Two years after non-fungible tokens stormed onto the crypto scene the tools and infrastructure for trading them remain rather undeveloped. A new project from DKODA Labs called the Wasabi Protocol is hoping to change that by allowing users to buy and sell a type of derivative called options on NFTs.

“NFT markets are maturing,” Eren Derman, the founder of DKODA, said to me recently. A step forward was when the NFT market Blur – which has overtaken OpenSea as the largest NFT platform -- introduced two-way pricing, Derman said. Prior to Blur the only prices put out came from sellers, he said.

“Without both sides of the market you don’t have healthy pricing,” Derman said. “That was a big step toward a better, more-efficient market.” The Wasabi Protocol will open to traders on April 20 and at first won’t be available in the U.S. as the startup seeks regulatory approval.

And while the NFT market is now worth about $21 billion, there’s still significant infrastructure that needs to be built to support it, Derman said.

“In traditional market you’re able to hedge yourself, you’re able to purchase insurance on your investments. With NFTs that’s not possible,” Derman said. About nine out of 10 NFT projects are illiquid right now or priced below the amount they first sold for, which shows “a lot of bad activity in the space,” he said. “People don’t have any way of hedging themselves, they don’t have any way of shorting these collections and making money out of it so that they can avoid malicious behavior.”

Options allow users to gain exposure to projects they may not be able to afford and to protect themselves from falling NFT prices. If an investor wants to buy a Bored Ape Yacht Club NFT but doesn’t have the $112,000 on average that they cost, they can use an option contract to bet that the price will rise. If it does, they make money on the trade. In the other direction, if an NFT holder is worried that the price is going to fall, they can use an option to limit the loss – or they can bet on an NFT they think will fall in price and make money if they are correct.

Another a key element to a healthy market is introduced with options – they allow for speculators. While sometimes derided as greedy or opportunistic, speculators are needed because they take risks that allow natural sellers of commodities to hedge their products. They can also help an NFT collector earn income on their portfolio because the collectors get paid a premium for making their NFTs available for speculators to bet on.

“With your NFT collections you basically put in a limit order” that says “at this price, I am willing to sell them in the future,” Derman said. “And according to the prices you specify we have certain algorithms that we use to price options” and if traders agree with that price they “will pay you upfront to reserve the right to buy your assets at that price up until a certain expiration date.”

DKODA will be working with the U.S. Commodity Futures Trading Commission for regulatory approval to offer its services to U.S. users, Derman said. “We’ll do our best to open in the U.S. as soon as possible,” he said.

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Derman comes from a family of artists, his mother was a painter and his grandparents are both sculptors. Yet he saw firsthand how hard it can be to support yourself or a family as an artist. “I always wanted to be an artist like my mom but I was never courageous enough,” he said. When he understood NFTs his opinion about sustaining an art career made more sense to him.

“That’s why I think NFTs as a financial tool are very powerful to support creators and artists as they’re building their creative projects,” he said.

The Wasabi Protocol is working with TempleDAO and Frens Capital as early supporters. And as with a lot of new innovations in crypto, the NFT space has seen its share of scammers and projects that are only looking to make a quick buck and then disappear. With options, Derman said NFT investors would for the first time have a way to protect themselves from the less-honest side of the marketplace.  

“That’s why we’re building Wasabi, we just want to build a much more efficient and highly-functioning market for NFTs,” he said.