Examining Issues in the NFT Industry
According to DappRadar data, The NFT market faced challenges in 2024, with trading volume and sales numbers dropping to their lowest levels since 2020. At the beginning of 2024, NFT trading volume in the first quarter reached $5.3 billion, a slight 4% increase compared to the same period in 2023. However, this momentum was short-lived, as trading volume fell to $1.5 billion in the third quarter of 2024, before partially recovering to $2.6 billion in the fourth quarter.
This article analyzes the overall issues in the NFT market and explores new project frameworks from the perspective of NFT projects. We believe that the NFT market as a whole faces the following problems:
- Most NFT projects lack a well-structured and effective decentralized governance mechanism, leading investors to prefer short-term holdings.
- The liquidity of NFTs in individual projects is severely insufficient, making it difficult to establish an effective price discovery mechanism.
- NFTs have limited functionality, preventing holders from participating in broader blockchain ecosystem activities, such as DeFi.
Lack of a Well-structured and Effective Decentralized Governance Mechanism
Most NFT projects, especially emerging ones, adopt a traditional centralized governance model, where decision-making is led by the core team or founders.
Nouns DAO is considered a benchmark for decentralized governance. In Nouns DAO, a 32×32 pixel-style Noun NFT is generated and auctioned daily, with all auction proceeds entering the DAO treasury, collectively managed and controlled by Noun holders. Each Noun NFT holder has one voting right to participate in proposal reviews and decisions. Nouns DAO’s primary funding source is the total revenue from daily Noun auctions. Members can propose and vote on how to use these funds, enabling them to directly influence the project’s development and resource allocation, embodying the core principles of a decentralized autonomous organization (DAO).
Additionally, Nouns DAO offers a fork mechanism as a governance tool. If a certain percentage of holders (currently 20% or more) disagrees with proposals or governance directions, they can fork from the original DAO to create a new independent organization and withdraw their proportional share of the original DAO’s treasury funds. This forking mechanism differs from the traditional “rage quit” method, where members dissatisfied with specific decisions can immediately exit and reclaim their assets. Instead, Nouns DAO’s forking mechanism requires specific conditions to be met and goes through a proposal and voting process.
However, the primary issue with the Nouns DAO forking mechanism is that when NFT holders lose confidence in the project’s development, they have difficulty quickly converting their assets into liquid funds. Aside from selling their NFTs, users have few alternatives, which not only impacts NFT prices but also weakens overall ecosystem activity.
We believe that it is necessary to remove the restrictions of the fork mechanism, allowing NFT holders to exit the DAO at any time (possibly at a discounted rate). This would attract more users to participate initially and, through a funnel mechanism, retain long-term community members.
Furthermore, we have observed that according to the Nouns DAO economic model, within the first five years of the project, for every 10 Nouns NFTs auctioned, one (e.g., Noun ID #0, #10, #20, etc.) is automatically sent to the founders’ multi-signature wallet for the founding members to share. This design aims to incentivize the founding team and continuously provide operational funds. However, given the market’s poor liquidity, the team’s large NFT holdings cannot be effectively converted into liquid funds, making it difficult to support project development and management. Additionally, in a decentralized community, the founding team holding 10% of the voting power may raise concerns about centralization.
To solve this problem, two aspects need to be addressed:
- How to improve NFT liquidity, allowing holders to quickly realize their assets at acceptable market prices.
- How to design a dual-token model (NFT & FT), enabling the founding team to receive FT token incentives and funding support without affecting the governance of the NFT community.
These points will be explored further in the following sections.
Lack of Liquidity
Currently, NFT trading liquidity is fragmented across platforms such as OpenSea and Rarible, which primarily use an order book model, leading to highly dispersed liquidity. Additionally, due to the unique nature of NFT transactions, prices often deviate from their actual value, frequently resulting in illiquid assets or single transactions causing significant slippage.
To enhance NFT liquidity, we recommend adopting a model similar to NFTX, developing a decentralized NFT trading platform.
NFTX is a decentralized NFT liquidity protocol designed to address liquidity shortages and price discovery challenges in the NFT market. It employs a pooling mechanism that groups NFTs with similar attributes and pairs them with a target token (e.g., $ETH). Buying and selling NFTs automatically update the pool’s floor price. For example:
- Selling: Users can deposit NFTs (of the same series or category) into a pool of similar attributes. In return, they receive ETH equivalent to the pool’s floor price.
- Buying: Users can purchase a randomly selected NFT from the pool at the current floor price in ETH (or select a specific NFT at a higher price).
For an emerging trading platform, liquidity establishment and incentives are crucial in the early stages, requiring support from the platform’s native token. NFTX’s issue is that its FT token relies solely on platform transaction volume, which, in a bear market, lacks fundamental market trust.
Our proposal is to tie the FT token to NFT project sales, supporting FT value through NFT sales while using FT to incentivize long-term market liquidity and governance. As the platform matures, NFT pools can be opened to other project teams, and FT voting can determine liquidity incentives for different projects, increasing demand for FT among NFT projects.
How NFT Holders Can Participate in the Broader DeFi Market
Once the trading platform has sufficient liquidity, an NFT lending platform can be developed, allowing users to use NFTs as collateral to borrow stablecoins or ETH. By utilizing the platform’s floor price mechanism, the common issue of unexecuted liquidations in current NFT lending platforms can be resolved through smart contracts.
Like the trading platform, the lending platform can also use FT tokens for decentralized governance and to incentivize borrowing and lending activities. The introduction of lending services enables NFT holders to access liquidity while retaining their assets and provides new financial opportunities for ecosystem participants.
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Dual-Token Model Improvement
Based on the analysis above, we propose creating a new NFT project that follows a regular auction model, where each NFT is generated periodically and auctioned publicly, with proceeds going into the project treasury. This project introduces a dual-token mechanism, consisting of NFTs and a newly introduced FT token, forming an NFTDAO and an FTDAO.
1. FT Token Overview
10% of NFT sales revenue is allocated to FTDAO, while 90% goes to NFTDAO.
10% of FT issuance is reserved for the project team as an incentive.
FT token utilities include:
- Incentivizing NFT/ETH liquidity providers on the trading platform
- Incentivizing participation in NFT lending
- Incentivizing liquidity providers for FT/ETH on DEXs
- Distributing FTDAO dividends for long-term staking
- Governing the trading and lending platforms
By providing ample liquidity, FTDao can effectively enhance token circulation, which is crucial for increasing the activity of the secondary market. Conversely, the active utilization of FT also plays a significant role in stimulating NFTDao.
2. FT Liquidity Incentives and Continuous Issuance
FTDao draws inspiration from the concepts of veCRV tokens and the CRV-war mechanism to formulate its liquidity incentive measures. veCRV is a locking mechanism in Curve Finance that allows users to lock CRV tokens in exchange for voting rights and a share of transaction fees. CRV-war refers to the competition among protocols to lock CRV in order to gain these rights and benefits.
Based on this design approach, FTDao implements a similar continuous FT issuance strategy to encourage long-term participation from liquidity providers and platform users. FT will be used to incentivize market participants to provide liquidity for FT/ETH and NFT/ETH pools. At the same time, different NFT projects will compete to earn FT rewards, fostering a healthy and competitive ecosystem similar to CRV-war.
3. Revenue Model and Locking Incentives
FTDao’s revenue model will incorporate the ‘ve’ locking mechanism, allowing users to lock FT tokens to receive dividends and governance voting rights. The dividends will come from multiple sources, including 10% of NFT sales, trading platform revenue, and lending platform revenue.
This model enables users to enjoy economic benefits while actively participating in platform governance, ensuring that the platform’s direction aligns with the community’s vision. The ‘ve’ locking mechanism strengthens user engagement and loyalty by tying profit-sharing to long-term commitment.
4. Fostering a Competitive NFT Market
FTDao leverages a flexible incentive mechanism to foster competition among NFT projects in terms of tradeability and liquidity. Different NFT projects can attract more liquidity to compete for market attention and FT incentives, creating a dynamic competitive environment that drives the growth and prosperity of the NFT market.
Under this competitive framework, various innovative projects will continuously emerge, providing users with more investment and collection opportunities, thereby enhancing the overall diversity and activity of the market. The FT incentive mechanism acts as a catalyst, effectively stimulating the incubation and growth of innovative projects, further accelerating the evolution of the entire NFT ecosystem.
Conclusion
By introducing a dual-token mechanism and FTDAO, the new NFT project aims to solve major challenges in the NFT market, enhancing adaptability, user engagement, and economic stability. We invite the community to participate in refining and implementing this model for long-term ecosystem growth.
Reference：
- 《Blue-Chip NFTs Spark a Resurgence in the NFT Industry》 from DappRadar
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