2020 is definitely the year of DeFi, especially in the 4 months of 6, 7, 8, and 9. But after entering October, based on indicators such as yield and market enthusiasm, it can be said that DeFi has entered the second half.
In order to continue the DeFi fever, many project parties and investors have set their sights on the DeFi+NFT gameplay, making NFT, a niche market, out of the entire crypto market. Therefore, many people assert that NFT is the next hot spot. But the logic of this assertion is rarely scrutinized strictly.
This article attempts to answer this question, mainly from four aspects of what NFT is, NFT ecology, typical NFT applications, and whether NFT will be popular.
1. What is NFT
NFT is the abbreviation of Non-Fungible Token, which has two keywords: Fungible and Token.
Fungible means homogenization. To understand the meaning of this word, there are cases in the real world around us. Commodities in the real world can be divided into homogeneous commodities and non-homogeneous commodities.
The most famous example of homogeneous commodities is currency. In the era of metal currency, every gram of gold is exactly the same. In the era of paper money, although paper money has a code on it, because it is a general equivalent, the purchasing power of the same denomination paper money is exactly the same, and people have no need to distinguish. Other examples include those commodities (oil, coal, grain, etc. of the same quality). There are also many non-homogeneous products, such as the real estate market and the art market. No house or artwork is exactly the same, and it is difficult to standardize. Therefore, each house/artwork is unique.
Token means pass or token. In the initial stage of the blockchain, the Tokens on the blockchain are mainly native encrypted tokens, and these tokens are homogeneous. With the abundance of digital assets on the chain, especially game assets such as crypto cats, there is a demand for non-homogeneous tokens. On the other hand, because the blockchain is a trusted machine, with the development of the blockchain, more and more real-world assets are on the chain, and non-homogeneous tokens are more needed.
The scope of Token expands, not only can be encrypted currency tokens, native digital assets (virtual pets), but also can be used to mark shares, real-world goods (real estate, artwork), digital art, etc. By representing something as a Token, they can be created, traded, interacted, and even destroyed through smart contracts, which can greatly reduce transaction costs on the chain. In this regard, the concept of smart contracts brought by Blockchain 2.0 has made great contributions.
Currently, NFT on Ethereum is mainly defined by two standards: ERC721 and ERC1155.
ERC721
Four developers William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs proposed the Ethereum improvement proposal EIP721 in January 2018, which defined the ERC721 standard.
This is how ERC721 is defined in EIP721. The ERC721 standard implements a standard API for NFT in smart contracts. The API defines a series of methods and events. See ERC721 methods and events. ERC721 provides basic functions for tracking and transferring NFTs, including transferring tokens from one account to another, obtaining the current token balance of the account, obtaining the owner of a specific token, and the total supply of tokens available on the network. There are other functions, such as approving third-party accounts to transfer the number of tokens in the account.
For example, transferring tokens actually means calling the transfer event of a smart contract deployed by a certain developer, and the ownerOf(uint256 _tokenId) method defines the number as the owner of tokenIdNFT.
Each NFT token is marked with a unique tokenId in the ERC721 contract, and it cannot be changed during the entire contract life cycle. Through the contract address and tokenId, it can be ensured that each NFT is uniquely marked on the entire Ethereum blockchain.
ERC1155
Another widely used NFT standard is ERC1155.
ERC1155, pioneered by the Enjin team, brings the concept of semi-fungibility to the NFT world. In ERC1155, tokenId does not represent a single asset, but an asset class. For example, a tokenId represents “sword”, and a wallet address may have 1000 (1000 Copies) such swords.
The difference between ERC721 and ERC1155 can be illustrated with the sword above. If the user wants to transfer 1000 swords, using ERC721, you need to call transferFrom 1000 times, while using ERC1155, you only need to call transferFrom 1000 times.
Comparison of ERC20, ERC721 and ERC1155
In one sentence: ERC20 maps the number of tokens to the owner, ERC721 maps the unique tokenId to the owner, and ERC1155 is a nested mapping from tokenId to owner to amount.
Metadata extension
Some native digital asset NFTs (such as ENS domain names) are all on the chain without additional data. However, some NFTs need to generate tokenId to mark NFTs, but also need additional data to represent asset attributes or map off-chain assets.
Taking into account such needs, ERC721 provides Metadata extensions as an option, including methods for name, symbol, and tokenURI, which can define the name and symbol of the NFT and return the public URL. Metadata can be stored on centralized servers and IPFS.
Developers can further call these methods to obtain NFT metadata. The picture below shows the Metadata in the ERC721 contract on Opensea.
2. NFT ecology
Let’s take a look at the NFT ecology as a whole. The picture below shows the NFT ecology compiled by Golden Financial Reporter.
Because NFT is developing rapidly, this NFT ecological map is definitely incomplete, and Golden Finance will continue to pay attention. As Kyle Samani, partner of Multicoin Capital, said, NFT has many sub-sectors, many of which are completely independent businesses.
According to NFT characteristics, it can be divided into 7 categories:
Decentralized domain names: ENS, Unstoppable Domains
NFT trading market: Opensea, Rarible, MakersPlace, Mintbase, SuperRare, Dmarket, Async Art, Auctionity, Nifty way, KnownOrigin, WAX
DeFi+NFT: yInsure, NFTfi, NIFTEX, Aavegotchi, MEME, Dego, Whale, CryptoWine
Games: CryptoKitties, Gods Unchained, MyCryptoHeroes, League of kingdoms, Sorare, Axie Infinity
Virtual world: Decentraland, Sandbox, Cryptovoxels, Somnium Space
Collection: Urbit, CryptoPunks, Unisocks
Infrastructure: Openzeppelin, Flow, Enjin, 0xcert, status, Metamask, Nonfungible.com, NFTBank, Counterparty, Cocos-bcx
3. Typical NFT application
Decentralized domain names: ENS (Ethereum Name Service), Unstoppable Domains
ENS is the most famous decentralized domain name service platform. ENS maps human-readable names to blockchain and non-blockchain resources, such as Ethereum addresses, IPFS hashes, or website URLs. ENS domain names can be bought and sold on the secondary market. Unstoppable Domains allows users to replace encrypted currency addresses with readable addresses and is resistant to censorship.
NFT trading market: Opensea, Rarible, MakersPlace, Mintbase, SuperRare, Dmarket, Async Art, Auctionity, Nifty way, KnownOrigin, WAX
OpenSea is currently the world’s largest NFT trading platform and the trading platform currently used by mainstream NFT players. OpenSea was established in January 2018. Users can directly create NFT tokens in Opensea or put NFT tokens issued elsewhere on OpenSea, thus integrating NFTs of various platforms.
Rarible is another popular NFT trading platform, which was only established in 2020, but its innovation is that it released governance token RARI on July 15, allowing the most active creators and collectors on Rarible to vote for any platform upgrade , And participate in management and review. In addition, in order to attract users, Rarible has also introduced a “market liquidity mining” mechanism, and 60% of the total 25 million generations are distributed to users based on weekly purchases and sales.
Other NFT trading markets are similar, with their own users and scenarios.
DeFi+NFT: yInsure, NFTfi, NIFTEX, Aavegotchi, MEME, Dego, Whale, CryptoWine
yinsure.finance is YFI’s decentralized insurance project. yinsure.finance uses NFT to tokenize the insurance policy, which is called yInsure NFT. In addition to owning the NFT insurance policy, you can also trade on the NFT market or participate in mining.
Aavegotchi is an NFT project developed for Aave investors. Each Aavegotchi is an ERC721 standard NFT token, which comes from the mortgage of aToken (interest-bearing equity token on AAVE). Every Aavegotchi can be sold on a platform like Opensea, and it also carries some value.
MEME is the first NFT to be introduced into DeFi liquidity mining. The source was originally a fictitious project by ConsenSys developer Jordan Lyal mocking DeFi liquidity mining. A few hours later, MEME tokens were created and airdropped for free. The gameplay is to pledge MEME to earn pineapple points, which can be exchanged for a limited number of NFT collection cards, all drawn by famous crypto artists. The price of NFT varies according to the rarity. For example, the NFT card of YFI founder Andre Cronje sells for 48 ETH.
DEGO is a DeFi aggregator. It has issued NFT GEGO and airdropped. Users can receive V1-V6 quality GEGO after completing characters as required. DEGO also launched NFT mining. Users can obtain NFT collectibles GEGO by staking DEGO, and can participate in mining, dividends and governance.
Whale was founded by NFT senior collector WhaleShark. Its liquidity mining method is to mortgage NFT works in The Vault to obtain WHALE tokens. Therefore, WHALE has the value of NFT works as support. WHALE holders have privileges such as buying or renting NFT works in The Vault.
Games: CryptoKitties, Gods Unchained, MyCryptoHeroes, League of kingdoms, Sorare, Axie Infinity
CryptoKitties is the first blockchain game that adopts the ERC721 standard. It is a digital cat collection and breeding game based on blockchain technology. Players can buy, sell, and trade. Unlike traditional collectibles, players can also pass two Only CryptoKitties mate and reproduce, and a brand new CryptoKitty with a unique gene is born.
Gods Unchained is a turn-based competitive card game, similar to “Heartstone”. Players need to build a deck of 30 cards and attack to reduce the opponent’s health to 0. The cards on Gods Unchained are NFT tokens and can be traded on the NFT trading platform.
Sorare is a “fantasy football” game on Ethereum, launched in March 2019. Players can form a team and participate in virtual football matches by purchasing NFT player cards. The company has signed agreements with more than 90 football clubs.
Virtual world: Decentraland, Sandbox, Cryptovoxels, Somnium Space
Decentraland is a decentralized virtual reality platform based on Ethereum. It issues token MANA, which is a homogenized token. In Decentraland, users use Decentraland token MANA to purchase LAND. LAND is identified by Cartesian coordinates (x, y). On LAND, users can create their own content, environment or applications. LAND on Decentraland is the NFT token, and of course it can also be traded.
Sandbox, Cryptovoxels, and Somnium Space play similarly to Decentraland. Among them, Sandbox has issued tokens, which are SAND, Somnium Space’s token is CUBE, and Cryptovoxels has not yet issued tokens.
Collection: Urbit, CryptoPunks, Unisocks
Urbit is a peer-to-peer network, which was born as early as 2002. There is a decentralized identity system Azimuth in Urbit. Users are marked by Urbit ID, and each Urbit ID is an NFT token.
CryptoPunks are the first batch of NFTs issued on Ethereum. They are a set of 10,000-pixel cartoon collections.
Unisocks is a token issued by Uniswap for Uniswap in 2019, with an initial issuance of 500. When Uniswap issued coins, 1,000 UNI tokens were airdropped to each Unisock holder. This category only lists the above three. It should be noted that there is overlap between this category and other categories. For example, CryptoKitties, ENS, Decentraland LAND, Gods Unchained cards, etc. can all be used as collectibles.
Infrastructure: Openzeppelin, Flow, Enjin, 0xcert, status, Metamask, Nonfungible.com, NFTBank, Counterparty, Cocos-bcx
Openzeppelin is a blockchain development tool provider and audit company, providing ERC721 and ERC1155 smart contract solidity libraries and development SDK.
Enjin is an online game community creation platform established in 2009. Its vision is to allow players to truly own the ownership of game assets. It submitted the ERC-1155 standard in June 2018 and became the official Ethereum standard in 2019.
Flow is a public chain specially designed for blockchain games developed by Dapper Labs, the developer behind CryptoKitties. Flow will introduce a non-homogeneous token corresponding to Ethereum’s ERC-721.
Wallets such as Metamask are among the NFT infrastructure.
Nonfungible.com and NFTBank are NFT data analysis websites.
4. Thinking about whether NFT will fire
According to the first section of this article, two conclusions can be drawn:
1. NFT is not equal to uniqueness: NFT can only ensure the uniqueness of the tokens on the chain, and cannot ensure the uniqueness of the off-chain assets corresponding to the tokens;
2. Uniqueness on the chain is not equal to scarcity: Scarcity comes from the ratio of power between supply and demand. NFT ensures uniqueness on the supply side chain, but if there is no demand, it will not be scarce.
We start from these two conclusions to investigate whether NFT will be popular.
For NFTs such as ENS, which have no off-chain data, each of them is unique. Whether it is scarce or not depends on whether anyone buys it. Liquidity is difficult to guarantee.
NFTs, such as artworks that require off-chain data, are unique on the chain, but off-chain pictures, music and other works can be copied and downloaded. For people with IP, they are naturally willing to buy NFTs.
Although a single NFT may be a low frequency transaction, the NFT trading platform and its platform currency can capture the NFT long tail market. After all, art is a big market. The same is true for games, providing additional and personalized services to better meet user needs.
The reason why many people assert that NFT will be popular is that some DeFi projects have introduced NFT. On the one hand, DeFi enters the second half and needs to differentiate from existing DeFi products, but it is not the basic DeFi service itself; on the other hand, the meaning of DeFi should be to serve users without permission and with the lowest possible threshold, Ethereum is higher Miners’ fees have caused liquid mining to become a large-scale game that has been criticized by people. It can be said that the introduction of NFT by DeFi goes against the original intention of DeFi. Whether DeFi+NFT will be popular is to say hello.
More off-chain assets on the chain may be a large-scale landing case of NFT. Off-chain assets are different from on-chain assets, which require a centralized trust mechanism. For example, NFT tickets need to be issued centrally by the event organizer. For example, uploading pictures in Opensea and Rarible, and casting NFTs on artworks does not guarantee that the pictures and artworks are original by the uploader. In the future, copyright agencies may be required to cooperate. For example, in the future, real estate certificates may need to be completed by an authority.
Back to the question at the beginning of this article, is NFT the next hot spot? It is difficult to have a unified answer. Some NFTs will be valuable but low liquidity, some NFT platforms will be bigger, and some NFTs will be used.
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