participate in an otherwise risk latent market. Where risks are prevalent the same as other markets, however, more hazards are unknown and less evident for lack of historical data. A composite index could bring much-needed risk-management to the crypto space and onboard a larger crowd of investors who would otherwise not accept the risks involved.
After all, if an indicator of a healthy market is predictable performance and consistent cycles of growth and contraction, then crypto indices are the next step towards calming the beast– magic internet money.
Clarke’s Three Laws
- When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong.
- The only way of discovering the limits of the possible is to venture a little way past them into the impossible.
- Any sufficiently advanced technology is indistinguishable from magic.
