Written by: Jasmine Zhang and Fiona He, Partner and Investment Manager of A&T Capital respectively

In "The Three-Body Problem", Evans created the Three-Body Problem game. With the help of the iris link and a whole set of somatosensory equipment, the virtual world was used as a guide, and the history of the Three-Body Problem was used as a blueprint to attract the elites of the earth's civilized society to understand the advanced civilization of the Three-Body Problem . If we turn our attention back to the human society in real life, with the continuous advancement of science and technology in recent centuries, we have initially mastered the technology of realizing space travel and building virtual reality, and are constantly moving towards Web3, decentralized Internet of Things The age of all things is advancing. At the same time, we are also facing the constant depletion of the earth's resources, the deterioration of the ecological environment, and the solar system that is going to perish step by step----interstellar travel and virtual reality have become tools for human beings to survive for a long time and become advanced civilizations . And in the future where the real world and the digital world are bound to intertwine, how will we own our own things?

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NFT is expected to become the fastest landing blockchain application

Whether it is a game or a work of art, NFT can help it realize the leap from reality to virtuality. From the digital works of artists, to the highlight moments on the field of professional athletes, to the rare cards in video games, more and more different eyes have begun to focus on the gameplay of NFT. The giants active in the art, entertainment, and even fast food markets have also begun to devote their attention to the NFT market. For example, Christie’s began to auction NFT artworks, the NBA jointly launched Top Shot, and Disney and Taco Bell also launched peripheral electronic collections. But the issuance of NFT is not limited to professional players with a huge fan base. Due to the extremely wide audience of the NFT market itself, people can also turn any asset they think has unique value into a blockchain programmable asset without permission, and Cast your own NFT through the NFT platform, and if it is discovered, it will be auctioned.

Since the outbreak again in August 2020, NFT has become a track that cannot be ignored

With the public beta of NBA Top Shot in August last year, with the powerful IP of NBA, it led the rapid explosion of NFT. According to Coingecko data, as of June 10, 2021, the overall market value of NFT has exceeded US$17 billion, accounting for about 1% of the market value of the entire cryptocurrency market. Before August last year, the NFT market was almost negligible. From the perspective of historical transaction volume in the NFT market, according to nonfungible data statistics (excluding NBA Top Shot, only tracking NFT data on Ethereum), the NFT market transaction in the first quarter of 2021 showed a historically high level of activity. The week saw an all-time high weekly trading volume of $173 million. Although the current NFT transaction volume is slightly declining, it has become a track that cannot be ignored.

The picture below introduces several noteworthy works of art in the NFT market. The first two works were created by Beeple, a well-known graphic designer in the American circle, and they are the first and fourth highest transaction records in NFT history. The publisher of the third work, Stay Free, was released by Snowden himself, the NSA prism door demystifier, and then he donated all the proceeds from the auction to the Freedom of the Press Foundation. The fourth work, NYAN CAT, is derived from a video that was popular on the Internet ten years ago, and then derived into projects such as games and cryptocurrency, which also symbolizes the vitality of streaming media in the digital world.

NFT strengthens the correlation between blockchain and traditional industries, everything is possible and everything is willing NFT

The outbreak of the new crown epidemic Covid-19 has forced the traditional business model to shift from offline to online, and people have transferred more behaviors to the Internet. For example, art collections and auctions have always been dominated by offline exhibitions and physical delivery. The empowerment of the blockchain may profoundly change this industry: a) traceability and transparency on the chain, authentication of authenticity, and resolution of trust issues; b) Non-physical delivery, a forced transformation under the epidemic. For example, star cards can be directly and conveniently stored in digital wallets; c) Improve the liquidity of transactions such as artworks; d) For both users and creators, the NFT chain trading platform provides a lower entry threshold and is easier to create The value of authors and their works is discovered.

As an asset representation tool in the blockchain, NFT's core is to tokenize unique value. Prior to this, only FT represented indiscriminate value, while NFT further expanded the types and scenarios of assets on the chain, making it possible for various assets that could not be represented on the chain before.

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We are going through a transition from creating NFTs to using NFTs to social NFTs

Looking back at the history of NFT development, every bull market has an NFT representative project leading the market. The first bull market, known as Colored Coin (BitcoinX), Colored Coin can mark a variety of unique assets, similar to stamping a line of information on a $1 bill that can be exchanged for 1 share of Tesla. This attempt has allowed more people to understand the possibilities of blockchain and Bitcoin beyond transactions. By the time of the second bull market, the outbreak of encrypted cats caused serious congestion in Ethereum, making NFT enter the public eye for the first time. CryptoKitties had nearly 20,000 users at the time, contributing $40 million worth of transactions. The most expensive kitten "Dragon" was sold for 600ETH (equivalent to $170,000 at the time). The third bull market is the stage we have experienced. NBA Top Shot has made NFT out of the "circle" quickly. It has more than 1 million users and total sales of more than 600 million US dollars. Currently, the most expensive sales item is nearly 390,000 US dollars. James pays tribute to Kobe's slam dunk moment. From the previous bull-bear changes, we can see that NFT has gone from 0 to a track with a market value of 17 billion US dollars, and the trend has changed from NFT creation (Colored Bitcoin, Encryption Kittens) to NFT use (NBA Top Shot).

We predict that the next explosion of NFT will be NFT socialization.

First of all, NFT-based social platforms provide NFT holders with a platform to display and show off. Whether you are a speculator or an investor, there is a need for a platform that provides collection display and price discovery. In the social environment of human society, Proof of Passion provides a channel for people to exchange value and inspiration. These proofs can be a work of art, a pair of limited edition sneakers, or a record; in 1961, Keith Richards met Mick Jagger holding a blues Chess record at the railway station in Dartford, England, and the two People start talking. A few years later, the two of them co-founded the Rolling Stones, and together became the most influential pair of music creators in the history of rock music. Nowadays, people are used to listening to music on streaming media platforms and keeping their collections of artwork at home, and the arrival of NFT makes it easier for them to show others proof of their hobbies in digital form.

Second, the token incentive mechanism of NFT can further improve the originality of social media content, encourage creators to provide more interesting, unique and valuable content, and ultimately increase the overall value of the platform. We compare several social forms commonly used at present from several basic elements of social networks, the elements are as follows:

• Scope of communication: how many people and social circles can be reached

• Transmission speed and frequency: Whether the way of access is convenient to increase the speed and frequency

• Uniqueness and originality: Is the content being reached unique, interesting and sincere

Third, social platforms allow content creators to freely promote and share channels, lower the threshold for creators to display, and can skip the middleman to establish more direct and transparent communication with fans. For creators, they can release works-related NFTs through social platforms anytime, anywhere to raise funds for creation, and these NFT-style "work tokens" will also appreciate in value along with the portfolio, and can be used as proof of fans' hobbies Display on social platforms. Instagram and Twitter are currently representatives of centralized social platforms. Their highlight is to encourage users to use short words and pictures to convey and share information, and use huge sub-communities and precise algorithms to recommend content related to their hobbies to users; for NFT We believe that the opportunity to get out of the "circle" also exists in platforms that allow users to easily pass and display NFT hobby proofs, provide accurate NFT content and value indexes, and reasonably design community/work tokens.

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Investment Opportunities in the NFT Field

At present, the development of the NFT track is still in the early stage, and the project targets are concentrated in the vertical field, mainly covering games and artworks. We focus on the following directions:

• Bottom layer: Focus on the NFT bottom layer protocol specification.

• Platform: Focus on comprehensive platforms, such as whether it includes convenient NFT casting, comprehensive search engines, contagious social networking or high-value IP resources;

• Application: Focus on the combination of two aspects with DeFi, one is the new DeFi ecology derived from NFT as the underlying asset, and the other is the more complex composability of NFT as a value representation tool.

We selected several key sub-tracks as follows.

Underlying opportunity: NFT’s underlying protocol specification

The underlying protocol operates on the public chain, which to a certain extent determines the development space for upper-level NFT applications. For example, ERC721 is the most stringent NFT standard. Each smart contract only corresponds to one NFT, and it is impossible to define the FT part of the game. This limits The scene of the game, such as 1000 pieces of armor of the same level is actually FT. ERC1155 solves this problem, allowing smart contracts to represent a collection of NFTs of a series of FTs, but the disadvantage is that it cannot track the information of individual assets in the collection.

The composability of NFT also largely depends on the underlying protocol, attempts include: ERC998 allows any NFT to own other NFT or FT, including multiple ERC721 and ERC20 tokens; the Fractional project allows splitting the ownership of NFT and converting it into FT Improve liquidity; RMRK project tries cross-chain NFT on Kusama.

There are also some protocols under discussion that are exploring the use of specific scenarios, such as EIP2615 trying to define NFT mortgages and leases, EIP1523 trying to define NFT insurance policies, EIP2981 trying to define NFT royalties, and so on.

In summary, each protocol specification has its own advantages and disadvantages. ERC721 has been widely used as the protocol with the lowest trial and error cost due to its early appearance. From the perspective of requirements, the underlying protocol needs to be open (developer-friendly, less restrictive, and imaginative), composable (cross-chain, split and reshape, etc.), and the integrity of defined information, etc.

Platform Opportunities: NFT Minting

At present, the development of NFT casting is very early and elite, lacking inclusiveness and mature on-chain process, and there is a problem of decoupling of on-chain NFT and off-chain assets.

First of all, the casting of most NFT platforms is only open to a small number of artists, such as MakersPlace and SuperRare, and the screening criteria are opaque. Because the platform itself needs traffic, it is biased towards well-known artists. Referring to the recent analysis by NFT researcher Kimberly Parker, 65% of NFT sales are priced below $300. Considering that Gas Fee cannot make money at all, only a few well-known artists such as Beeple can really enjoy NFT among all the artists who have passed the screening. The technological change dividends brought about by the industry cannot empower the entire industry to a greater extent. You can think about NFT+DAO, how to make NFT more open and decentralized.

Secondly, in the process of being cast into an NFT on the chain, the artist only needs to complete a series of questionnaires and check whether they are original or not for the platform background to check. Lack of a complete database and confirmation process.

Finally, most of the underlying assets and data of NFT are off-chain, and the extent to which NFT can anchor its representative assets depends on the data storage method. For example, Aavegotchi can completely store all media and metadata on the chain. Mintbase uses a combination of Ethereum and Arweave to mint NFT; SuperRare uses IPFS to store files and file metadata.

Application opportunities: NFT empowers DeFi and complements each other

DeFi's current mainstream applications such as lending and trading only support FT, and the combination with NFT is still in a state of separation and independence. Early attempts include grab.finance (DeFi) in the form of cryptowine (NFT): users provide Grab/ETH token pair liquidity on Uniswap to obtain certain tickets, and the obtained tickets can be exchanged for cryptowine NFT representing random fractions, while The transaction fee will be injected into the prize pool, and the prize pool prize will be divided equally according to the score. Here NFT is just a dispensable attempt in the middle.

There are also projects trying to use NFT as the underlying asset of DeFi to enrich the DeFi ecosystem and expand asset classes, but NFT poses a challenge to upper-level DeFi applications due to its poor liquidity. Try to have the Whale project, issue FT token Whale based on pledged "valuable" NFT, the value judgment is relatively rough, NonFungible audits its pledged asset pool every month, mainly based on the transaction price of similar NFTs in the past period of time for valuation , The delay and lag are serious, and it is currently difficult to build a meaningful DeFi ecosystem on top of it. The current valuation of the Whale asset pool is only less than 50 million US dollars. However, once a solution can be found on the liquidity and pricing of NFT, it will not only establish a new generation of DeFi lending and transactions (such as the new "MakerDAO", "Compound", and "Uniswap"), but also leverage the traditional fields The capital market for weakly liquid assets such as artworks and collectibles.

Some NFT attempts of DeFi projects are also worthy of attention. For example, Aavegotchi NFT is obtained by mortgaging the interest-paying deposit certificate aToken on the Aave lending platform (DeFi), which expands the use of NFT to the game scene. For example, Zapper obtains NFT through interaction with the platform, but the usage scenario of NFT has not yet been opened. There are also some attempts to show the real demand for using NFT. For example, yinsure.finance tokenizes unique insurance policies with NFT, which can flow in the secondary market and increase the liquidity of insurance policies; for example, Uniswap V3 expresses LP Token as NFT. The liquidity value under different market-making strategies is defined, so that complex financial scenarios begin to appear in front of us with the representation of NFT: long positions, automatic rebalancing, lending, hedging, etc.

In general, we pay attention to the scenarios where it is necessary to combine the characteristics of NFT in DeFi, not just simply superimposing the concept of NFT on DeFi, looking for the value that can be represented by NFT, which can expand the underlying assets of DeFi or strengthen the reliability of DeFi. Combination.

Some Other Opportunities for NFTs: Games and Culture

People hold works of art in their wallets, but they have no more efficient use value besides collection and display, and games can provide interactivity and participation that works of art cannot currently do. According to Forte statistics, since 2012, the annual revenue of the game industry has exceeded the sum of the film and music industries. How NFT can empower the game industry is a cliché. In the past, most of the games we saw were NFT-based in-game props, or blockchain-based traditional games, but we also saw another way of thinking in one of the embedded markets. According to statistics from Statista, the 2020 League of Legends Global Finals peaked at 46 million viewers. Just imagine, if it is possible to launch collectibles in the form of NFTs that record the wonderful moments of e-sports players (Godlike, Legendary, etc.), its market potential is no less than that of NBA Top Shot. Moreover, the characteristics of the e-sports market audience and the currency circle users have a large overlap, they are very young and easy to overcome the threshold of blockchain use, and the education cost is low.

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