In this article, experts from the blockchain development company Boosty Labs will not talk about the past and present of the NFT industry. Instead, they’ll try to look into the future. In what directions will NFTs develop, what problems may they face?
Fast And Cheap Transactions
First of all, the NFT market faces the problem of bandwidth and high fees on the Ethereum network. The memory of the CryptoKitties is still fresh. Today Ethereum is a network for the rich; only those who move digital assets worth thousands of dollars can pay such fees.
NFT projects will look for a way out in the form of sidechains, including federated Bitcoin sidechains, and other blockchains, for example, WAX and Flow. NFTs have weakened the dependence of the owners of digital objects on their developers, the next step is to weaken the reliance of the NFT on Ethereum blockchain.
The ability to use NFTs outside of their parental environment increases their utility and liquidity. Cross-chain NFT transactions and the ability to trade NFT via different blockchains on the same platform will be a breakthrough for the NFT market, but NFT interoperability has a more interesting aspect. This is the ability to use items and characters from one game in another game. The opportunity to move from one virtual world to another with your virtual things.
Second-level games on top of CryptoKitties are the first experience of creating a game for NFT, and not NFT for the game. Aavegotchi is the first example of creating a game with certificates of deposit turned into NFTs. The Enjin gaming universe is expanding and its example inspires other projects.
Decentralized Storage of NFT Metadata
NFT metadata, which turns a regular token into a game character or digital artwork, can be centralized or decentralized. Not only stablecoins, but also NFTs can be centralized. First, the token issuer can secure the right to freeze and confiscate this token. Second, he can control the collateralization of this token.
If the NFT metadata is kept under the control of the owner of the centralized server, then he can change it or simply shut down the server.
Decentralized storage of NFT metadata does not necessarily happen on-chain – the ability to write data directly to the blockchain is very limited. You can upload this metadata to IPFS, for example, via Pinata, and other decentralized storage networks, such as Arweave or Filecoin. Decentralized storage of NFT metadata further diminishes dependence of the owners of digital objects on their producers.
Ownership of NFTs can also be decentralized by tokenizing them.
NFTs are non-fungible and indivisible, but tokenization can fix that. NIFTEX allows you to wrap NFTs in ERC-20 fungible and divisible tokens – shards.
The scheme for issuing shards is the following. The user chooses how many shards to split the NFT into, what part of the shards to keep, and what to sell in the primary market and at what price. Next, the NFT is sent to a smart contract that manages the collateralization of shards, and shards are put up for sale at a specified price. The initial placement of shards lasts for two weeks, then all unsold shards are returned to the issuer.
After the initial placement of shards, the NFT with which they are backed can be obtained in its entirety in two ways. The first is to collect 100% of the shards. If this were the only option for redeeming shards, then it would be a very specific version of the gold bullion standard, since getting 100% of shards can be problematic for various reasons, which means that there is a risk that the NFT will remain frozen forever. To avoid this situation, there is a second way, provided by the redemption clause.
If you have an NFT shard that you want to receive in its entirety, then you can make a buyback offer to the rest of the holders of its shards. You set the buyback price of the missing shards in ETH and deposit this amount of ETH and your shards into a smart contract. The rest of the shard holders of this NFT have two weeks to reject or accept your offer.
To reject your offer, they will need to fully repurchase the shards you supplied at your suggested price. If this does not happen within two weeks, then your offer is considered accepted: you receive the desired NFT, the shards you put are burned, and your ETH is used to redeem the remaining shards of this NFT.
NFT Secured Loans And Shard Trading
MetaCartel funded the RocketNFT experiment, a DAO for NFT-secured lending. On the NFTfi credit market, you can lend and borrow against NFT collateral. Decentraland, in cooperation with Ripio Credit Network, offers a mortgage – the purchase of digital land LAND on credit. Game characters and objects, digital land and artwork can be used as collaterals. You can get a loan secured by your favorite game character and do not play with him until you repay the debt.
The problem with NFT as collateral is its indivisibility and low liquidity, but shard trading can fix this: NFT shares in the form of ERC-20 tokens that are traded on Uniswap are more liquid than whole NFTs that are traded on NFT marketplaces. Due to this, automatic loans secured by shards in AMM-type Compound credit pools can be added to the above-mentioned "order" models of lending against NFT collateral, which require the lender to consider each individual application.
If shard trading develops and traders start using borrowed shards for leverage, then credit AMM shard pools will appear – shards can be used not only as collateral, but also deposited. The importance of shard trading is that it creates a new pricing mechanism for unique things.
NFT Valuation Dilemma: Auctions Versus Exchanges
Traditionally, auctions are used to sell unique items. Digital lands and works of art are auctioned off in the primary and secondary markets, just like their analog predecessors. Appraisers of these virtual assets seek to leverage the market experience of real land and art. There is nothing fundamentally new in the existing developments on the methodology for evaluating NFTs – the prices of NFTs, which were formed at auctions or when selling at a fixed price, are taken as the basis.
From the market price of the shard, the “capitalization” of the whole NFT can be calculated. The sale of NFTs in the primary market may not take place through an auction, but through the initial placement of shards. The further price of the tokenized NFT will be formed in the secondary shard market.
If the NFT, under which shards are issued, is redeemed through a kind of auction provided for by the redemption clause, then its current price is the redemption price formed as a result of this auction. The NFT shards unpaid after redemption don’t represent this NFT anymore, but the share of ETH paid for it at the redemption. Thus, after the redemption, the NFT price can no longer be calculated as the current capitalization of its shards.
Trade in the smallest particles of is creating a new pricing mechanism for unique items. At the same time, the reason why a particle of a collectible NFT has value does not change – it is the same as that of a collectible NFT in its entirety. The reason is that someone wants to collect NFTs.
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