Back to the future — NFT Rediscovered

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  • This article is translated from the work of founder@Dego China Community, Mr Heifeng Li. Dego core team would like to express ts gratitude for his contribution to the Community and wish him a good fortune.

1. Preface

Since the emergence of Internet, Homo sapien society has embraced a rapid leap, where the very way of information production and transmission is over throned. Hence, the course of civilisation was also changed, for good. Decades after the Internet singularity, mankind clings to stitching patches on the foundation of Internet with the new protocols, programming languages, advancing hardware and more, making themselves too obsessed to explore the next storm that could sweep across civilisations. Long we have waited to witness another revolution comparable to the birth of Internet.

12 year ago, the genesis of first block on Bitcoin blockchain made it possible for people to actually own their assets and transfer value beyond boundaries, for the very first time. If the Internet serves as infrastructure to the information era, then the blockchain is an expedition into the future, where the blockchain is facilitating better exchange of assets and value on the basis of simpler transmission of information, pushing worlds to evolve for the greater good.

On the eve of blockchain era, we witnessed the emergence of native assets on original blockchains and experienced the DeFi-mania. Financial systems on-chain and off-chain have not converged yet, while assets in both worlds are floating in parallel. The key to solve this problem lies in issuing assets on blockchain, where the best asset carrier might just be Non-Fungible Token (NFT).

In previous use cases, people tend to ground their imagination to the scarcity of NFT, which was the biggest misunderstanding of it. It is empiricism that leads to narrowed minds, but NFT’s utility should mimic or be in the service of Law of things in reality.

Every step that mankind advanced are not just technology thrusted, but more of ideal driven. This thesis seeks to lift seals and expands thoughts on NFT from molecule level, which might inspire the crypto space.

2. Transfer of value

Once upon a time, slow is the travel even by horses, long is the waiting for lover’s letters, it takes a lifetime to love the one.

Nowadays, with the progress of science and technology, information has no boundary, and communication across time zones has become common. The Internet has become the rigid demand of our basic society, and the transmission of network information has become an essential component of communication. The communication logic of Internet information is to convert traditional different types of information into machine-readable 0/1 binary data through technical means, and then achieve information interconnection through data transmission among networks.

Under the continuous development of science and technology, the Internet is evolving. From the ADSL dial-up, broadband and then fiber, mobile communications has experienced five advancements. The physical hardware performance as Moore’s law repeatedly take effect by leaps and bounds, and the Internet in the technical innovation has brought the development on the content delivery, reflected in the two dimensions of the ideology of form and content.

The development of content digitization is a process of constantly expanding the amount of information that can be carried. From the early text digitization to pictures, audio and video, the content forms that can be carried and transmitted on the Internet are constantly enriched, and the derived functions and services are increasingly permeated into daily life.

In the Era of Web1.0, the Internet was only used as an information sharing platform, and the generation and consumption of content were often 1 to N. Discourse groups and early Internet companies controlled the role of content producers, and Internet users, as consumers, could only passively receive information from the Internet. The stage is equivalent to the functional reproduction of traditional books, newspapers and other information carriers by the Internet, without giving new connotation with the characteristics of the Internet.

In the Web2.0 era, the Internet changed from the ‘information sharing’ to ‘information co-construction’. the power of Internet users in the Internet changed from ‘read only’ to ‘write’, derive concept such as the UGC, PGC, equivalent to ideology and discourse dispersed to individual users on the Internet. Everyone has both consumers and producers dual role. As a result, the magnitude of Internet content has exploded, leading to the demise of portal websites that take PV, UV and other parameters as evaluation indicators. and the birth of community-based Internet platforms that take user quality as the core competitiveness. From the popular BBS and Blog of PC Internet in the early days to Youtube, Facebook, Twitter, Quora and other content production communities of mobile Internet today, they are all products of the Era of Web2.0.

To sum up, we may say that the development of the Internet = the development of digital content. In the past decade the Internet has brought the heritage of human civilisation, but it also set the constraints for the future of the Internet after all. Its application has not out of content (information) category, and gap with one of the important proposition of Web3.0 — value of the Internet. In other words, while the binary data information delivered by the Internet can generate value, the Internet cannot carry value itself.

So where does the value come from?

In the real world, the best manifestation of value is assets. Real estate, stocks, bonds and Copyrights are all assets. These assets and the Internet have not really integrated, and there is no “real assets” on the Internet. As a simple example, User A sends User B his property ownership certificate over the Internet, but User B gets only one picture, and there is no transfer of property value.

To cope with the development dilemma of the value Internet, the simplest idea is to transfer assets to the parallel world of the Internet to achieve efficient transmission of real assets in the network, which can be understood as ‘assets online’. However, the idea obviously fails due to the difficulty in determining the rights of assets and other issues. At this point, the blessing of blockchain technology may bring some new ideas for the transfer of assets.

The definition of assets on the original chain: assets originating in the blockchain world, disconnected from the real assets and completely decentralized. Such as BTC, ETH. But stability coin such as USDT is not in this category.

In the same way the real-world assets require the protection of laws, contracts, and regulators, loopholes, fraudulent contracts. Bad institutions can make your assets evaporate or change ownership in an instant. Assets on the original chain don’t need to be considered. A decentralized blockchain network can make the ownership and disposal of these assets permanently vested in you, with no possibility for any third party to forcibly expropriate the assets.

From the development path of asset transfer on chain, there are two stages:

Digital assets: It’s the attribute of assets in the original chain. For example, the current BTC and ETH have their own asset properties, which are mainly reflected in the transfer and transaction in the early stage of development. Subsequently, with the development of DeFi, more extensive financial activities such as lending and financing are realized. We are now in the phase of digital capital. The innovation of DeFi in every track is to build a financial system independent from the real world, in which the assets in the original chain can achieve the inner cycle of value. But this relatively closed way of development is clearly not enough to shake the foundations of the traditional financial system. The $400 billion encrypted market value is the ceiling of its future development.

Asset digitization: It’s circulation on chain for real assets. It is a stage with great imagination. If assets with value attribute in reality can be reflected in the chain and circulate freely like assets in the original chain, then it is equivalent to the total amount of human economy directly transferred to the block chain. The idea, impressive as it seems today, is entirely possible given the development trend of blockchain, especially the development direction of NFT. It may become the novelty of human civilisation after the birth of the Internet in 1969.

We can also see in the current blockchain industry that some DeFi projects have sensed the breath of change and are exploring the chain of real assets. I believe that in the near future, there will be more and more projects and the boundary between the real world and the encrypted world will gradually be blurred and dissipated.

The significance of assets digitization and on-chain is to move valuable assets in the real society to the chain, so as to realize the actual use of real assets on the chain, such as right confirmation, payment, and circulation. However, on our way to the beautiful vision, there is still a mountain traversed, that is how to evaluate asset. The current encrypted world and the real world are fully isolated, and an “oracle” is needed to transfer off-chain credible information to the chain. As the bridge between them, we have not yet found a reliable “oracle” solution that can provide this kind of service. If the assets or information on the chain itself are fake, then the chain will be meaningless, and spam will not be converted into effective information because of the chain.

Regarding the issue of asset on chain, the current mainstream opinion is to let a centralized regulatory agency take responsibilities of evaluation, authentication, and authorization for assets. This seems to be a “perfect solution” combining reality and chain, but the biggest bug is that the regulatory agency is acting like a “black box”.

For example, one of the culprits of the subprime mortgage crisis in 2008 was the three major rating agencies: Moody’s, Standard & Poor’s, and Fitch Group. They collected money from banks and packed C-level bonds and A-level bonds into a B+ level package. Who can ensure that the nightmare will not happen again? Who will supervise the regulator? Who will regulate human nature?

The centralized method of capital verification is using traditional empiricism to deal with blockchain. Centralized institutions play a decisive role in making the asset on-chain itself a false proposition.

In contrast to the encrypted world built by assets on the protogenetic chain, DeFi tends to have more collective intelligence due to the rendering of decentralized ideas. The governance rights are distributed to participants in the form of governance tokens, and governance decisions are executed through intelligent contracts to achieve the purpose of decentralized governance. Theis seemingly equal and democratic design is not foolproof. A few giants can still rely on a large amount of capital input to easily occupy the most governance tokens and monopolize governance rights. The Matthew effect and Pareto’s law in the real world will take effect on the chain again, and many DeFi programs are the same, wearing decentralized coat of the new financial order but driving the reverse of traditional financial.

The existing so-called decentralized governance is only a phased solution that maps the “rule of man” society to the chain. We can only hope that those giants who hold a lot of governance tokens can provide fair and right decisions for the project development. Their will represents the trend of the encrypted world, like a few people are in power in the centralized real world. At this stage, people only master the blockchain technology while they don’t have “blockchain thinking”. The human civilisation needs to comprehensively transit from “rule by man” society to “rule by law” society to reach a higher level. Only “Law is Code” is the evolution of organization. The advantage of human being is not individual intelligence but ‘collective intelligence’. Are we living in a world where ‘country’, ‘money’ and ‘ideal’ are all necessary for survival? Actually, it isn’t. They are all fabricated by our imagination. The phantom and the real bubble overlook the differences from the birth of our wisdom. Our imagination is the core competitiveness.

Therefore, when we think about the logic of the blockchain world, we may have a dialectical mentality. Referring to the reality, the existence of the world on the chain does not necessarily need to compromise with the reality. Maybe it’s not blockchain going to humans, but humans going to blockchain. Sometimes a big change will break up the old world. What really needs to be changed is the old financial system and we should not get it wrong.

The products on chain are quite different from our original experience. It should have its own way, rather than a summary of our financial experience in the past. The financial system of the old world was originally full of flaws.

3. The Use and Definition of NFT

NFT refers to “Non-fungible Token”, which is the relative concept of Fungible Token (FT). The biggest difference is “unique” and “divisible”. It also makes the NFT more suitable for the scale of assets in the real world — After all, the evolution of civilisation has given a differentiated description for everything. Even a batch production of consumer goods, the production dates and coding will be different as well.

Existing perspectives tend to describe the NFT market as an independent track, playing on its scarcity, using encrypted artwork and game cards as the primary means of value output channels. It is a very strange phenomenon, as if no one would treat the FT as an independent market.

The reason for the misleading statement is that empiricism limits the imagination of an entire industry. NFT has gone from a brief highlight in 2017 to its slow development in recent years. Many people lost their way because of the popularity of CryptoKitties and the NFT are forced to be bonded with art, cards, and scarcity in their mindset, but they have not realized that this is only a small part of the NFT application scenario.

The rise of DeFi in 2020 will push NFT to the frontline in the spotlight again. DeFi+NFT has given the market an education value and many people have begun to rethink NFT’s more valuable future. DEGO, in particular, quotes the core idea of “structural description”, which allows us to see NFT that is long shrouded in the shadow of “collectibles” returning to its original appearance.

“The value of NFT lies not in rarity, but in the description of the structure.”

Let’s take leaves as an example to discuss how the structure description can give NFT new ideas.

There are no two identical leaves in the world, and every leaf we pick up on the ground is a special existence. If I own a leaf, I think its veins are beautiful and unique, and it is worth 2,000 yuan. You recognize this value and are willing to buy it, then its value is 2,000 yuan, which comes from our “consensus”. If you think it is only worth 1 yuan, then our consensus does not match. I can decide to either sell it at a lower price or wait for someone with a consensus on the value of 2,000 yuan to buy it.

This is an example of NFT’s scarcity application. Nowadays, encrypted artworks often rely on this rough “abstract consensus” to speculate prices. Although it is undeniable that a small number of encrypted artworks have unique artistic charm, most of them are simply trusting in the “Bigger Fool Theory” — that someone else will take it at a higher price.

If we convert this leaf into a “structure” that wraps assets and let it add more attributes beyond the “abstract consensus” of rarity, then the description of this structure may be:

0. Picture: Leaf

1. Name: Mulberry Leaf

2. Face value: 10000USDT+500ETH

3. Category: Synthetic assets

4. Grade: A

If we do not consider the scarcity and practicality premium brought by 0, 1, 4, then the reasonable price of this leaf is coming from its “face value”. If we consider the first two attributes, then the value will be greater than its “actual face value”. In other words, this leaf has not only the guaranteed value coming from the basic face value, but also the consensus value with a premium space. The “universal certainty” brought by the face value and the “scarcity” of its own can make it in a controllable and reasonable pricing within the scope.

If this leaf is an NFT asset on the chain, then the structure description can enrich its value connotation. This will firstly applied to wrap the structure of FT encrypted assets, such as using BTC and ETH to cast NFT and form an asset package, which is equivalent to an index fund wrapped in multiple stocks in the real world. If we assign functional value to this NFT (such as DeFi mining) or bind a painting, then its value is greater than the face value of the FT spent in casting.

Back to the real world, the best example is the Chinese characteristic “school district house”. For houses with the same size and in the same floor, the difference location of the school district house may differ the prices greatly, even they are just one block away. The area and floor are the guaranteed “face value”, and the geographical location and school district attributes are the “consensus value” that triggers a premium.

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Blind boxes are mostly bought for its “blindness”, while the rest are for “boxes.”

Many people compare blind boxes with garage kits (GK) and models, because they are similar in nature. However, buying blind boxes is not just to get the item inside. The greater fun is the moment when they open the box and guess whether the item inside is the one they want.

As we all know, rare things are expensive. The value of an item is not only determined by its cost, but also depends on its rarity. Each blind boxes series has one or two models popular, and the number is small. These models are often sold 50% more expensive than the original price with people’s speculation! Some extremely rare “mystery models” will even be sold at more exaggerated prices.

As the originator of NFT, CryptoKitties first appeared in 2017. The shortcoming of CryptoKitties is the intrinsic value, and the scarcity can be guaranteed by the decentralized consensus algorithm. With a picture of a kitten, people would say it is a rare species generated with a probability of one in ten thousand or one in a hundred thousand. That is the probability that no one can fake it and it is not copiable. Likewise, the ERC721 standard is public, and there is no problem of fraud.

Even the founder of the game cannot violate the law of the algorithm and secretly generate countless rare cats for arbitrage. However, the traditional blind box is centrally produced by enterprises. The so-called “rarity” is completely guaranteed by enterprises’ reputation. If the price of the rare blind box reaches 10,000 times or even 100,000 times, then the producers of the blind box can predict that there will be no better market, and the bubble will burst soon. Then they could massively produce these rare model blind boxes and sold them.

For example, the scarcity of CryptoKitties is a simulated natural scarcity, just like rocks in the soil and fish in the water. After the development team sets the probability, CryptoKitties will become a smart contract on the Ethereum chain when it is published, and it cannot be easily modified by the development team. The scarcity of blind boxes is controlled by people, just like a person deliberately pinches a large water pipe as thin as a finger, and then pours water and sells it bit by bit. And he says he will do this fairly and will not secretly release more water to anyone.

What will be the effect if the structure design is introduced for NFT?

In 2020, DEGO and Aavegotchi gave intrinsic value to the past CryptoKitties, which not only preserved scarcity, but also solved the problem of usage scenarios, especially for DEGO. It rationally used “structural thinking” and organized an unprecedented “shovel” activity.

Players need to complete official tasks during the event, and they can cast a random number of DEGO’s NFT shovel for free after completing the tasks. These NFTs have structural attributes. The number of tokens determines the “basic value” and the “level” determines the mining efficiency of the NFT shovel. This can be used as a premium to add value.

Due to the differences in random “par value” and “level”, this event has become an NFT “blind box”. In theory, high par value NFTs have higher basic price and larger premium spaces. Players will continue to purchase and draw blind boxes driven by curiosity and speculative psychology and contribute to building the NFT world. Moreover, these NFTs will not depreciate due to a large amount of production. These low-level shovels in the later stage can be used in many different scenarios, such as “casting”, “synthesis” and “forging”, etc.

After the introduction of “structural thinking”, the value of DEGO NFT is not only “scarcity”, but also the practical application scenarios from the inaccessible sky tower.

cToken is an interest-bearing Token on Compound V2. It is also a certificate for users to deposit assets in Compound. cTokens was originally used by Compound to simplify the user’s experience of earning interest on borrowing items in the on-chain lending market.

Before the launch of cTokens, lenders needed to lock funds in a funds pool to get interest. In this way, the funds locked in the lending market can only be used after it is unlocked, and it will reduce the amount of available funds when it is withdrawn. After the launch of cTokens, the above-mentioned situation can be avoided, because the funds on the Compound platform will circulate in the open market in the form of cTokens. This will not affect the funds locked in the platform, thus not reducing the amount of funds of the borrower.

If we replace the common FT in DeFi with NFT, which is mortgage NFT for loan, financial management or liquidity mining, then we can also generate a Proof of Stake similar to cToken (tentatively named nToken) with the minting of NFT. When the NFT asset is in a certain agreement, users can get more income or benefits by taking the nToken to other agreements without unlocking or conducting transactions directly. The process is in the same way as it is in the real world. A similar example is that user A mortgaged in the bank, and the house is directly transferred to the creditor under the name of user B.

Of course, there are more possibilities in nToken beyond its own cToken applications. For example, since nToken is produced with NFT, is it possible for multiple nTokens to be combined to form a new asset portfolio to get more value?

In Compound, we (or smart contracts) can judge the level of participation, contribution, and understanding of the product indirectly through factors such as the number and time of cToken held by users, but the dynamic information that FT can accommodate is limited. If cToken is displayed in the form of NFT “structure”, more dimensions of data can be added, which can be used by smart contracts as a basis for judgment to assign differentiated revenue coefficients and governance weights to different users.

Similarly, NFT can also reshape the LP Token of AMM DEX. Taking Uniswap as an example, the mobility of provider’s income is only related to the amount of funds invested, no matter they are existing players or new players, loyal believers or speculators. Everyone is equal in front of the rules. On the contrary, this seeming equality will increase the effect of capital monopoly and invisibly damage the interests of true contributors. If the LP Token is displayed in the form of NFT with time dimension added, the additional weight is calculated based on the duration of the user’s mobility. It is similar to the years of the coin in PoS that will allow players with consensus to receive higher rewards. In this way, platform governance tokens will also be distributed to players with governance capabilities.

The DEGO is using the mining computing power partition and speculation penalty mechanism currently, which is a preliminary exploration on the differentiated value distribution system. If the subsequent DeFi can involve computing power, LP Token, governance rights and more, users’ benefits and rights will be all presented in the form of NFT. The governance system of the entire DeFi world will be changed dramatically, and the situation of capital-ruling will be completely replaced by consensus.

Although NFT is a non-fungible token, the contract can set an “NFT framework” out of the “NFT standard” in fact. Assuming everything is under the same “NFT framework”, this framework can become a “pool”. NFT can be mortgaged to generate FTs into “bonds”, and NFTs can be traded in batches like FTs, and the mobility problems that plague NFTs for long time can be solved.

For example, various consuming goods in the real world are NFTs, such as iPhone. Each iPhone 12 has the same version, color, size, memory, and even made in the same Foxconn factory. However, the IMEI of each mobile phone is different. They are the ID of each mobile phone. If there is an “NFT framework” that specifies some important and less important parameters, then you can purchase iPhone 12 in bulk at one time.

GameFi means gamified finance. In the future, DeFi monetary policy may tend to be more gamified, and user assets will be converted into equipment used by DeFi games.

We can get some inspiration from existing blockchain games that use NFT. There are always different types of assets in the game like characters, character accessories, weapons, weapon accessories, and pets. These assets can be mapped into contracts where different “categories” of assets can generate more segmented game scenarios. For example, thresholds can be set in the game, and players who are classified as “Role 1” and “Pet 1” can enter the designated dungeon.

On this basis, it is feasible to deeply introduce “GameFi thinking” into the real-world financial market.

In the real world, banks will classify various types of assets. For example, there are multiple “classifications” in the ABS scenario. Asset securitization is divided into real estate securitization, accounts receivable securitization, credit asset securitization, and future income securitization, bond portfolio securitization, etc. Banks will make various reasonable allocations according to different asset classes and risk exposures. We can divide different types of securities into different “classifications”, such as the “equipment” system in GameFi. Banks write rigid entry or redemption clauses in the contract in advance, and all participants can be freely configured in a fair and open environment with the help of smart contracts.

As a structure, NFT has more application attributes than FT due to the complex nature of carrying value. If the oracle solution is mature enough, it will be possible to achieve the NFT of assets on the chain in the future. The application boundary of NFT will be expanded again, and the application scenarios of assets like commodities and real estate in the real world will have the opportunity to be transferred to the chain, such as real estate leasing, product trial, precious metal pawn, etc. These applications are different from peer-to-peer asset transactions because they do not involve the transfer of ownership, but give other users limited use rights.

Tracing back to thousands of years of development in history and civilisation, human beings have established a relatively complete legal system off the chain. Regarding the part of civil property rights, we have passed the paper contract and kept the license hereby to determine the ownership and use rights of assets.

Smart contract restores the law with code, without human intervention. We can directly integrate the contract into the NFT and generate a new regulatory path that balances justice, efficiency, and fairness, and then realizes code governance.

Currently, there are existing NFT standards that claim to support the separation of ownership and use rights, but they lack the “time” parameter. In other words, the owner of the NFT cannot regulate usage time when granting use rights to other users. This problem makes the separation of ownership and use rights a simple concept. For example, Cocos-BCX launched the BCX- NHAS-1808 NFT standard for blockchain games.

Pawn in the real world refers to obtaining a certain amount of funds by pledging valuable assets, delivering principal and interest before maturity to repossess the assets. If the principal and interest cannot be paid in time, the assets will belong to the pawnshop. This logic is applied to excess mortgage lending in the encrypted world, but the difference is that lending is an interaction between individuals and the platform’s capital pool, while pawns can be peer-to-peer transactions. When User A initiates a pawn request, the smart contract transfers the right of using the NFT to the pawnshop or individual user like User B who accepts the pawn business. User A receives a certain amount of funds based on the asset value according to the NFT package. If User A fails to pay the principal and interest before the deadline, the ownership of the NFT will be transferred to the pawnshop or User B.

Leasing is extremely common in the real world, such as the traditional renting business, shared bicycles, power banks, electronic devices, etc. Let’s take house renting as an example here. User A has an idle real estate and generates an NFT including the real estate through the chain confirmation. The location, rental, lease contracts and other related information of the real estate are set through smart contracts in the NFT. When User B wants to rent the property, he needs to pay a deposit and rental to User A to obtain the right to use the property’s NFT. If the rental is discontinued during the period, the User B’s usage right will be cancelled. If the rental has been paid normally, User B’s right to use will continue until the lease expires and the deposit will be returned at the time of expiration.

4. The leap from information society to value society

The application of the Internet has changed the way of information transmission and civilisation inheritance. People’s behaviors such as communication, production content, knowledge acquisition, and spread of ideas have all been integrated into the binary code, which has made the modern information society’s data explosion.

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The emergence of the blockchain allows us to see more possibilities for value generation and transmission. We have witnessed the digital assetization process of a Bitcoin from scratch, and we are also exploring the value prospect of asset digitization from zero to infinite. What lies behind is the evolution of ideas spawned by technological advancement, which makes us no longer rest on the current stable and boring social, economic, and financial system. Starting from the ideological anchor point of “NFT+”, we are looking up to a starrier sky.

This transformation of assets and value will not stop at the evolution of information interconnection to value interconnection. Instead, it will promote the overall chaining of human society from a centralized information society to a decentralized value society with the support of blockchain. What follows is a brand-new on-chain governance system and value distribution method. Assets and value will no longer be restricted by law or ruled of human beings within a small country or territory. They will achieve absolute privatization and free circulation on a borderless basis. Relying on the governance of collective wisdom, we will create a higher dimension of human civilisation.

After the introduction of structure description in NFT, we are not far from this in the future. Perhaps after the 100th anniversary of the Internet, we will be able to break through the barriers on and off the chain and achieve chaining of a wide range of assets. The value on the chain will account for the majority of the human economy. At that time, the control of civilisation by centralized institutions will be greatly weakened. The society will embrace the blockchain, and mankind will enter a new world.

DEGO.Finance — Decentralized Finance with Sustainability

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