A panoramic view of the NFT stack: consumer-centric
Original: Messari
Original: Messari
At its core, non-fungible tokens (NFTs) are just a primitive form of blockchain, like fungible ERC-20 tokens. But the narrative of NFTs as a category has begun to refer to broader trends, so that, similar to DeFi, the term "NFT" now encompasses its own ecosystem.
Layer 1: Layer 1 items
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The NFT space has so far been dominated by Ethereum, Flow and, to a lesser extent, Wax. Most NFT applications may need to transition from the Ethereum mainnet to Layer 2 solutions or sidechains while relying on Ethereum as a settlement layer. Exceptions to this rule might be those high-end digital art or blue-chip collectibles that require stronger censorship resistance.
Other base layers (Layer 1), such as Solana, are actively building out their NFT infrastructure, such as Metaplex, enabling individuals to build their own NFT storefronts and distribute NFT collectibles through customizable royalty distributions.
Layer 2: Layer2 Solutions and Sidechains
Most consumer-focused non-fungible token applications — games, sports, virtual worlds, utility assets, etc. — have experienced turmoil on Ethereum. After building CryptoKitties and CheeseWizards, Dapper Labs decided that Ethereum would never be able to provide the robust scalability game studios needed, and chose to build Flow. Likewise, even projects like Sorare — which rightly set the direction for scalability — built on sidechains like Loom that ultimately shut down — have failed to attempt to scale their NFTs. Unwilling to depend on other third parties, Axie Infinity embarked on the path of building its own sidechain, Ronin, which has so far been very effective in reducing gas costs and increasing user adoption.
Gods Unchained,As an Ethereum hybrid Layer 2, Polygon's biggest advantage so far is its compatibility with Ethereum, which reduces the learning curve for users and developers. Additionally, Polygon uses its token to incentivize bridging to its network very well. Notably, Polygon is doubling down on NFTs by setting up a new $100 million fund for gaming and non-fungible token projects.
The developers at Immutable Labs are about to launch ImmutableX, their Ethereum Layer 2 scaling solution. This Layer 2 is built using ZK-rollups, which the Immutable team claims is better suited for NFT-based applications.
Check out Messari's article on Ethereum scaling solutions for a breakdown of ZK-rollup and sidechains and state channels.
By now, the story should sound familiar - [insert crypto project] built a relatively successful NFT protocol, but was unable to achieve the necessary scalability on the Ethereum mainnet, and opted to build its own solution [insert new zone block chain].
Although the battle of smart contracts is the battle of DeFi applications in the blockchain, the upcoming battlefield between Layer 2 will compete for NFT hegemony.
Layer 3: Vertical/Application
Layer 3: Vertical/Application
While NFTs are created and transmitted at Layer 1 or Layer 2, the application layer is a potential interface for issuing these tokens. Virtual worlds like Decentraland and Cryptovoxels slowly grew over time as individuals entered the world of conferences, art galleries, casinos, and upcoming use cases.
Other apps, like fantasy sports, have experienced wild speculation but are still adding new users. Crypto-based sports apps have been incredibly successful so far. NFT sports apps have generated more than $800 million in secondary sales, which could exceed $1 billion if primary sales are factored in.
While blockchain-based gaming as a trend hasn't quite taken off yet - partly because of scalability issues - the space continues with the release of several upcoming games, including Illuvium, EmberSword, Aurory, and more increase.
Additionally, Uniswap V3 is the first financial application to effectively utilize NFTs. Uniswap's V3 protocol requires active liquidity management — LPs select ranges within a custom price range within the asset market — creating individual price curves represented by NFTs in the process. Each NFT is displayed as unique on-chain generated art based on the attributes of your position.
Additionally, DeFi protocols like Synthetix have chosen to use NFTs as members of the Spartan committee that governs the Synthetix protocol. Each Committee NFT (SC-NFT) is unique to the individual and can be withdrawn from old members and awarded to newly elected members of the committee.
While issuance protocols that offer to create your own unique NFTs (i.e. SuperRare Tokens or Zora’s zNFTs) might be suitable for the application layer, the main benefit of the market comes from its liquidity, which is why I put these protocols in the financialization layer.
NFT issuance is a commoditization layer that can be facilitated by multiple layers of the stack, including:
Layer 1 or Layer 2 blockchain and scaling solutions
White label distribution agreements (e.g. Nameless is used for Veefriends)
Marketplace protocols (eg Rarible)
Individual applications (i.e. Sandbox, Uniswap, etc.)
Ultimately, these platforms will have to rely on the unique utility proposition they can offer their users. The virtual world can license content, and the Top Shot cards will be used in the NBA Top Shot game Hardcourt.
Layer 4: Auxiliary Apps
Layer 4: Auxiliary Apps
Decentraland and other virtual worlds will undoubtedly have various applications in their ecosystems, such as the online casino Decentral Games. Additionally, Sorare has a partnership with Ubisoft, which is developing its own One Shot League using existing Sorare cards. The composability of this layer means that applications or protocols that facilitate the development of third-party applications will have the opportunity to capture more value.
Layer 5: Financialization of NFTs
Layer 5: Financialization of NFTs
Similar to assets in DeFi, NFTs require similar primitives such as lending, liquidity, and asset management. Additionally, while the value proposition of NFTs lies in their uniqueness, fungibility is important for increasing liquidity and the financialization of NFTs. So far, projects focused on the financialization of NFTs are trying to make non-fungible tokens as fungible (and liquid) as possible.
Most protocols that aim to increase NFT liquidity do so by creating liquidity pools where individuals can deposit similar NFTs, or by subdividing individual NFTs to encourage greater speculation.
NFT Fragmentation Project
Fractional - Collectors create fractions of NFTs as fungible tokens that can be combined to redeem tokens, or the underlying NFT can be purchased at a price above the reserve price.
Niftex – NFT owners create shards of NFTs as fungible tokens. The underlying NFT can be recovered by acquiring 100% of the shards or through special buyout terms.
NFT liquidity pool project
NFTX – Collectors can deposit NFTs into NFTX vaults and mint fungible tokens (vTokens) that represent ownership of random assets within the vault, or redeem specific tokens from the same vault.
NFT20 – A decentralized exchange where individuals can deposit NFTs into a pool in exchange for fungible tokens (eg 100 Punks tokens) that can replace one NFT (eg CryptoPunk) in the pool.
Unicly – subdivides collections of NFTs into tradable uTokens. Specific collections (such as uPunks) are locked
Earning NFT Assets
Uniswap V3 LP positions - By providing liquidity, LPs receive fees based on three tiers per pool - 0.05%, 0.30% and 1% - corresponding to different price ranges.
market
market
In this regard, NFT distribution protocols and marketplaces will compete based on the following characteristics:
Brand Value
Brand Value
Liquidity (depth and breadth of assets)
Unique features (i.e. unique token criteria, royalties, collection fees, etc.)
Additional service offerings (e.g. partnerships)
In the long run, marketplaces may aim to be closer to social networks in order to anchor users to their platforms. Ironically, this is in contrast to social networks like Facebook and Instagram, which started as social networks and later developed markets.
Layer 6: Aggregators
Layer 6: Aggregators
While many view OpenSea simply as a marketplace, it also aggregates a wealth of NFT data and metadata — data about data — accessible through its API and potentially for other purposes. Both OpenSea and Rarible continue to create full-featured platforms for projects and individuals to issue non-fungible assets. As aggregators compete for growth, they will continue to expand their asset offerings across multiple blockchains.
Layer 7: Frontend and interface
Layer 7: Frontend and interface
There are many companies vying for eyeballs and building the de facto front end for NFTs. With collectibles and crypto art as the first breakthrough use case, entrepreneurs choose to build galleries or interfaces for collectors to showcase their non-fungible assets. Wallets like Coinbase Wallet and Rainbow and platforms like Zapper and Zerion offer friendly interfaces to view NFT portfolios.
More powerful NFT analysis platforms (such as NFT Bank) provide returns on investment analysis, taxes, price estimates, and more. Several analytics platforms exist but do not provide an interface to view NFTs, including Nonfungible, Cryptoslam, and Nansen.
Likewise, apps like Showtime and Nifty are building social networks for users to share and like NFT collectibles and interact with other collectors. Eventually, displaying NFTs on profiles or social networks could become universal across platforms. Finally, platforms like RabbitHole are issuing rewards (as tokens and potentially NFTs) for users of applications like OpenSea and Uniswap.
final thoughts
Over the past 12 months, the NFT landscape has evolved from a small ecosystem with hundreds of millions in sales to a multi-chain ecosystem where individual projects such as Axie Infinity have surpassed $1 billion in sales. OpenSea's full-year 2020 sales were $24 million, and by August 2021, sales exceeded $1 billion. Unlike the DeFi ecosystem, NFTs are highly consumer-oriented and eye-catching. As DeFi continues to build the financial rails of the future, NFTs will periodically enter the cultural zeitgeist.
This article is from The Way of Defi, reproduced with authorization.
