Table of contents
1. The crypto economy in the cold winter needs to be reborn
2. BTC and blockchain are the fuse for the development of Web3
3. Ethereum opens and promotes the prosperity and development of the Web3 ecosystem
4. ERC20 and FT pave the way for the initial cornerstone of ecological development
5. ERC721 promotes NFT creation and NFT-Fi innovation boom
6. FT&NFT both promote and limit the development of the Web3 ecosystem
6.1 The relationship between financial assets and economic activities in reality
6.2 The limitations of FT and NFT restrict industry development and innovation
6.3 The relationship between financial asset classes and crypto-economy in Web3
7. SFT-based DeFi may open a new chapter in Web3
8. Winter has come, is spring still far away?
1. The crypto economy in the cold winter needs to be reborn
The current development and changes in the encrypted world have superimposed the influence of global geopolitics, the epidemic, and the Fed’s rate hike and lock-up, showing three notable features:
First, there is a close positive correlation between BTC and NASDAQ . As shown in Figure 1-1, some people say that BTC is more and more like a technology stock, which indicates that the crypto world is more and more integrated into the global economic system, and it also shows that the current crypto world is more and more affected by the global dollar economic system.
Figure 1-1 BTC and NASDAQ are positively correlated (picture made by Tradingview)
The second is that the supply of stablecoins pegged to the U.S. dollar has generally declined as U.S. dollar liquidity has contracted . This may mean that institutional capital entering the crypto-economy is being withdrawn, resulting in a reduction in liquidity within the crypto-system. According to Dune.com data (Figure 1-2), the total market value of stablecoins has dropped from around $180 billion in May 2022 to $153.7 billion (as of September 13), and the maximum drawdown was close to 20%. The reduction in liquidity has made growth weak, and the total market value of the entire crypto economy has retreated from $2 trillion to about $1 trillion today. The crypto world seems to have entered a cold winter.
Figure 1-2 Changes in the supply of stablecoins (Image source: Dune)
The third is the weak performance of DeFi and NFT, which represent the prosperity of the Web3 industry . As shown in Figure 1-3, the TVL of DeFi dropped from a maximum of 180 billion US dollars to 54 billion US dollars, and the monthly NFT transaction volume on Opensea (Ethereum) dropped from a maximum of nearly 5 billion US dollars to 190 million US dollars. The most important thing is that after innovations such as DeFi’s mortgage lending, Dex, liquidity market making, Yeild Faiming, and NFT’s innovations such as PFP, encrypted art, collectibles, community Meme, and game NFTs, the actual development of the industry has not been driven for a period of time. Instead, DeFi and NFT innovations have encountered bottlenecks, and the development of the industry has been sluggish. Where should we go next?
Figure 1-3 DeFi TVL changes and NFT transaction volume changes (pictures from: Defiliama, Dune)
The answer to this question is very important, and it may determine how long it will take for the crypto world to get out of the predicament, and adapt to the cyclical changes in the macro economy from bears to warmer to usher in rapid and high-quality development, and achieve beyond the past. The scale of the encrypted economy; it may even decide that even without obvious changes in the macro economy, the encrypted world can break through the ice and be reborn, thriving, and usher in a structural spring.
This article is based on the judgment and analysis of the current macro environment and industry development status, by sorting out the logical relationship between the basic elements of industry development and application development, trying to clarify the law of industry development, and making exploratory thinking about the future development of the industry.
2. BTC and blockchain are the fuse for the development of Web3
The emergence of BTC has a clear background (the subprime mortgage crisis in 2008 and the over-issue of the Fed’s currency) and the purpose (to break the centralized currency issuance system and create a decentralized electronic trading system). For this reason, Satoshi Nakamoto created BTC, but Unexpectedly opened a “new narrative” in the encryption world, the latter process we call “Web3”.
As the first programmable cryptocurrency, BTC has realized the currency protocol, established a new currency paradigm, and opened the digital assetization. Coming from the legal currency system in the real world, BTC has the typical characteristics of “1BTC=1BTC”, which makes BTC the originator of the “later concept”-FT (Fungible Token) .
The core underlying implementation logic of BTC – distributed ledger, is formed by connecting each packaged block through a hash pointer to form a blockchain, which is called “blockchain”. At the same time, it was found that the structure of blockchain realized and made BTC, and BTC became the first and most successful use case of encrypted digital currency on the blockchain.
The popularity of BTC has driven people to explore and mine the blockchain in depth. Blockchain (distributed ledger) has the technical functions of “distributed storage across the entire network, multi-party consensus bookkeeping, block chain structure, software smart contracts, and rights and interests certificate”, which make it “open and transparent, loss-proof, anti-loss”. Features such as tampering, traceability, traceability, verifiable rights, and automatic contract execution” can be collectively referred to as “decentralization”.
So far, with the blockchain as the core underlying technology and the development purpose of “decentralization”, Web3 has become A collective that became the spokesperson of the encrypted world and started its vigorous journey.
3. Ethereum opens and promotes the prosperity and development of the Web3 ecosystem
Compared with BTC, the positioning and implementation mechanism of Ethereum based on “smart contracts and decentralized application platforms” greatly unleashes the feasibility of blockchain innovation, guides the blockchain to a broader commercial application field, and brings encrypted digital currency. The explosive growth of FT (mainly ERC20), encrypted digital assets NFT (mainly ERC721), basic protocols, decentralized finance and industry applications has opened up the vigorous development of the Web3 ecosystem.
Web3 ecological development presents 4 stages
According to the 4-year cycle of encryption technology development and evolution, up to now, the Web3 ecological development is mainly presented in 4 stages, and each stage has its “mainstream narrative”, as shown in Figure 3-1.
Figure 3-1 Dividing the development stages of Web3 from the development cycle of encryption technology
(Picture made by Tradingview)
- Decentralized ledger stage (2008-2014):
BTC sings a one-man show, and the blockchain emerges . It focuses on the production, computing power, transaction, transfer, and storage of BTC, involving mining machines, mining pools, exchanges, BTC wallets and other links. At this stage, because of BTC, people discovered the blockchain (distributed ledger) and began to further explore the practice.
- Decentralized computing platform stage (2014-2017):
Smart contracts issue coins with one click, setting off an ICO frenzy . With the development of Ethereum as the mainstay, smart contracts have been fully utilized, decentralized applications (DApps) have begun to appear, and the “ICO” frenzy has produced countless encrypted digital currencies. Regardless of their pros and cons, most of these digital currencies follow the ERC20 token standard and can be exchanged, traded and transmitted indiscriminately, becoming the basic encrypted digital assets for the subsequent development of DeFi.
- Decentralized finance stage (2018-2021):
The three basic protocols of DeFi bring prosperity to the industry . The three basic protocols of Uniswap (DEX protocol), Maker Protocol (stable currency protocol) and AAVE/Compound (mortgage loan protocol) have laid the foundation for the development of the entire DeFi industry, and have produced a large number of replications, combinations and model innovations. “Farm, food” speculation and hype chaos, showing the prosperity of “DeFi Summer” as a whole.
- Decentralized application stage (2020-2022):
The NFT breakout market broke out, and the NFT and application innovation hotspots continued . The NFT based on ERC721 successfully broke the circle and fermented in the fields of art, collection, entertainment, games and other fields. At one time, the price of a single product exceeded 100 million yuan. The NFT creation boom and the NFT market have exploded one after another. At the same time, applications based on NFT infrastructure such as chain games, social networks, domain name services, DID, Metaverse and other hot applications are constantly innovating.
- Next stage: (2022-? Year):
Macro superimposed industry changes, where will Web3 go in the cold winter ? Affected by factors such as global macro-geopolitics, Fed rate hike and balance sheet reduction, and the epidemic, coupled with industry development bottlenecks and the explosion of Terra, 3AC, and Celsius, Web3 has entered a cold winter. Where will it go in the future?Public chain, chain game, DeFi, NFT-Fi, stable currency, social network, SBT, SFT… Who will sound the horn of the next bull market and who will be the protagonist of the bull market?
4. ERC20 and FT pave the way for the initial cornerstone of ecological development
ERC20 defines FT, and FT becomes the first encrypted asset class to meet people’s basic financial needs
The development of the Web3 ecosystem is inseparable from countless encrypted digital assets. They are like the raw materials of various decentralized applications. Without them, there is no foundation for existence and operation. TheERC20 standard defines a homogeneous token FT (Fungible Token), which expresses an abstract unit of quantity and represents an encrypted digital uniform that is “homogeneous, divisible, can be added and subtracted, can be replaced with each other, and is exactly the same”. Qualitative certificate , as expressed by “1BTC=1BTC”, “1BTC=0.3BTC+0.7BTC”.
As early as the start of Ethereum in 2015, Vitalik proposed the idea of realizing FT through smart contracts, and Fabian Vogelsteller proposed the ERC20 standard in November of the same year. After 2016, ERC20 has become the most widely used and well-known digital token standard, opening up a huge industry of trillions of dollars.
With a large number of encrypted digital currencies of varying quality, people immediately have basic financial needs such as storage, transmission, exchange, and transaction, and the risks of centralized applications (such as centralized wallets, exchanges, etc.) are becoming more and more clear. Decentralized finance (DeFi) came into being in the event of bankruptcy, running away, self-stealing, etc.
DeFi meets diversified financial needs and accelerates the prosperity and development of the Web3 ecosystem
Compared with the chaotic rhythm of the last stage of ICO, the development of DeFi seems to be on the right path from the beginning. In the crypto winter that started in early 2018 and lasted for two years, Uniswap (DEX protocol), Maker Protocol (stable currency protocol) and AAVE/Compound (mortgage lending protocol) stood out and laid the foundation for the development of the entire DeFi industry.
As the first AMM DEX protocol on the chain, Uniswap is known to the public with the “X*Y=K” market making curve, which meets the needs of users for permissionless and trustless market making and trading of ERC20 encrypted digital assets. Because it is completely open source, it has become a public product that promotes the development of the industry, setting an excellent example for decentralized exchanges.
Maker Protocol uses high-quality encrypted assets such as BTC and ETH as collateral to create the first decentralized stable currency DAI, which has become a value measure in DeFi to meet the needs of trading and exchange; The risk of volatility, and against the risk of centralized custody and monitoring of centralized stablecoins.
AAVE/Compound is known in the industry as a decentralized mortgage lending protocol. AAVE pioneered the first peer-to-peer lending market (later changed to a lending pool), while Compound created the first peer-to-peer automatic lending model. It is clear that the interaction between lenders and borrowers and the lending pool is more efficient than the manual mode of interaction between users. Both restructured lending services in a trustless and automated way with over-collateralization without credit evaluation.
It should be emphasized that in February 2020, Compound launched the COMP community governance token, and token holders have the right to propose, vote and distribute rights. This behavior established a new paradigm of protocol governance, changed the industry operation mode, promoted the transfer of project protocol centralized management to decentralized community management, and also endowed ERC20 tokens with new meanings.
Based on the open, open source and composable characteristics of the above three major DeFi basic protocols, the same industry can quickly replicate, improve, and combine innovation. Sushiswap (liquid vampire attack), Yearn Finance (income aggregator), Curve Finance ( Phenomenal DeFi products such as stable currency exchange) and Yam Finance (flexible supply of cryptocurrencies); at the same time, many “agricultural” and “food” projects for speculative speculation for liquidity and high yields have emerged, which once triggered Fomo and brought confusion.
According to the classification of the well-known investment institution Multicoin, the DeFi ecosystem presents six major sectors, including stablecoins, transaction layers, oracles, DeFi basic projects, aggregators and wallets, as shown in Figure 4-1. Since 2020, DeFi has continued to explode, and this process is called “DeFi Summer”. In general, DeFi at this stage drove the development of the entire Web3, and ushered in its first heyday in the April 2021 bull market, with DeFi TVL exceeding $120 billion.
Figure 4-1 Six major sectors of the DeFi ecosystem (Image source: Multicoin)
5. ERC721 promotes NFT creation and NFT-Fi innovation boom
ERC721 defines NFT, and NFT presents three development paths
ERC721 was proposed by William Entriken and other three people in January 2018. This standard defines the non-homogeneous token NFT (Non-Fungible Token). This is a concept opposite to the homogenized token FT, which is a new asset class used to express “unique, irreplaceable, indivisible, and incomputable” digital items , such as:
1CryptoPunk#5822=0.3CryptoPunk#5822+0.7CryptoPunk#5822 This division does not hold at all, and CryptoPunk#5822≠CryptoPunk#3655, the two cannot be added or subtracted, irreplaceable, and the price difference is even more than 20 million US dollars. Therefore, NFT is more suitable for expressing unique artworks, collectibles, game equipment, domain names, etc.
At present, the development of NFT mainly presents three paths, one is the creation of the NFT content itself; the second is the innovation of standards and industry applications; the third is the financialization of NFT.
In terms of NFT content creation , NFT has become a paradise for encrypted artists, and has successfully broken the circle and is sought after by people in the traditional art, collection, film and television entertainment, games and other industries, inspiring people’s enthusiasm for creation. In line with the ERC721 standard, NFT creation during this period focused more on the content itself and presentation forms , such as avatars, art, text, domain names, land, social meme, games, identity, and more.
According to the statistics of NFTGO in March 2022, the number of NFT holding addresses is as high as 1.9 million, and the number of NFTs projects is as high as 1,859, which exceeds the total number of global digital currencies in the ICO bull market in 2017 of 1,372. However, the total market value of NFTs is only 16.78 billion US dollars, accounting for about 1% of the total market value of the encrypted market during the same period.
In terms of NFT standards and industry application innovation , it is mainly based on ERC721 for expansion and extension, giving it functions and business logic to meet different application scenarios. Relevant standards are ERC-1155 (game NFT), ERC-1523 (insurance policy NFT), ERC-898 (nested NFT), EIP-1948 (variable information NFT), EIP-2981 (NFT royalty ), ERC-4907 (NFT lease), etc. Relevant application innovations include NFT data, curation, finance, social networking, pan-secondary market, trading market, wallet, Metaverse, etc.
In terms of NFT financialization , NFT has the characteristics of non-homogeneity, it is difficult to price, the threshold is high, and the liquidity is poor. NFT-Fi tries to solve these problems with financial means, and then forms the innovation of NFT-Fi in various subdivision directions. , has become the current hot spot, and the NFT-Fi ecosystem is showing a booming scene.
Committed to solving the pain points of the industry, NFT-Fi has become the current innovation hotspot of Web3
Cobo Veture believes that there are two major pain points in the NFT market, lack of liquidity and flawed pricing.Insufficient liquidity is manifested by high entry barriers, limited transaction accuracy and low capital utilization; pricing deficiencies are manifested in difficult price consensus and insufficient price discovery mechanisms.
The entry barrier is too high : solved by NFT aggregators and crowdfunding methods, such as the aggregator protocols Genie and Gem, and the crowdfunding protocol Mesha;
Low capital utilization rate : solved by borrowing and leasing, such as P2P lending protocols NFT-Fi, JPEG’d, P2Pool lending protocols DROPS, BendDAO and leasing protocols Doubles;
Accuracy problem : solved by fragmentation, such as NFTx, Tessera, Unicly, etc.;
Price consensus and price discovery : solve through game theory pricing models and oracles, such as pricing models; autonomous computing oracles Banksea, NFTbank, Bankless;
In addition, NFT trading is also an important part of the NFT market. At present, it is mainly a centralized NFT trading platform, such as Opensea, Coinbase NFT, Nifty Gateway, Okx NFT, Binance NFT, etc., which often become the main battlefield of blue-chip NFT. However, Sudoswap adopts the SudoAMM automatic market maker mechanism and launches a decentralized NFT liquidity pool for long-tail NFTs. In addition, there is also Element that integrates different public chain NFT trading platforms to provide users with efficient information integration and NFT transactions.
At present, innovation in the NFT-Fi field continues, and various NFTs, standards, basic protocols, and industry applications have formed a relatively complete infrastructure and picture of NFT-Fi, as shown in Figure 5-1.
Figure 5-1 NFT-Fi ecological landscape (image source: GBV)
FT&NFT both promote and limit the development of the Web3 ecosystem
We see that the emergence of FT and NFT has promoted the prosperity and development of the Web3 ecosystem, but at the same time, there are also many problems in the development: some problems are related to the human nature in the development, such as following the trend and catering to the pseudo-innovation of speculation; Business model implementation is related, such as programming language, token economic model, etc.; but there is a more fundamental problem, that is, FT and NFT, as an asset class, have their own limitations that make it difficult to realize certain applications or achieve efficiency. and utility is too low to even hinder further innovation .
In this case, the solution to the problem should no longer stop at FT and NFT itself, but should examine them from a higher and more comprehensive perspective, and then return to a lower-level, more basic logic to find the answer. Therefore, further development requires broader and deeper thinking.
The relationship between financial assets and economic activities in reality
Modern society is basically a contract society . In reality, all kinds of economic activities are carried out around legal currency, financial instruments, derivative assets or physical assets, etc., relying on various contract rules formed by laws and regulations, people carry out various economic activities in an orderly manner, the purpose is to obtain the required various types of economic activities. As an economic return, assets are used to pay individuals, organizations or the entire society for consumption, costs, production inputs, etc. in order to obtain survival and development, thus forming a sustainable development cycle of the entire contract-based social economy. As shown in Figure 6-1.
Figure 6-1 Interrelationship between traditional financial assets and economic activities
Changes in the underlying assets have a fundamental impact on the entire economic system .
For example , in terms of the liquidity of the underlying assets , if the US dollar in circulation around the world continues to be issued, the prices of various assets around the world will rise, and various economic activities will become active and profitable; At the same time, the prices of various assets fell immediately, and economic activities were also difficult due to “inflated costs” and “liquidity drying up”. The Federal Reserve is well versed in the underlying logic of economics and finance, and is proficient in using this trick to repeatedly scour the global wool.
For example , from the innovation of the underlying asset class , BTC broke the convention of centralized issuance of currency, created the first decentralized, trustless programmable encrypted digital currency, and triggered the deconstruction of the traditional Internet and the construction of the Web3 value network from the bottom. This move is like “the butterfly in Florida flapped its wings”, and the “Web3 hurricane” blew up around the world, giving birth to the “encrypted economic system”, which once reached a market value of 3 trillion US dollars. It is believed that with the continuous innovation, development and improvement of technical standards, assets, basic protocols, and industry applications in the field of Web3, its influence and coverage will be more universal and extensive.
Therefore, it can be said that the impact of underlying assets on upper-level economic activities is global. Asset types, attributes, and roles can not only promote the conclusion of contracts and economic innovation, but also limit or even hinder their innovation and development due to their own limitations. .
The limitations of FT and NFT restrict industry development and innovation
As we mentioned earlier, ERC20 and FT have established and promoted the development of the DeFi industry. DeFi TVL once reached 180 billion US dollars; ERC721 and NFT brought NFT creation and NFT-Fi innovation boom, and the total market value of NFT has reached 30 billion US dollars. The two have successively promoted the prosperity and development of Web3.
On the one hand, the market value represents the prosperity of the market, but it does not necessarily reflect the real value supported by industry demand. It is often a big bubble blown by superimposed capital on top of the real value . Lack of real demand support and transitional financialization make both DeFi and NFT-Fi at risk of bubbles.Therefore, we should consider which innovations are supported by real needs and application scenarios, and which innovations are only catering to speculation and hype, which may eventually evolve into noise in the development of the industry.
The close correlation between the underlying assets and the economic development of the upper layer inspires us to discover the limitations of the two major types of assets, FT and NFT, as well as obstacles to further innovation in the industry.
Limitations and obstacles in FT and DeFi
FT lacks credit and actual value support, and the price fluctuates wildly . Different traditional fiat currencies have a central credit endorsement corresponding to the actual wealth value. It is also different from companies that increase their value and then issue stocks or bonds. Encrypted digital currencies are issued through smart contracts, and some are just a string of software codes and “pies” drawn in white papers. This is the so-called “consensus value”, and the real value needs to be captured in the later development, and there is uncertainty about whether it can be realized in the future. Therefore, the price of encrypted digital currency fluctuates violently, and in the initial stage, it more satisfied the needs of speculation and trading.
It is easy to be manipulated by large capital, the mortgage assets are easy to be liquidated maliciously, and the stable currency has become an anchorless thing . Since the assets on the chain are open and transparent, everyone can check, and the rules are transparent, this feature can be used to snipe DeFi protocols that carry out mortgage lending business under severe market fluctuations, forcing users’ assets to be maliciously liquidated, causing huge losses. . In addition, stablecoins are issued by pledging mainstream encrypted digital currencies. Since the price of encrypted currency fluctuates by 20% or even more than 50%, the value of the mortgaged assets is greatly reduced, resulting in the de-anchoring of the stablecoins, and even entering a death spiral, and eventually the system collapses. Luna/UST, for example, brings catastrophic losses to both individuals and institutions.
The native assets on the chain cannot realize the integration of on-chain and off-chain, and the market space is limited . FT defined by ERC20 belongs to the original assets on the chain. Assets and value are limited to circulate in a closed encryption system. The constructed DeFi system is independent of the real financial system and cannot realize the integration of the two worlds on the chain and off the chain, which means more The large market space is insulated from this.
Over-collateralization, lack of credit expansion, and shrinking overall liquidity reinforce over-financialization .Although AAVE, Compound, and Maker Protocol are generally considered mortgage lending protocols, there is no credit expansion. Over-collateralization of high-current and high-value encrypted assets, lending stablecoins or other encrypted assets, but reducing liquidity in the entire system, may restrict the overall development of the encrypted economy. In addition, this model is difficult to attract institutions to participate, because traditional institutions cannot use low-current high-value assets or institutional credit to expand liquidity, while obtaining credit loans to expand liquidity is an advantage of institutions in traditional finance. However, through the “matryoshka”-style revolving loan, it can meet the trading needs of individuals to go long or short, but it has contributed to the atmosphere of speculation and over-financialization.
Investment in the primary market is locked for a long time, it is difficult to release liquidity, and the utilization rate of funds is low . Individuals or institutions participate in various rounds of project financing, and the obtained project tokens have different lock-up periods and release rules, which increases the risk of early investors and is not conducive to investors with temporary liquidity needs. If the lock-up share is represented by NFT (or SFT mentioned later), it will neither generate selling pressure in the secondary market, but also solve the liquidity demand. More importantly, a liquid primary trading market can be created. However, due to the inherent characteristics of FT assets, it is difficult to do this, hindering further innovation.
Based on the construction of homogeneous assets, DeFi is difficult to meet differentiated needs and hinders the entry of traditional institutions . For example, Uniswap V2 realizes indiscriminate market making, but to improve the efficiency of capital market making and meet the differentiated market making of tokens in different price ranges, NFT defined by ERC721 is needed to achieve this. This is the V3 market making method. In addition, for mortgage loan agreements such as AAVE/Compound, it is difficult to provide loan methods with flexible terms and different interest rates, but only provide undifferentiated demand mortgage loans, which cannot meet the differentiated high-level needs of institutional users; , the liquidation is automatically executed, and there is no time limit conversion, which brings greater risks, and ultimately shuts out the majority of traditional financial institutions with strict risk control.
Limitations and obstacles of NFT and NFT-Fi
There are many pictures of NFTs, but few high-quality blue chips . As stated above, the number of NFT creations exceeded 1,859, exceeding the total number of global digital currencies in the 2017 ICO bull market of 1,372. However, the total market value of NFTs is only 16.78 billion US dollars, accounting for about 1% of the total market value of the encrypted market during the same period. The ones that really have blue-chip consensus are CrptoPunks, BAYC, MAYC, Azuke, CloneX, Doodles, etc., and they contribute more than 90% of the total market value of NFT. Most of the NFTs are just pictures with little or no value, which reflects that the NFT market is still at a very early stage, and the order is being established through exploration, and the process is chaotic and full of bubbles. If you don’t know enough, you still need to “cross the river by feeling the stones”. Before “the stones are rounded”, it is inevitable to collidewith each other .
The emerging technology maturity curve released by Gartner in 2021 also confirms this view, as shown in Figure 6-2.
Figure 6-2 Technology maturity curve of NFT (Image source: Gartner)
The expression content is more scarce, and the expression use value is less . Most NFT creations focus on content form and make a fuss about scarcity. This aspect is more of a market for artworks and collectibles, a paradise for artists, not a “dish” for most people. Although there are expressions of business such as ERC-1155 (game NFT), ERC-1523 (insurance policy NFT), ERC-898 (nestable NFT), EIP-2981 (NFT royalty), ERC-4907 (NFT lease), etc. Standard innovation of logic and application scenarios, but the number of related NFT products is still relatively small.
There is a lot of infrastructure and very little real demand . In the innovation boom of NFT-Fi, various financial infrastructures such as mortgage lending, fragmentation, leasing, and derivatives appear, but dozens of NFT-Fi projects jointly snatch about 10,000 users of a few blue-chip NFTs. According to Dune.com data on September 14, the NFTfi protocol has accumulated 13,699 users, while JPEG’d has only 276 users, which is too much. As shown in Figure 6-3.
Figure 6-3 The cumulative number of users of the NF-Fi project (Image source: Dune)
The low liquidity of NFTs has led to doubts about the feasibility of the business model. “NFTs” seem to want to replicate the revival of DeFi, but this inertial thinking is likely to be a “sweet trap” at the moment . A typical example is that the BAYC floor price fell to 72 ETH on August 18, which caused the BAYC #533 health factor to be less than 1 to trigger the liquidation auction mechanism, and no one bid triggered a chain run, the floor price continued to fall, and the peer-to-peer pool liquidity was exhausted and other chain reactions. , which eventually led to a liquidation crisis in BendDAO. Although BendDAO has successfully rescued itself through its governance proposal, the viability of its business model has been questioned. The fundamental reason is that, unlike DeFi built on high liquidity, which has a good market transaction depth, NFT liquidity is very low, even 0 in some periods, which is the “lack or no market transaction” faced by all NFT-Fi projects. depth” common problem . Liquidity is the core requirement of financial business. If the core demands are lost, the foundation for the existence of the project will also be lost. Through a series of “saucy operations” of the business model, the project can temporarily survive, but after all, the future is worrying.
There is a lot of financialization of NFTs, and there are very few financial NFTs . NFT has realized the digitalization of content on the chain. In order to solve the problems of low liquidity, difficult pricing, and high threshold of NFTs, a large number of financial methods have been introduced. However, due to the characteristics of ERC721 being non-homogeneous, inseparable, and non-computable, ERC721 can express some simple differentiated requirements. For example, Uniswap V3 uses ERC721 to express market-making certificate (LP NFT) to improve capital utilization. Centrifuge uses NFT documents to express As a collateral asset, it is committed to mapping off-chain assets to on-chain. But it is difficult to express financial needs of complex logic, and the limitations of ERC721 NFT itself limit innovation. Therefore, more complex financial business logic is not the capability category of NFT-Fi, but the main battlefield of financial NFT, but there are basically no financial NFTs that match complex business logic .
To sum up the above points, ERC721, as the mainstream standard of NFT, is mainly used in NFTs such as art and collection, and pays more attention to the expression of content itself and presentation form. Although a large number of financial infrastructure built around it has been hot, most of the business development has slowed down or even stopped due to factors such as NFT’s low liquidity, low market transaction depth, doubtful business model, and lack of real user needs.
Recent events are confirming this article’s analysis and views. On September 13, the NFT rental agreement Rentable announced the closure. Its founder Emiliano Bonassi summed up the lessons in his Medium, believing that using the experience in DeFi in NFT-Fi is likely to be a trap, and the initial goal setting and assumption framework of the product need to be verified repeatedly. , because “assumptions and goals on paper” may not be the motivations and goals of the user.
One of the most important lessons learned is that narrow positioning makes it very limited. However, the author believes that the limitations and obstacles of NFT-Fi may not mainly come from the limitations of financial means, but fundamentally from the NFT itself. It is the characteristics of the NFT itself that limit its scalability, flexibility and innovation, and it is more difficult to Satisfy higher-order financial needs . If you realize this, you will find that NFT-Fi imitates DeFi and follows the trend of innovation. It is like building a building in the air, and it is futile.
To solve this problem, we should no longer stop at NFT to innovate products, because products can solve one kind of problem, and standards can solve one kind of problem . Through the innovation of standards, the innovation of asset classes will be realized, and the sky will be cleared, applications will be upgraded, and greater development space will be obtained.
This is the new asset class SFT that will be discussed later. In order to better understand the major innovations brought by SFT and its significance to the development of Web3, we need to first sort out the relationship between financial asset classes and the encrypted economy in Web3.
The relationship between financial asset classes and the crypto-economy in Web3
In 6.1 and 6.2, we have analyzed the relationship between financial assets and economic activities in reality, as well as the specific performance of the limitations of FT and NFT restricting industry development and innovation. The relationship between asset classes and crypto-economy is sorted out and summarized.
Figure 6-4 Interrelationship between encrypted assets and encrypted economy
As shown in Figure 6-4, corresponding to the traditional financial world, Web3 is a digital contract economic system built around the underlying encrypted digital assets through smart contracts. The types, characteristics and capabilities of the underlying encrypted digital assets will determine the construction method of the upper-layer smart contracts, so as to affect and determine the feasibility, robustness and sustainability of the encrypted economic system . For example, the FT defined by ERC20 is suitable for building DeFi applications with common needs and high liquidity, but it is not suitable for meeting differentiated financial needs; ERC721 NFT is more suitable for expressing unique and inseparable digital content of art and collection, based on which The various NFT-Fi of ERC721 are limited by the characteristics of ERC721 NFT itself, and the commercial feasibility and execution efficiency need to be verified.
The three co-founders of Solv Protocol conducted in-depth and detailed discussions on the relationship between encrypted asset classes and DeFi in their sharing on the theme of ” ERC-3525: Origin, Design and Practice “, as shown in Figure 6-5. On the basis of serious study, the author will cite relevant opinions and conclusions, and sort out and summarize some of its contents, so as to better present the analysis and opinions of this article.
Figure 6-5 The relationship between asset classes and DeFi innovation (Image source: Solv team)
The figure clearly shows that, whether in the physical world or the encrypted world, all assets can be divided into three categories: homogenization, semi-homogenization and non-homogenization. Homogenized assets include currencies, stocks, standard options and futures derivatives, precious metals, etc.; semi-homogeneous assets include various financial instruments, semi-standard traditional assets such as carbon assets, loyalty cards, membership cards, gift certificates, etc.;non-homogeneous assets include Qualitative assets include artworks, collectibles, game props, most physical items, real estate, etc.
The encrypted economic system formed by smart contracts based on ERC20 FT homogenized encrypted assets mainly expresses unified rights and interests; while the encrypted economic system formed by smart contracts based on ERC721 NFT non-homogeneous encrypted assets mainly expresses diversified rights and interests ; And higher-order financial needs require new standards to define new asset classes to break down limitations and create feasibility . Asset class innovation will bring breakthroughs and innovations in DeFi, and the Solv team achieves this by launching the ERC3525 standard to define semi-homogeneous assets SFT (Semi-fungible Token).
SFT-based DeFi may open a new chapter in Web3
Similarities and differences between SFT, FT and NFT
ERC3525 defines the semi-homogeneous encrypted asset SFT, which is a general standard of the same level as ERC20 and ERC721. It fills the gap between FT and NFT, and together covers all digital assets in the encrypted world .
The structure determines the function, and the different implementation methods of the three types of standards determine their respective properties, performance and application scenarios. The so-called asset is a collection of the quantity and form of rights, and different assets are balanced between the two, with different emphases. ERC20 FTsimplifies the form of rights and simply describes the size of rights, which is the so-called “1BTC=1BTC”, “1BTC=0.3BTC+0.7BTC”. ERC721 NFT omits the size of rights and focuses on the expression of rights, such as the avatars of CrytoPunks, each of which is unique and cannot be split, representing the owner’s complete ownership. ERC3525 SFTdescribes both the form of rights and the size of rights. It is a financial NFT suitable for expressing digital items that contain quantitative characteristics and sometimes need to be merged or split, such as financial instruments, advanced financial contracts, land, and everything else. A standardized commodity with an intrinsic quantity.
Decentralized financial applications corresponding to the three types of encrypted digital assets of FT, NFT and SFT can be summarized and defined as FT-Fi, NFT-Fi and SFT-Fi respectively. The three types of Fi are combined to form a complete DeFi .
Application Scenarios of ERC3525 SFT
Too standardization can only provide basic financial services, and non-standardization limits financial attributes and scalability. Therefore, in view of the semi-standard between the two, it is a more flexible, expressive, and scalable solution. , compatible with the previous two capabilities, and is more suitable for expressing high-level financial needs. As shown in Figure 7-1.
Figure 7-1 Blue ocean and protocol support for SFT application scenarios (picture from: Solv team)
SFT can create various financial NFT assets and apply them to various decentralized financial scenarios: such as building various advanced digital financial assets, such as certificates of deposit, bills of exchange, bonds, options, swap contracts, etc.; developing Web3 or Metaverse advanced virtual items and equipment, such as the merging, splitting, upgradeable and merging game equipment of the Metaverse virtual land, etc.; as a digital asset wallet that can be transferred and split, such as encapsulating different types and quantities of encrypted digital assets into one SFT, such as 1000 PHA, 500 Dot, 1 BAYC NFT and another SFT packed into one ERC-3525 SFT. A very important point is that SFT can realize real-world assets on the chain, thereby opening up a larger market space… The above functions and application scenarios are difficult to achieve or inefficient and uneconomical for FT and NFT, while SFT highlights its advantages. .
Combination of ERC3525 and applications in the industry
Since the release of the ERC3525 standard, it has attracted strong attention and heated discussions in various social media and communities. Everyone is exploring how to use ERC3525 for business innovation. For example, some people suggest that Uniswap V3 adopts ERC3525 to provide more flexible and differentiated market making services; SBT can use ERC3525’s own value attribute to more flexibly adapt to the “credit score” scenario; wallets or ordinary addresses can use ERC3525 The “anti-poisoning” function of the coin mixer avoids the “laying gun” incident that uses the coin mixer Tornado Cash to poison celebrity wallets; Metaverse game developers use ERC3525 to realize the split and fusion of game equipment; ERC3525 can even be used as a visualization , tokenized smart contracts, and develop more flexible business logic, such as an industry collaboration platform for supply chain tracking and management… I believe that with the deepening of everyone’s understanding and practical exploration of ERC3525, there will be more and more protocol implementations that are compatible with ERC3525. combination to create more application cases.
SFT will push DeFi into the next phase
Open a new chapter of Web3
The traditional Internet focuses on information release, information sharing and information co-construction. In Web3 based on blockchain, ERC20 FT realizes digital assetization to build FT-Fi; ERC721 realizes content assetization to build NFT-Fi; ERC3525 belongs to financial NFT and realizes asset digitization. In this way, SFT-Fi is constructed; three standards and asset classes, as well as the constructed DeFi system, are jointly committed to promoting the construction and development of the Web3 Value Internet . As shown in Figure 7-2.
Figure 7-2 Building a DeFi system based on FT, NFT and SFT
At the same time, ERC3525 SFT will greatly increase the diversification of on-chain assets, increase the number and scale of financial NFTs, and meet higher-level financial needs; in particular, DeFi enters the real economic system and realizes traditional assets on the chain, which is worth trillions of dollars. It is the scale and volume measured in units. At that time, DeFi will usher in a broad market space based on real financial business needs.
In the previous section 3, we divided the development of Web3 into 4 stages, perhaps the next stage will be the decentralized financial NFT stage (2022-? Year) . At this stage, ERC3525 SFT has broken through the bottleneck of industry development, condensed “new consensus”, opened “new narrative”, released development potential, opened up market increment space, or will promote Web3 to open a new chapter.
Winter has come, is spring still far away?
As the macro environment continues to deteriorate, the global economy has fallen into a deep winter, and the crypto world is also following suit, which is unavoidable. In addition, the total market value of cryptocurrencies has dropped to around US$880 billion again in recent days, which is close to the level in early January 2018, bringing the chill of “the north wind is blowing” and adding a bit to the industry. The wind is shaky and the water is cold, and the strong man will never return once he goes.”
However , it is not without warmth in the cold winter. It is the market that turns cold. Web3 Builders have never stopped moving forward . In fact, they have been surging . In the future; the mainstream ecological public chain Ethereum will complete the merger and become a PoS public chain. The construction and improvement of infrastructure such as the value settlement network will surely bring about the rapid development of ecological applications such as DeFi, and bring new narratives and new opportunities to the industry; Polkadot developers The number continues to grow, XCM is integrated by more and more parallel chains, assets are cross-chain, and the interconnection of ten thousand chains will present more innovative applications; the proposal and practice of SBT, Web3 is one step closer to “Desoc”; and the ERC3525 standard may promote DeFi has scored twice, accelerating the construction of an Internet of Value that integrates on-chain assets.
When we look back on the history of the crypto world and emerge from each bear market, we will write a new narrative and present a new scene. Bitcoin, Ethereum, DeFi, NFT, Chain Games, and the Metaverse have all made their debut in turn.Maybe this time it is the home of SFT. What kind of scene will it bring ? We will wait and see.
There is an Arabic proverb: “The dogs may bark, but the caravan movers on.”
As the author once wrote in a poem “I have a dream”: “A fertile land that can be cultivated, the winter moon sows hope… Pick up the hoe with new mud and welcome the warm sun of the new spring. “
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/from-ft-nft-to-sft-defi-or-will-open-a-new-chapter-of-web3/
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