Author: Sally

Original source: IOSG Ventures

Original source: IOSG Ventures

Satoshi Nakamoto believed that Bitcoin was a self-enforcement prophecy. By analogy, if NFT can achieve the same coordination of belief and choice as Bitcoin, we also have reason to believe thatThe value of NFT can be continuously strengthened in the long-term Nash equilibrium. Of course, the anchoring of beliefs and choices is floating. At present, NFT is far from reaching the consensus level of Bitcoin, so it is naturally difficult to control or ensure this anchoring.

To solve this problem means that we still need to add the conditions to support the Nash equilibrium equation - the intrinsic value and use value of NFT. The truth is actually very easy to understand. Teacher Guo Jingming once told us in his youth pain literature: "Love without material things is like a pan of loose sand", which highly refined the essence of materialist values. So interest and belief are only necessary but not sufficient conditions,Only when the real value is improved, the demand will be rigid and the choice will be firm.

It is not difficult to see that there are currently two ideas for opening up the demand side in the market:

1. Step to the right to improve investment attributes - NFT financialization (Financialization)

2. Step left to improve consumption attributes - NFT commercialization (Commoditization)

Next, we will discuss these two approaches separately.

1. NFT financialization: DeFi x NFT = NFT Fi

The financialization of NFT is not a novel topic. We have seen many discussions around this narrative as early as the first half of 2021 (see IOSG, 1kx, Hashkey and other research reports for details). Because NFT itself is a token standard on the chain, including several protocols such as ERC20, ERC721, ERC1155, etc., it is very straightforward and reckless to regard it as an investment product and want to further extend and explore its financial attributes and derivatives Great logic chain conduction. Then the question is: (1) Can the financialization of NFT solve the demand? (2) To what extent can the financialization of NFT open up the demand side of NFT?

We believe that the financialization of NFT can help expand and increase demand to a large extent, mainly based on the following two points:

1. Improve NFT consensus by combining DeFi gameplay.After NFT is combined with the DeFi protocol, it can reduce the threshold and education costs for participating in the NFT market. Because the entry threshold for trading non-traditional financial instruments is relatively high, players tend to take higher trading risks when they lack knowledge and information on this unique or exotic asset, thus preventing more long-tail buyers from entering the market. The lack of sufficient transaction depth and market confidence will naturally delay the accumulation of NFT's overall value consensus.

2. Increase tradability and stimulate liquidity through securitization.By converting illiquid NFT assets into tradable securities, NFT can be used as collateral like traditional securities assets to help cut and disperse the underlying asset pool and credit risk. With the birth and application of NFT assets and their derivatives, Web3 participants can spread their risks to a wider range of categories by dividing their positions, so as to benefit themselves.

Based on the above knowledge, we believe that we can first focus on the following three directions in the NFT Fi track:

• Exchanges: Create NFT Instant Trading Pairs

• Collaterals: Using NFTs as Collateral

• Derivatives:: Develop NFT derivatives

A. Exchanges

A big bottleneck in traditional pending order exchanges like Opensea and LooksRare is that they cannot provide instant liquidity for NFT, and thus cannot further improve capital efficiency. The most straightforward and effective way to solve this problem is to build an instant trading pair of NFT (ERC-721) and FT (ETH/ERC-20).

AMM is undoubtedly an excellent form of implementing this idea. In the past typically asFragmented NFT flow pool solutions such as NFTX and NFT20, has successfully realized the value aggregation and averaging of the same series of NFT collections. But the problem is that its single NFT is represented by a fixed number of FT,x*y=k constant product (constant product) algorithm similar to uniswap V2, and NFT and FT have a huge difference in circulation, so it is easy to cause insufficient depth of the NFT market and high slippage.

Sudoswap is another recently emerging upgraded AMM mechanismThis issue has been improved to a great extent. On the one hand, it allows LP to pass constant, linear or exponential formThe Bonding Curve sets the parameter variable delta by itself, thus freeing the degree of freedom in the quotation mode and controlling the deterioration of the slippage of large orders. On the other hand, what is different from traditional AMMs such as NFTX is that Sudo saves the process of converting NFT to ERC-20, and players can choose to set up unilateral or bilateral transaction pools. Therefore, this type of bonding curve-based AMM can be regarded as what Uniswap's V3 is to V2.

However, the current NFT AMM mechanism on the market is still simply homogenizing NFT into FT.To a large extent, it is only suitable for medium and long tail game NFT assets. It is far from a satisfactory liquidity solution for head NFTs with obvious attribute characteristics and large price differences in collections. at the same timeIn the setting of user operation process and joint curve, the processing of existing platforms is very rough, looking forward to adding some simple step functions and data analysis interfaces for reference in the future.

B. Collaterals

Considering that the current mainstream NFT lending is actually based on the blue-chip pfp NFT, we can first use the traditional art collection lending market as a reference. Historically, the financial paradigm of obtaining loans by pledging art collections has existed in traditional banking for a long time.The valuation of the art collection loan industry has already accounted for a quarter of the total value of the global art market.Deloitte and ArtTactic estimated in last year's Art&Finance report (p193-202) that the total amount of global art collection mortgage loans has exceeded US$24 billion, a year-on-year increase of 10.7%. In addition, past related studies have also pointed outIn times of economic depression, the loan demand for art collections will increase based on geography.

So the next question that arises from this is,Where does this need for mortgage lending come from?

We believe that compared to tokens, market entrants tend to be less willing to directly sell their blue-chip NFT collections. However, holding NFT for a long time also means that a large amount of funds will be locked in illiquid assets. Therefore, on the one hand, when the market environment is good, it is easy for holders to find better short-term speculative opportunities. Naturally, using NFT as collateral for temporary lending to release liquidity would be a good option; on the other hand, when the economic environment When it is poor, holders will tend to use the over-collateralization methods in DeFi protocols like Compound, Aave, etc., to prevent potential or sudden shortage crises while ensuring that they do not lose their NFTs. explains why overall NFT lending has a lower default rate).

Generally, we can divide the NFT mortgage lending solutions currently on the market intoPoint-to-point (P2P), point-to-pool (P2Pool), collateralized debt warehouse (CDP) and over-the-counter lending (OTC) four categories:

C. Derivatives

financial derivativesA contract or financial instrument generated around the underlying asset (Underlying Asset).Common financial derivatives include predictions, futures, options, etc. Generally, financial derivatives have the characteristics of high risk and high return, and are widely used for hedging and risk diversification. Taking real estate as an example, buyers can buy top-level (senior tranche) CDOs without holding the original assets (real real estate), but they also face the possibility of default. For underlying assets such as NFT, we have also observed that emerging derivatives agreements are emerging in the market, trying to further activate the liquidity of the NFT market and reduce transaction costs. Simply, we can divide NFT financial derivatives intoFutures, Options, Insurance and Structured ProductsThese four categories.

• The NFT futures solutions represented by NFTprep and NFTures can help realize long-term and short-term transactions for NFT assets and push up profit and loss leverage. But this also puts forward higher requirements for the price feed of the oracle machine and the depth of the supply pool of the market maker. At present, the main products on the market are still in the test network stage.

• NFT option schemes represented by JpeX, Nifty, etc. allow users to hedge the floor price fluctuations of NFT in their hands by purchasing call (call) or put (put) options, and to a certain extent lower the threshold for NFT speculation. However, several projects are currently in the early stages and are facing liquidity difficulties.

• Insuring NFTs that are scarce/high net worth or represent off-chain assets is also a risk transfer method worth exploring. Considering the characteristics of NFT, certain adjustments need to be made on the basis of the traditional insurance model.

• Index funds like Index Coop JPG based on different NFTs or NFT products, as well as buy-now-pay-later projects represented by Cyan, Cedar, etc., are good explorations of NFT structured products.

In the past research, we have interpreted and sorted out some of the lending and derivatives projects mentioned above, and more content will be further discussed in the future "NFT Fi Report".

2. NFT commercialization: new consumption x NFT = NFG

The commercialization of NFT is a very interesting topic, because it may mean the subversion of the entire big consumption track. But before discussing the commercialization of NFT, one of the questions we need to answer first is:

Can NFT be regarded as a traditional commodity?

Fundamentally, consumer goods exist to address and calm the urges and annoyances that are widespread in Maslow's pyramid.The primary purpose of people buying and consuming bulk commodities is definitely not for speculation or profit, but for taking advantage of their unique functional value to ease their short-term pain.To give a few simple examples, we buy rice to satisfy our hunger, cars to travel, games to entertain, and coffee to refresh ourselves. Conversely, when a commercial item is purchased mainly for the purpose of utilizing and exchanging its own functional attributes rather than seeking profit returns, it should be regarded as a consumer product.

Following the reverse deduction of the underlying logic of public consumption, combined with the current era background, we can make a hypothesis to be verified, that is, if NFT can achieve:

1. The primary purchase objective is to de-speculate

2. Mass Identity of Endogenous Culture

3. Scale coverage of assortments

It can be nested into the narrative logic of traditional commodities and consumer goods.

And if NFT can be directly equated with traditional commodities, an idea worth exploring, but not necessarily correct, will be: to translate the investment logic of Web2 e-commerce to the NFT marketplace track of web3.

So back to the topic, what are the directions for the development of NFT commercialization? What usage scenarios can it represent?

We believe that any(1) Not completely homogeneous (2) Benefit from ownership digital certificates.Any product with these two types of attributes can actually be expressed in the form of NFT. and an interesting concept that would arise from this would beNon-Fungible Goods (NFG).image description

NFT-related commoditization use cases (Image source: @shivsakhuja )

Simply, we can divide NFG intoPrivate Goods and Public GoodsTwo categories. Among them, the private type can be subdivided intoTransferable vs. Non-Transferable / Soul Binding (SBT)Two paradigms, the public type is mainly based onCC0/CBE(can't be evil) narrative as representativehave a discussion.

1. Private Goods

• Transferable

Typical transferable NFG use cases are tickets and passes.

Because the number of tickets for concerts, sports games and other large-scale events is usually limited, and relevant vouchers are required to obtain entry permits when visiting venues. Therefore, relying on NFT is a very suitable choice.

On the one hand, NFT tickets can eliminate the problem of counterfeiting to the greatest extent, making it easier to verify the ownership and authenticity of tickets; on the other hand, NFT tickets can alsoGreatly activate the trading liquidity in the secondary market.On Ticketmaster or Vividseats and other similar traditional web2 ticket second-hand platforms, the efficiency of market transactions is relatively low, and it is difficult to protect the rights and interests of buyers. NFT tickets can help establish a fair standardized market that protects the rights and interests of both parties.

In addition, by collecting historical attribution data of ticket holders on the chain, performers or organizers can also consider airdrop passes, discounts, gifts, etc. to give back to fans in the future.

• Soulbound (SBT)

Non-transferable NFT (SBT) can be widely used as a decentralized digital identity (DID) or verifiable credential (Verifiable Credential). Considering that NFT is essentially a digital certificate that is anti-counterfeit and can be verified by anyone, then publishing and holding academic certificates, skill certificates, diplomas, scores and achievements in the form of SBT NFT means that anyone can verify Its legitimacy, so as to realize the trustless verification of user identity. Among them, protocols like Sismos that issue SBT (ERC-1155) identity badges to users based on zk proof technology can also complete a closed loop on the basis of protecting user data privacy.

Furthermore, SBT NFT can also be used to solve problems such as verifying votes, and may become a global identity standard, helping to eliminate friction and barriers between regions due to incompatible identity authentication systems.

B. Public Goods

• CC0/CME

Japanese sociologist Miura Zhan divided the development of Japanese consumer society into four stages in "The Fourth Era of Consumption", pointing out that the needs of the people are also undergoing the evolution from basic consumption to the pursuit of individual brand and cultural consumption just like the West . And this phenomenon is gradually extending to many developing countries around the world. More and more people are stepping over the basic consumption level, and the emphasis on the brand culture of commodities has replaced the pursuit of cost performance.

And CC0 (Creative Commons Zero), which represents the author to give up all IP copyrights, will undoubtedly further stimulate people's pursuit of the brand culture of such projects and their enthusiasm for secondary creation. Compared with the NFT business model created by traditional private brands, CC0 has gradually evolved into an open source "application" or "platform" with network effects by bringing goods into the public domain. Under the positive cycle of continuous creation and sharing of derivative products, the attention gained by the original brand and the collective consensus within the community can naturally be extended and strengthened. It is not difficult to explain why there are still NFT projects announcing to switch to the CC0 model despite the greatly increased operational difficulty.

3. Write at the end Closing thoughts

NFT is a romantic and idealistic concept, and some Nerudas are mixed in Romain Rolland. But poetry cannot solve the problems in our reality, nor can it provide a basis for forming a strong consensus. The development of NFT requires more Machiavelli to actually improve the marginal utility of users, otherwise the progress of NFT2.0 may only stop at fantasy.

From Adam Smith's production and consumption theory, to Alfred Marshall and Hart's "Consumer's Sovereignty" (Consumer's Sovereignty), and then to Hayek's interpretation of "consumer's exercise of sovereignty over producers", we see that With the development of Internet technology, consumers have increasingly strong and clear demands for the full realization of their own preferences.

18 years ago, Chris Anderson (Chris Anderson) published the classic "Long Tail Theory" (The long tail) in "Connection", which pointed out thatThe reduction of attention costs in the Internet era makes it possible for the individualized and scattered long-tail demands at the tail of the normal distribution curve to add up to form a market larger than the popular demand, and the economic benefits will even exceed the "head" ( the hits).This means that niche products targeting niche market segments are likely to hold greater value and growth potential.

We believe that under the background of two steps of financialization and commercialization, the demand side growth of NFT will achieve a further leap.Original link

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