The Inevitable Financialization of NFTs

The mainstream NFT boom is now a little over two and a half years old. NFT trading started off with a Shopify-esque experience where you click on something you like before clicking again to buy it. Over the last two years, with deteriorating market conditions and dwindling user counts, it has evolved into tools and charts that enable users to squeeze more and more value out of the market.

This shift in our approach to the NFT market is primarily user-driven. The number of weekly traders is down from its Jan 2022 all-time high of 256,000 to around 70,000. Most of the casual traders have been washed out over the last year due to several reasons, most notably crypto market conditions throughout 2022 and other macro factors. The NFT traders still in the market are the diehards and the pro traders, so it makes sense that current applications reflect that.


Financialization of NFTs is already under way. The most well-known and widespread version of the phenomenon is NFT borrowing and lending. Other use cases include options, fractionalization, appraisal, liquidity scaling, and NFT rental protocols.

NFT lending has been blowing up in recent months, especially since the launch of Blur’s perpetual lending protocol Blend in May 2023.


While lending adoption is steadily on the rise, other NFTFi (NFT finance) use cases remain nascent. We identified a huge inefficiency in the NFT sector when it comes to pricing, and that is when Waterfall was born.

We started Waterfall in Sep 2022 in order to solve the problem of pricing and thereby unlocking additional liquidity and price discovery for NFTs. Currently, there is no clear and reliable way to price a specific NFT besides the floor price, which serves as nothing more than a reference point for an NFT collection. NFTs listed at or near the floor price will usually sell because that is where an overwhelming majority of the liquidity is present. When it comes to rare NFTs, grails, and/or 1/1 pieces, pricing becomes even more arbitrary since these particular NFTs are meant to be sold for a premium.

The protocol mechanism is simple:

  • NFTs listed on Waterfall are fractionalized into shards (ERC-1155 tokens).

  • Traders can come in and trade shards.

  • A buyer can come in at any time and acquire the listed NFT by paying the current price, which is the sum of prices of all shards at any given time.

History of Fractionalization

The Waterfall protocol uses fractionalization to break up a listed NFT into a specified number of ERC-1155 tokens, which we call NFT shards.

Fractionalization is not a new concept. In fact, some fractionalization protocols existed as early as 2021, with Tessera (FKA Fractional Art) leading the charge.

The mission was simple and compelling: fractionalized ownership of valuable NFTs. If you didn’t have 100 ETH to buy a CryptoPunk, you could now acquire a small piece of it for a much lower price.

While legacy fractionalization protocols did what they were intended to do, they failed to account for a major problem that would arise after an NFT had been fractionalized.

The Problem with Past Models

With traditional fractionalization models, doing anything with the fractionalized NFT (like transferring, trading, or selling) was gated behind governance consensus. A fraction holder would need to submit a proposal, which other fraction holders could vote on and pass. This introduced extreme friction to ownership of NFT fractions. We saw this happen time and time again. An NFT would get fractionalized, users would purchase fractions, and the NFT would get locked in the fractionalization protocol forever. This would most often occur because no governance proposals would ever pass due to the quorum never being met.

The Solution

We’ve applied what we’ve learned from legacy protocols and have solved this problem. The Waterfall protocol forces all NFT shards to be listed at all times. We accomplish this by prompting a shard trader to input their relist price and expiration date as they purchase their shards, which get relisted right after purchase for the set relist price. Shards that pass their expiration date without getting acquired by another trader will be subjected to an automatic linear Dutch auction (down to 0) until a buyer is found.

As mentioned previously, this mechanism design forces all shards to be listed at all times, effectively eradicating the problem of a listed NFT being locked in the protocol. This is due to the fact that any buyer can step in at any time, pay the current price (sum of prices of all listed shards), and acquire the listed NFT. No governance consensus needed.

The Future

We are gearing up for the launch of Waterfall Testnet very soon, and we can’t wait for everyone to try it. We’re excited about the future of the NFTFi industry and contributing to its growth and success.

To celebrate the launch of our blog, we’re releasing the Waterfall Blog Badge.
Available until September 1, 2023.

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