They may sound fancy and incomprehensible, but at the heart of it, derivatives are quite simple- a derivative is an asset which derives its value from something else. Those in the financial sector will be very familiar with derivative contracts, as the global market value of outstanding derivatives is well into the hundreds of trillions of dollars. Financial historians will make a big point of the fact that derivative contracts have existed as far back as Ancient Mesopotamia, and play a necessary function in risk mitigation for any exchange economy. However, the extent of the current derivatives market is a relatively modern phenomenon, and one which not all economists think is particularly productive. Some see them as emblematic of the ostentatious and unnecessary wealth of the financial sector.
Therefore, it is not unreasonable that many in Web3- a sector originally defined by its distrust of conventional finance- would be nervous about hearing the word derivative applied to NFTs.
However, Web3 derivatives are slightly different- although no less controversial. NFT derivatives are collections which derive their value from other prominent NFT projects, through having visual similarity or a similar classification. This can be done by splitting the NFT token into smaller tokens, index funds (which are more similar to the financial instruments based on an underlying value) or through futures and options. These can serve different purposes, either making the NFT market easier to speculate and profit from, or, further monetizing a popular NFT.
Not all are happy with derivative NFTs. Part of this is because not all derivative NFTs are approved by the artist, although there are spin-off NFTs and affiliated NFTs which do have artists permission. Others also see derivative NFTs as copies, which are totally lacking in artistic value.
The derivative NFT market will never be worth hundreds of trillions, but it is something NFT enthusiasts should be keenly aware of. As NFTs have grown in value the interest of finance has peaked, with derivatives being a small way in which traders can make the NFT market easier to profit from. NFT art purists will likely be frustrated by this- but it is a shift that is almost inevitable when the assets being traded are worth significant amounts. It is a problem the wider fine art industry also struggles with.
Team Stratisphere will be monitoring derivative NFTs closely to see how the market develops.
