Why is asset NFT the only way for DeFi?

[Introduction] This article is an article written by Solv co-founder Zhou Zhiqiang, explaining why the NFTization of assets is the inevitable direction of DeFi development. In the Solv team, the author has the most frequent and most in-depth exchanges with investors and partners, and he has the deepest research on DeFi products and practical technologies. Solv chooses NFT asset innovation as its main direction. The author is one of the key decision makers and has a deep understanding of the motivation, meaning and value behind it. However, in actual communication, we found that many DeFi users, even experts, have insufficient understanding of the NFTization of digital assets.

To this end, the author specially wrote an article to explain the long-term value of NFT assets to DeFi from the perspective of capital utilization efficiency. The logic is very strict and interlocking, and it is worth recommending to everyone. It should be noted that the non-homogeneous fund pool is not the only reason we are optimistic about NFT, but it is indeed one of the important arguments. This article is more professional and aimed at DeFi professionals around the world. Its English version has been published in advance. I suggest that the author publish a Chinese version to promote professional Chinese DeFi technology and exchange of ideas. With the consent of the author, it is reproduced in my public account. Experts are welcome to criticize and correct. —— Meng Yan

People in the Crypto field talk about NFT and DeFi every day. As a carrier of rights and interests, NFT can well describe rich information and represent the unique ownership of assets such as artworks, collectibles, and game props. These assets are inseparable from the financial services provided by DeFi, including trading, lending, splitting, and ETFization. NFT can also be used to describe complex financial contractual relationships, thus becoming sheets of financial bills, representing the holder’s rights and interests protected by smart contracts in the DeFi world.

As a DeFi practitioner, I am very concerned about the second type of assets mentioned above, that is, NFT assets that represent financial papers. I firmly believe that the volume of such assets will not only far exceed the total value of collectibles and art NFTs in the near future, but may also exceed the total value of all DeFi projects on CoinMarketCap.

This is a bold prediction, because it is equivalent to saying that in the future DeFi field, users’ asset certificates will use NFT as a value carrier instead of the usual ERC-20 homogeneous token.

This is counter-intuitive. After all, even today, the homogeneous token represented by ERC-20 is overwhelming in size, and even a fraction of NFT assets can not be touched. And because of the perfect infrastructure, most of the DeFi innovations are still stuck on ERC-20, so that when I was promoting Solv, the biggest question I encountered was, what you want to do, why Do not use ERC-20? What do you want to build DeFi protocol based on NFT (people currently mainly use ERC-721 and ERC-1155)? Isn’t the certificate based on FT (ERC-20) more homogeneous and more liquid? Why bother to do this?

I hope to answer this question from a special perspective in this article, and my discussion will start with Uniswap V3.

Uniswap’s construction of a non-homogeneous capital pool is a leap of innovation

The innovation of Uniswap V3 that attracts me the most is to upgrade the homogeneous fund pool to the non-homogeneous fund pool, support users to allocate funds in a personalized manner, and fundamentally improve the utilization rate of funds. I think this is the only way for all fund pool products, because in the long run, with the addition of institutional users and more regular troops, users will have more and more demand for fine-grained allocation of capital risk and return combinations. . This will force many DeFi protocols to follow UniswapV3 to upgrade their own fund pool model, allowing users to more personalized allocation of funds.

Let’s take a look at how Uniswap upgrades its own fund pool to a non-homogeneous fund pool, so as to provide users with more flexible fund allocation options?

Compared with V2, the biggest change of V3 is to allow users to flexibly adjust between urban areas, thereby greatly improving the utilization of funds. In the past, the funds in the Uniswap fund pool were evenly distributed on the entire curve of x*y=k, and now it is possible to flexibly select a smaller range for market making. As shown below:

Why is asset NFT the only way for DeFi?

https://uniswap.org/blog/uniswap-v3/

It is worth noting that the key to this in V3 is to improve the compatibility of the fund pool and allow funds to be “individualized.” In contrast, V2 requires all funds to be undifferentiated. For users, if they choose to put funds into V2, they can only accept unified management and utilization. If you put it into the V3 fund pool, you have the right to choose. Because each block of funds in the V3 fund pool can be clearly divided by the owner, the difference between funds is not only the difference between the amount, but also the difference between the urban area and the accumulated handling fee.

Based on this clear division capability, Uniswap is able to give users the ability to choose. At present, users are generally willing to greatly compress funds to maximize the benefits of market making. Take the ETH/USDC pool (July 15, 2021) as an example. The distribution of funds is as follows. It can be seen that most people are around 2104 The price of USDC/ETH is market-making. In the case of Uniswap V2, the figure below should show a uniform distribution rather than a centralized distribution, because everyone evenly puts funds between the infinite and infinitely small prices of ETH compared to USDC.

Why is asset NFT the only way for DeFi?

https://info.uniswap.org/#/pools/0x8ad599c3a0ff1de082011efddc58f1908eb6e6d8

If the DeFi protocol can operate according to completely unified rules for the composition of a certain fund pool, then this fund pool can be called a homogeneous fund pool, which means that the fund composition in this fund pool is homogenized. There is only a difference between the amount of each fund and the other. This is the same reason that we say that Bitcoin is homogeneous, because every Bitcoin is exactly the same, and people have only the difference in the number of Bitcoins.

If the funds in the fund pool are individualized, and each part of the fund is not only a difference in quantity, but a difference in attributes, then this fund pool is called a non-homogeneous fund pool.

Therefore, we can conclude that V2 constructs a homogeneous fluidity pool, and V3 constructs a non-homogeneous fluidity pool. V3 can provide users with more flexibility to choose between urban areas. The core is that the non-homogeneous liquidity pool allows users to retain their personalization while depositing funds in the same liquidity pool.

Why is asset NFT the only way for DeFi?

Non-homogeneous fund pool is the only way in the development process of DeFi products

Let’s take a look at other non-homogeneous fund pool products.

Armor, a broker specializing in helping users place insurance policies on Nexus Mutual. As a middleman, Armor’s main job is to accept orders from policyholders and help them insure corresponding products. For all insurable projects, Armor has built a fund pool contract to uniformly manage the demand from the insured. Each insured can choose different projects and any time within 30-365 days of insuring, which makes the insured funds appear diversified. The funds in the fund pool are in a state of “non-homogeneity”.

88mph, a fixed-rate lending agreement. The logic of 88mph is very similar to Armor, except that it focuses on borrowing the track. It mainly helps users obtain a fixed deposit rate of return through risk sharing. 88mph has constructed different non-homogeneous fund pools for different projects, providing deposit users with a diversified choice of deposit maturity.

It can be said that in all DeFi product tracks such as trading, lending, insurance, futures, options, etc., the need to provide more abundant capital allocation options for professional institutions and other capital pool suppliers is an inevitable trend. In the trading track, Uniswap provides users with more flexible fund allocation options and greatly improves the utilization rate of funds; with the addition of low-liquidity collateral, the lending track provides a flexible term choice for both borrowers and lenders, thereby realizing regular borrowing It will be very necessary; the underwriters in insurance racing products should have more flexible choices about their insurance items, so as to better balance the risks and benefits they bear, and so on.

NFT is the ownership bill that the non-homogeneous fund pool has to choose

Whether it is Uniswap, Armor, 88mph, and other non-homogeneous fund pool products, all use NFT as a proof of ownership of the fund pool. In other words, the provider of the fund pool will receive NFT to represent the right to withdraw funds from the fund pool.

Taking Uniswap V3 as an example, in order to ensure that each part of the funds has a clear ownership, the Uniswap team uses NFT-a carrier that can describe rich information to record the ownership of different “personalized” funds in the non-homogeneous fund pool. Each NFT can be specially customized, representing the user’s diversified capital position.

Why is asset NFT the only way for DeFi?

Going back to the question at the beginning of our article, why do we build DeFi protocols based on NFT (people currently mainly use ERC-721 and ERC-1155), and FT (ERC-20)-based certificates are not more homogeneous and more liquid NS?

When the fund pool for product construction is non-homogeneous, it is not impossible to build it based on ERC-20. The way to achieve this is to extract funds with the same attributes from the non-homogeneous fund pool to form a small homogeneous fund pool. Create different ERC20 smart contracts based on each homogeneous fund pool.

There are two main problems with this:

  1. The cost of team development is too high. Similar to Uniswap V3, once the user’s right to choose between urban areas is opened, there will be hundreds of urban areas. We don’t expect the team to deploy thousands of contracts for a product.
  2. For users, too much ERC-20 will bring a higher cost of understanding to users. Many DeFi products like to name ERC-20 with complicated information such as “2020-10-31-Borrow-5%”. This is still very confusing what the information represented by this Token is.

Therefore, in order to avoid the above-mentioned drawbacks, some products adopt solutions that limit the number of users’ choices. For example, only supports a few loan term options (such as Yield, Pendle), only supports a few underwriting term options (such as Cover), and so on. They sacrifice the power of user choice, this approach has disadvantages and advantages, we will explore in the future.

In summary, although ERC-20 is more flexible and more liquid than NFT, if you want to build a non-homogeneous fund pool product, you can only choose NFT as the proof of ownership of this fund pool.

Write at the end

It can be seen that giving the fund provider more options means that the funds will have personalized attributes, which will inevitably form a non-homogeneous fund pool, and DeFi projects will have to use NFT to define the ownership of user funds. This is the core point of the NFTization of DeFi that I am referring to.

When NFT fully enters DeFi, non-homogeneous fund pool products will provide fund suppliers with a richer choice of risk and return allocation. Zero entry barriers and abundant choice rights will form true financial freedom. The natural decentralization of DeFi has achieved zero entry barriers, but how to better meet the diversified needs of liquidity providers and how to create richer risk-return allocation options will become the next stop of DeFi’s path to financial freedom.

We collectively call all NFTs created in financial scenarios that represent certain financial rights as Financial NFTs to distinguish such NFT assets from artworks and collectibles NFTs. We created Solv Protocol, committed to introducing Financial NFTs into the DeFi world, and created a brand-new Token standard to support such assets and meet common split and merger requirements. For details, please see 

https://github.com/ethereum/EIPs/pull/3525.

references:

[1] Introducing Uniswap V3,

https://uniswap.org/blog/uniswap-v3/

[2] How Does Visor Integrate With Uniswap V3?

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-is-asset-nft-the-only-way-for-defi/
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