What It Is & How It Works

Let us guess. You’re in this research quest to know more about NFT index funds, but up until now, you still have no idea about what’s going on.

Source: Liveabout.com

I feel you. That’s how it was for me the first time around. So, we’ve simplified everything in the best way we can.

What Is NFT Index Fund?

First things first, let’s dissect the term.

Non-Fungible Tokens (NFTs)

Non-Fungible Tokens (NFTs) are digital assets you buy and sell in the blockchain system. You’re selling token ownership with the smart contract as evidence.

The thing is, despite its booming potential, NFT assets are still intangible and illiquid. They’re challenging to transfer, and it’s hard to determine their stable value.

Index Funds

For our stock investors here, you’re likely familiar with this.

Index funds monitor the performance of your stocks and bonds in the market index. You can track data and strategize from there to get the highest financial values.

It’s a “program” (if you will) that helps you maximize your stock performance. Utilizing this is also a form of investment.

NFT and Index Funds

When you merge these concepts, you’ll get a more precise grasp of what it is.

Instead of stocks and bonds, you’re tracking your NFT investing performance through decentralized exchanges.

This system solves the intangibility of an NFT as the ERC 20 tokens mark the liquidity of the asset.

In other words, investing in these funds for your NFTs adds value and helps with the price discovery of your NFT collectibles — whether single fund tokens or a tokenized basket.

With this index and decentralized exchange system, it’s now easier to transact within the NFT market and the NFT ecosystem.

How Does It Work?

For example, you were able to collect an NFT token from a marketplace (i.e., you won an NFT in Axie Infinity, or you bought an NFT real estate on Rarible).

You now have NFT tokens. But as we said, there’s no liquidity in that. It’s hard to earn yield and arrive at a financial product with just that.

You will now fractionalize those NFTs to ERC 20 tokens to acquire liquidity. No, you’re not selling the NFT ownership per se — you’re adding a tangible value into your NFTs.

A token can have multiple or fractionalized owners, too, unlike NFTs that only have one. The pool of owners can access the NFTs, set their terms, and decide to put the assets up for sale.

ERC-20 Tokens

In case you don’t already know, these NFTs are all happening in the Ethereum blockchain. Tokens are essentially the governing factors in this system.

Hence, NFTs exist. There are also fungible ones and combined fund tokens. That’s why you encounter the word a lot.

ERC stands for Ethereum Request for Comment, and the 20 is the identifier. But you don’t need to think about this too much.

You need to know that in the Ethereum blockchain, ERC-20 tokens work similarly to bitcoin.

They are the system standard, they play a significant role in smart contract rules, and they’re worth a lot.

In doing these, expect transaction fees and gas charges.

Platforms

There is a specific NFT space where NFT owners can participate in this decentralized finance. Examples are NFTX, CryptoPunks, and NIFTY.

Source: NFTX.io

Why the Need for It?

You’re probably thinking – why?

It’s an extra step to invest in something like this, and it isn’t straightforward. Why can’t we swap NFTs?

Well, the answer is liquidity.

In the financial space, being liquid is essential. It increases security, adds worth to your asset and NFTs, and formalizes the cryptocurrency.

If you’ve been into NFTs and crypto for a while now, you know how the intangibility and illiquidity of everything here make it difficult for others to trust the system.

Since the rates are highly volatile, people don’t believe in it. Only those who understand how crypto works appreciate the worth of this emerging system. 

Is It Worth It?

Yes, we think it’s worth it.

If you’re a serious NFT investor or looking to grow a business here, investing in index funds will help you move through the ecosystem with more gains and ROI.

And not only that, but you’re also making it easier for others and the system as a whole.

Perhaps one day, if this whole thing achieves total liquidity and assimilates into traditional financing, you’ll be a pioneering investor!

Conclusion

Did we make things easier for you? We hope we did, because here, we are passionate about answering any NFT questions you may have. 

Note that there are still a lot of technicalities to learn beyond this. But as for now, understanding the basics is fundamental to your NFT journey.

Good luck!