Sept 13
DeFi 101

NFTs and the Derivatives Market

NFTs and the Derivatives Market

6 min read

The recent boom in the NFT industry cannot be overstated. Crossing over the $2 billion mark and attracting the mainstream, NFTs have become an uber hot trend. From gaming, digital arts, to music and digital assets, there seems to be tons of use-cases for the NFT world.

Read more: NFT Market Hits High: Avatar Projects Major Catalyst

Read more: Play and Earn: NFT Projects Going Through The Roof!

As with all tech developments, new possible applications of NFTs are discovered with creativity and exploration. To expand on their limitations and boost liquidity for the NFT marketplace, NFT derivatives are now being created. Yeap, you read that right! NFT derivatives!

<text-h2>What are NFT Derivatives? <text-h2>

In one aspect, derivatives in crypto are financial contracts or agreements between two or more parties based on the future price of an underlying crypto asset. In other words, parties agree on a contract speculating cryptocurrency prices at a specific date in the future. Depending on the contract terms, the parties are required to settle at the agreed price on the date of contract execution. Derivatives contracts are widely used by professional traders to hedge risk or capture volatility in ways to generate returns from the market, whether its bull or bear. Common derivatives are options and futures contracts.

Read more: “CDs” (Crypto Derivatives), The Next Trillion Dollar Wave?

Now the same logic is being applied where new contracts or even tokens are “derived” from the underlying NFT. For example, a typical fungible ERC-20 token can be created to represent NFTs, which use the popular ERC721 standard on Ethereum. By doing so, these make NFTs easier to trade on marketplaces and create new ways to lend and borrow through NFT derivatives. Creating NFT derivatives creates new opportunities to attract investments and greater liquidity to the NFT marketplace via the secondary market. As a result, NFTs gain a whole new dimension of trading for NFT traders, marketplaces and owners to generate returns from their NFTs.

Some examples of recent NFT derivatives included:

  • Prediction markets on NFT floor prices — trade based on the average index price of specific NFTs. Example: predict if the average price of all CryptoPunks will go up or down in the month of October 2021.
  • NFT Swapping Protocols — Convert NFTs to ERC20 tokens and trade on DeFi trading platforms. Example: Generate passive interest by lending your ERC20 derivatives version of the NFT, similar to earning from lending ETH.
  • Short an NFT — use ERC20 token to short NFTs in a futures contract. Example: buy a futures contract to short the index price of CryptoPunks, if you think that the price of that CryptoPunks will drop before or on a specified future date.

Liquidity is one crucial need in the NFT marketplace. By creating fungible tokens based on non-fungible tokens, it will help attract more liquidity by allowing those who do not necessarily own NFTs to participate in the market. It also makes it easier to earn more from an NFT as opposed to just holding it. The possibilities of how NFT derivatives can be used is similar to the wide potential of DeFi.

CDzExchange is also currently exploring NFT derivatives to expand the possibilities of crypto derivatives. NFTs are here to stay, and derivatives are certainly part of what the industry’s future holds.

CDzExchange also has loads of updates underway. We are already working on the next tech for the core derivatives trading components and cross-chain bridges.

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