MXC Research: NFT, A Bridge between the Crypto World and Traditional Finance
What is NFT?
NFTs are non-fungible tokens, which means that they are tokens that cannot be replicated. A single address on the chain only corresponds to a single token, usually in the Ethereum ERC721 standard.
Typically, BTC, ETH, and so on are fungible tokens, namely FT. ETH within the same address can be divided into multiple fractions of ETHs and transferred while the remaining ETHs are still included in the balance of the address.
In contrast, one address corresponds to only one NFT token. During transfers, only this NFT can be completely transferred out. It cannot be split and has no concept of balance.
In a broad sense, NFT represents a kind of ownership, that is, owning the NFT of the address. This corresponds to owning a work, bill, or right. For example, when a photographic work is stored on the chain, a corresponding NFT address is generated and ownership of the NFT means ownership of the work.
When a user purchases the work, the NFT ownership corresponding to the address will be directly transferred to the buyer, along with the ownership of the corresponding photographic work.
Since the end of last year, there has been a surge of interest in NFTs, represented by DEGO, FLOW, RARI, OpenSea, and other projects or platforms.
However, at that time, the concept of the NFTs were mainly focused on picture art. Compared to the rich traditional art categories, there is still a very large room for development.
Since this year, with the emergence of MIST and UniswapV3, the Liquidity Pool Tokens (LP Token) has also appeared as NFTs.
NFT gradually expands its essence of “ownership” so it’s not only the ownership of crypto artworks but also as a broader verification of rights.
NFT as Certification of Image Ownership
CryptoKitties were launched in late 2017. Each CryptoKitty is an NFT token with unique appearance traits. This is the earliest form of NFT as a picture art.
Unique traits, rarity, and breeds determine the basic value of a CryptoKitty. Buyers purchase the CryptoKitties according to their appearance and generation, hoping that investors who enjoy the art will later buy them at higher prices.
At the beginning of its launch, CryptoKitties slowed down the Ethereum network and created the first wave of high gas fees. At one time, the daily active CryptoKitties addresses exceeded 14,000. In more than four months, the total trades exceeded 40,000 ETH, worth about ¥200 million CNY.
However, as the hype faded, the price of CryptoKitties gradually decreased and now they can be purchased on NFT platforms such as OpenSea.
In 2020, Christie’s, Sotheby’s and other auction houses started to accept NFT works for auction. The crypto artists and NFT applications then emerged in a concentrated fashion. In addition, the market improved and NFT welcome this surge in popularity.
The fundamental reason for the rise of NFT is that blockchain characteristically provides protection for copyright certification and transactions.
Take NBA Top Shot as an example. NBA Top Shot is the NBA’s official NFT-based basketball card trading platform based on the NFT public chain, Flow.
The cards originated from the American Baseball League and is a kind of carrier of culture. Traditional card trading is usually carried out on sports or e-commerce platforms such as Hupu and Taobao.
In July 2020, NBA star, LeBron James’, Rookie Card was sold for $1.845 million USD. Only 23 cards were made, corresponding to James’ jersey number. The buyer was the CEO of the B2B e-mail platform, Lob.com.
On August 21, the baseball card, 2009 Bowman Chrome Draft Prospects Mike Trout Rookie Superfractors 1/1 was sold at a sky-high price of $3.94 million USD.
NFT, the storage of the digital photo, represented by card, is a market with huge potential. Compared to traditional card trading, NFT has the following advantages:
Easy to distinguish the real thing from fakes
Compared to paper cards, the NFT address is unique. When purchasing it, the corresponding NFT address is transferred. Moreover, the NFT address can trace back the source of trade in the Ethereum network to ensure authenticity.
Easy to store and prevent physical damage
In addition to preventing physical damage and discoloration, NFT can, in fact, request the manufacturer at his own expense to make a new physical object and destroy the worn one under the premise of physical damage.
Richer forms of expression
NFT can be expressed in the form of pictures, gifs, videos, etc. NBA Top Shot launched an intelligent hardware-based NFT. If Kobe’s last shot before his retirement was purchased, the buyer will receive intelligent hardware that can play the video.
The space for imagination in ownership transfer
Most importantly, as code, NFT will be thought of as a certificate of ownership. Coupled with the characteristics of the blockchain smart contracts, NFT can have multiple imagination spaces such as copyright authorization, pixel mapping and re-transaction Dividends.
NFTs Go Beyond Pictures: The Future of Scanning and Rendering, Storage
Art is more than a flat picture and this means that NFT can be more than a picture.
In addition to picture art, traditional works of art include sculptures, art installations, light and shadow art, music, singing and dancing, etc. Even the paintings we usually see are actually three-dimensional and composed of multiple layers.
In the future, NFT artworks should not only be pictures, but also be able to reproduce art in a complete virtual environment.
Scanning, Modeling and Rendering
Scanning and modeling refers to placing an artistic work in a three-dimensional space, establishing the coordinates, and scanning it for preservation.
Rendering is the complete restoration of a three-dimensional work of art into NFT. Currently, the RNDR (Render) project is trying to solve the VR rendering problem for NFT.
Scanning and rendering is the process of making a real work of art into an NFT.
NFT is still facing storage problems. Three-dimensional art, modeled and rendered, usually requires at least tens of gigabytes of storage space. Current NFT public chains do not meet such storage requirements.
The combination of storage and NFT infrastructure may need to be resolved across the chain.
On April 11, popular Japanese artist Takashima Murakami announced at Instagram that he would cancel an art auction scheduled for OpenSea. The reason is that the current picture in the NFT cannot not fully express his artwork.
NFT Artwork Frontier: Trading of Copyright Licenses, Pricing and Collateral Loans, Pixel Mapping and Re-Transaction Dividends
In the future of NFT artwork trading, the following applications may emerge:
Currently, NFT is still mainly traded directly, and purchasing an NFT picture does not mean purchasing a copyright. In fact, NFT can be used as a copyright transfer certificate, authorized by the current owner to the next purchaser, and transferred with transfer of ownership of NFT.
Copyright authorization can be divided into full authorization and partial authorization.
Full authorization refers to the purchase of a NFT picture, which represents the purchase of the copyright of the picture. Buyers can license it to a manufacturer to make side products for profit.
Partial authorization refers to the purchase of a NFT picture and receives authorization within a specified scope, such as printing 1000 T-shirts etc.
Copyright Trading Market
The copyright trading market, which is promoted by copyright authorization, is responsible for the matching of trades.
Currently, NFT trading platforms such as OpenSea and Rari do not have copyright authorization characteristics. When a user purchases a picture, it does not mean that he/she has purchased the copyright.
Pricing and Collateral Loans
Determines the price of NFT works and supports collateral lending of NFT works. In fact, this model is similar to a “pawnshop”.
Pixel Mapping refers to mapping of a single NFT picture into multiple NFTs according to its pixels or other criteria, essentially separating ownership and right to income. Such NFTs exist as derivatives.
Buying NFT pixels represents partial ownership of a complete NFT, and when the NFT is transferred, the portion of the pixels held are able to receive a share of the proceeds. Currently, the 1MillionNFT project is doing something similar.
Re-transaction dividends refer to the percentage that a purchaser can receive from future sales of a single NFT after purchasing it.
Or, on the basis of pixel mapping, holding a certain part of the NFT’s ownership right can result in a partial proceeds from the sale of the entire NFT.
In the future, the NFT artwork market will compete for not only on copyright IP, but also authentication, authorization and pricing of NFT. Based on the liquidity of NFT assets, a derivative of the vertical area of NFT may emerge.
NFT as Ownership
NFT is essentially ownership. Artwork is just a form of ownership. In addition, NFT can be used as a certificate of ownership.
Recently, UniswapV3 has been completed and LP Token will be issued to investors in the form of NFT.
In the Alchemist (MIST) project, users can go to Uniswap to provide liquidity for MIST/ETH trading pairs, and the LP Token obtained can be minted into NFT within Alchemist to participate in mining as ownership.
Alchemist will use the minting duration as a multiplier for reward issuance based on the existence of NFT to provide rewards to users for liquidity distribution.
NFT represents a kind of ownership, which means assets serve as collateral in MIST to inject liquidity into it, and these NFTs can be traded later on.
If we think of MIST, ETH tokens as Layer1, NFT as Layer2. During trading, it would be interesting to have a standardized splitting of NFT without touching the MIST/ETH liquidity pool itself.
This logic is a bit like the recently popular “Shen Fang Li” in which single property is divided right into bonds. The income obtained from the sale, lease or transfer of the property right is divided according to the proportion of bonds held.
But Shen Fang Li is just a division of a single house. What if MIST made a DEX by itself? What about the further collaterals based on the NFTs that were split?
The space for imagination is enormous.
In the above example, NFT appears as a certificate of ownership.
NFT: A Bridge Between Blockchain and Traditional Finance
Based on the fact that NFT is the framework for certificates of ownership, let’s look at the Republic and Centrifuges projects.
Republic and Centrifuges introduced startup financing into DeFi, the difference being that Republic uses tokens as dividend tokens, while Centrifuges uses NFT as decentralized collateral tokens.
Republic (republic.co) is an Internet platform that helps start-ups raise equity or cryptocurrency rights, similar to platforms such as Duo Cai Tou, where general users can participate in startup financing, receive return on investments, and other premium rewards.
The token REPUBLIC NOTE is a token with the characteristics of a share dividend, and holders can enjoy Republic dividend yields.
Republic earnings come from two sources: financing commission and return on Capital investments:
1. Financing commission. Republic draws a 2% commission when it helps finance the project party, which is settled in cash or equity equivalent to cash.
When the Commission is equity, Republic can cash out its equity to generate a premium when the next round of financing is completed or when the IPO is listed.
2. Return on Capital investments. Republic also has its own investment business, Republic Private Capital, which means that Republic itself will also participate in equity or cryptocurrency financing for certain projects.
Republic Private Capital will cash out during the next round of financing, or when it enters the IPO listing stage, and will generate 1–16% Carry returns. 25% of the proceeds will be distributed to REPUBLIC NOTE holders.
Centrifuge (CFG) is a network protocol that connects real-world assets to DeFi, allowing enterprises to create an on-chain lending pool in the form of collateral to receive financing. Another project with the same concept is Naos Finance (NAOS).
Tinlake is Centrifuges’ application, which is essentially a decentralized financing and lending docking platform controlled by smart contracts.
In Tinlake, enterprises can mortgage bills, collateral and media copyright fees to generate NFT tokens. Investors can use DAI to participate in project financing in Tinlake. The DAI used to participate in financing can be withdrawn at any time.
For each financing project, a lending pool is created. Each lending pool has different risks and benefits.
For each lending pool, investors can invest in two different tokens, TIN and DROP. The design of TIN and DROP draws lessons from the investments in traditional financial risk structures.
TIN is a risk token. The holder has to bear the risk of project defaults but also get higher return. DROP is a yield token, which is protected against defaults by TIN token and receives stable and lower returns.
In addition to the project growth returns from TIN and DROP, users participating in the financing can also receive CFG token awards.
In the future, Tinlake will become a fully decentralized financing protocol, interoperable with different blockchains, and will support multiple forms of token financing.
On April 22, MakerDAO launched the world’s first DeFi-based real-world asset loan. New Silver, the Fix & Flip lending pool on Tinlake, a lending platform based on the Centrifuge protocol, was used as an asset initiator to obtain the first loan using MakerDAO as a credit tool.
On May 5, Centrifuge, PandaCredit, and NAOS Finance submitted a community proposal (MIP6) for additional collateral asset types at MakerDAO in the hope of adding supply chain financial assets to MCD as real-world assets (RWA). PandaCredit initiated and managed the collateral assets using Centrifuge’s model and the Tinlake protocol.
Finance emerged to allocate resources and manage risks. Banks concentrate on lending to businesses to diversify the depositors’ funds, and airlines use contracts to lock in fuel costs.
“One’s meat is another man’s poison”, farmers are exposed to the risk of falling grain prices, whereas bakeries, on the contrary, depending on how to match their demands and lock in with contracts.
The means of resource allocation and risk management is liquidity. If breweries need more raw materials, grain, they can buy contract certification from the bakery at a premium to get more raw materials by delivery date.
NFT is not limited to crypto artwork. It is more like certification in the traditional financial world, such as a certificate of accounts receivable. We can realize short-term fund lending based on long-term accounts receivable, so as to recover funds quickly.
Blockchain solves the problem of a trust-less collaboration environment. The liquidation system based on decentralized and smart contracts can improve the efficiency of traditional finance and reduce the cost of payment. NFT, as a certificate, will play a role as a bridge between the crypto world and traditional finance.