The expert in the interview, Xavier of DEGO China, is a senior Dapp and NFT player in the circle, with years of experience in the field of NFT. In the interview, we ask 22 questions exploring some financial innovation applications of NFT to outline a blueprint of the future development of NFT.
“Nowadays, most NFTs are artworks, but there is much room for utilization of NFT in the financial sector.”
1. Scarlett: Artworks are usually not traded frequently, and NFT artworks generally lack liquidity. Why do most NFT projects still follow the path of artworks and collectibles?
Xavier: After a short-lived prosperity of CryptoKitties in 2017, NFT did not come in the spotlight again until the end of 2020. Now, the NFT industry is still in a relatively early stage. The first NFT project that attracted people’s attention is CryptoKitties. The success and popularity of CryptoKitties then left a stereotype that artwork is the right path for NFT development, and NFT is naturally associated with art, collectibles, cards and scarcity. As a result, most subsequent NFT projects copy this model. This is quite normal.
2. Scarlett: Today, many NFT projects of artworks and collectibles are launched and developed based on well-known IP. What do you think of this development path of NFT+IP?
Xavier: I think there is a bubble in the combination of IP and NFT in the long run, which can be clearly perceived from the recent decline in data. This model is still dominated by European and US aesthetics. Technically it has a low barrier, making it easy to copy. Many institutional and individual investors have a FOMO mindset, and the valuation of such projects is generally high. So, NFT+IP may not go a long way. It is just because the combination of NFT and IP is new to people at the beginning. In contrast, some top NFT projects such as DEGO are not driven by IP, but based on some on-chain native models. Therefore, whether it is combined with IP is not a decisive factor for the success of an NFT project. The breakthrough of IP+NFT is combination with Dapp. There are still too few application scenarios for NFT at present. Only when this problem is solved will IP+NFT develop better.
3. Scarlett: Apart from the artwork field, I know you are more optimistic about the application prospect of NFT in the financial sector. Well, what specific problems in the financial sector can NFT solve?
Xavier: First, about investment, investors of a blockchain project face the risk of default and wrongdoing by the project developer not issuing tokens after receiving the investments. Besides, in addition to the project developer, the project’s investment agent may also run away with the money, or the intermediary who has not obtained a quota may falsely claim to have obtained it and commit fraud, or some investors may buy Coinlist third-party accounts only to see the accounts be reclaimed. These phenomena are actually very ironic because the blockchain itself is designed to solve the problems of trust and transparency in transactions, but finally investment in this field is still made by a series of very primitive means of transactions such as manual token transfer. However, NFT can be used to solve these problems.
4. Scarlett: Can you specifically explain how NFT can be used to solve the problem of investment and financing efficiency in the blockchain field?
Xavier: We can start with a specific scenario. For example, if an individual invests in a blockchain project, and if the quota for the project is not immediately given to the investor, the investor can get an NFT as a voucher, which means the investment interest has been directly transferred to the investor. Supposing the tokens of the project cannot be unlocked within one year under agreement, the users cannot use the NFTs on hand to claim tokens in the period and can only claim the tokens upon expiry of the period. However, as the interests are already in the hands of the investor, if the investor is no longer optimistic about the future of the project for some reasons, he/she may split the NFT before the tokens are unlocked. Specifically, for example, if an investor has invested US$1 million in a blockchain project, it is very difficult to directly transfer the US$1 million, but the investor may split the NFT of US$1 million on hand into ten US$100,000 NFTs or more to sell the investment quota on trading platforms like Opensea or Treasureland and transfer the quota to counterparties, which is much more efficient than buying off-chain Coinlist accounts. For the industry, such practice creates additional liquidity through a 1.5-tier market; for users, it reduces transaction costs of both parties and solved the problem of trust; for the project developer, it may even reduce the pressure of market making, as the 1.5-tier selling pressure is dissolved off-chain, which, so to speak, kills three birds with one stone.
“There is more to NFT fragmentation than increasing the liquidity. ”
9. Scarlett: What’s your comment on NFT fragmentation effectively solving the NFT liquidity problem?
Xavier: NFT fragmentation not only can increase NFT liquidity, but can also lower the threshold of NFTs. Most investors generally do not have an eye for art and NFTs, but they can still invest in NFT by investing in NFT fragments, that is, the threshold of access to NFT is lowered. At the same time NFT fragmentation can also contribute to the formation of many new markets, such as derivatives of NFT fragments and financialization of NFTs, that is, the NFTs which were originally not priceable are turned into priceable NFTs. This is the significance of NFT fragmentation in my view, rather than simply increasing the liquidity.
10. Scarlett: Do you think there is any satisfactory NFT fragmentation project or solution for the moment?
Xavier: I don’t think so. To name a few NFT fragmentation projects, NFTX, NFT20, DODO and Unicly generally do not solve the following three problems: 1. which NFT assets are worthy of being fragmented; 2. where does the liquidity of NFT fragments come from; 3. whether there is a good buyout mechanism for NFT: the process from public ownership to private ownership. In my opinion, currently no project has offered a satisfactory solution to these three problems.
“Native NFT financial assets + mature NFT pricing mechanism mark the financialization of NFTs.”
11. Scarlett: Do you think NFTs have now reached the stage for financialization?
Xavier: I think it is still too early to financialize NFTs. First of all, today 99% of NFTs are artworks, but in real life, artworks and collectibles are irrelevant to most people, while in the future, 99% of NFTs will be data and financial products. Based on this worldview, I think the whole NFT world is not rich enough in asset type.
12. Scarlett: What makes a sound environment for financialization of NFTs, in other words, how can we reach the stage of financialization of NFTs?
Xavier: I think there is a premise for the financialization of NFTs, that is, a good pricing system. Without a good pricing system and liquidity, financial activities such as collateral and lending cannot begin. NFTs can be financialized only after satisfying two requirements. One is native NFT financial assets which meet the following two conditions: 1. they must be priceable NFTs; 2. relevant interests must be specific. Let me give a few examples of native NFT financial assets: LP token of Uniswap V3; DEGO’s INO, that is, packaging the tokens to be unlocked of the project into an NFT as an option; DEGO’s synthetic asset known as “shovel”. These three examples have one feature in common, that is, it is easy to evaluate their prices, as the value of these NFTs is backed by FT. The other requirement is to turn certain NFTs, which were originally not priceable, into evaluable and priceable NFTs by some pricing method. Only after both requirements are satisfied can the financialization of NFTs be operable. Some existing problems regarding NFT lending and collateral will all be solved when the industry’s infrastructure and pricing system are developed to a sufficient level of maturity.
“NFT+DAO focuses on DAO rather than NFT which is merely a tool.”
13. Scarlett: Nowadays, many widely-known and highly-priced NFT products are created by celebrities or artists (such as Beeple) who have made a name. So, will NFT truly benefit long-tail artists?
Xavier: NFT can practically serve long-tail users. First of all, under the business model of traditional art markets (such as galleries), most profits and incomes go to intermediaries rather than artists since artists cannot exhibit their works and make profits without intermediaries. However, NFT has a lower threshold for artists by providing a platform for talented artists. Though market operation is also an important factor, NFT at least gives long-tail artists an opportunity to show their talent without reliance on any intermediaries or trust from third-party institutions. Secondly, the trading platform Superare has initiated the mechanism that artists can get 10% of the sales price of artworks traded on the secondary market, thereby getting the passive income from resale. Upon completion of a transaction, payment will be made automatically to the creator by smart contract, which is a business model that can only be achieved in the blockchain world but not the real world. Thus, artists truly own interests in resale and the copyright of their works. Last, NFT started from 2017, and has not become truly widely known until 2021. Currently, people take NFT as a celebrity game because it is young on the whole. In the next 50 years, more valuable works may appear and more people will set foot in NFT.
14. Scarlett: Do you think that NFT+DAO will contribute to the decentralization of NFT?
Xavier: Before answering this question, we need to think about what NFT exactly is. For me, NFT is merely an infrastructure with nothing special, like FT, like standard and non-standard products in real life. NFT should not be taken as a separate domain. It should be a broader concept. NFT is currently seen as a separate domain mainly because NFT is at its early stage and is mainly limited to artworks and collectibles. In my view, NFT is merely a basic technical means serving DAO. The focus should be on DAO, not NFT. The main application of NFT+DAO can be interpreted as that NFT is a symbol of right, obligation or identity. In other words, interests and data are put into NFTs to form a personal identity structure which serves as a technical tool assisting and serving DAO.
“On-chain native assets can capture higher value than tokenized assets”
15. Scarlett: Please explain the concepts of digital assetization and asset digitization.
Xavier: Digital assetization and asset digitization are two stages on the path of on-chain asset transmission. Digital assetization refers to the native digital assets in the blockchain world, such as BTC and ETH, the application value of which has evolved from the early medium of exchange to the later lending, wealth management and other financial functions derived from DeFi. Asset digitization refers the tokenization of real-world assets, which enables all assets in the real world to be circulated on the blockchain.
16. Scarlett: What is the difference between these two stages?
Xavier: Digital assetization refers to the building of a closed on-chain financial system, which is independent of the real world and can realize its own internal circulation. The value ceiling of this on-chain financial system represents the market value of crypto assets, the size of which is incomparable with that of the traditional financial market. Asset digitization can enable assets in reality going onto the chain through asset tokens, which means there is a chance to transfer the entire volume of economy in the traditional world to the blockchain. In the sequence of development, digital assetization is prior to asset digitization.
17. Scarlett: Now that asset tokens can realize transfer of the volume of economy in the real world onto the chain, why haven’t asset tokenization projects become hot so far?
Xavier: Although asset tokenization has been a hot topic in the blockchain field, so far not much progress has been made because it’s still too young and lacks a middle step. For assets, so far there has been no effective asset valuation solution and the blockchain is isolated from the real world without a bridge in between. Besides, oracle solutions are not mature enough, and people cannot find a completely trustworthy oracle to transmit information on the chain. If we rely on traditional centralized regulators for capital verification, it will also give rise to a series of problems: who will regulate the regulators? Is there a decentralized governance mode to ensure that the regulators behave themselves? If they don’t, is there a good response mechanism or even a rule on replacement? Therefore, at present I am not optimistic about all asset tokenization projects. Research on asset tokenization makes little sense; by contrast, on-chain native assets are more promising.
18. Scarlett: What’s your opinion about the development potential of fan economy and social tokens?
Xavier: In the real world, the relationship between idols and fans is generally unequal. In most cases, idols unilaterally receive earnings from fans. Despite that some fan leaders may earn a profit from the management companies by running fan communities or providing information, most fans do not have a chance in sharing the earnings. With the help of blockchain technology, more fans can take part in the economy between fans and stars and consolidating the bonding between them. So the existence of fan economy is justified. Regarding social tokens, I think in the future all individuals will represent their own credit systems, and currencies will not necessarily be issued by governments and central organizations, as they do under the traditional financial mode. Financial experience in the past may no longer apply and perhaps we can realize denationalization of currencies in the blockchain world so that everybody can issue their own personal currencies or personal bonds, also known as social tokens.
19. Scarlett: What do you think about Metaverse that has come into the spotlight in recent years?
Xavier: Metaverse is an unheard-of field in traditional capital market. Today, involution is quite common in various domains of the capital circle, and Metaverse, as a new domain, can drive the development of hardware, contents, culture and infrastructure, expand the capital market and create further room for investment.
20.Scarlett: Which Layer 1 or Layer 2 infrastructure is currently the most suitable for the layout of the NFT project?
Xavier: I think BSC is most suitable for the layout of NFT. BSC has always positioned itself as a competitor against Ethereum, which in my view is inaccurate. BSC is a test chain for Ethereum with lower cost, not a competing chain. As a test network, it can serve as an extension for Ethereum, and has absorbed many of the best developers on Ethereum. Developers, not assets, are always the most important on a public chain. In addition, BSC’s huge ecosystem can provide better support for the layout of NFT project, including DeFi and various types of infrastructure. For NFT projects, the prosperity of the public chain ecosystem is also an important consideration.
21. Scarlett: What is the meaning of Web 3.0?
Xavier: In the Web 1.0 era, netizens are only passive consumers of information on the Internet. In the Web 2.0 era, netizens can independently create information on the Internet. Netizens can generate and consume information at the same time, giving birth to the concept of UGC. However, the main information output is still monopolized by the Internet giants. While in the Web 3.0 era, the important proposition is to break down the barriers of Internet giants and eliminate the barriers on the Internet. NFT can be seen as an important infrastructure of Web 3.0. In the future, NFT will not be limited only to artworks but rather be financial vouchers of identity information so that users are no longer subject to the centralized Internet oligarchs, achieving disintermediation of contents.
22. Scarlett: Which areas of NFT will have investment opportunities in the future?
Xavier: At present, the infrastructure, basic protocol and basic game rules of all kinds of NFTs are still at their very early stage and are not yet perfect. But NFT itself is a very large domain. Just like in the real world where there are far more non-standard goods transactions than standard goods transactions, NFT has more application scenarios than FT, and the potential of using NFT to apply many real-world business models to the blockchain world is huge. DeFi+NFT, DID (the combination of identity, ID, and NFT) and NFT+DAO are more noteworthy at the current stage.
NFT is one of the key domains that HashKey Capital has focused on in recent years. The HashKey Capital team believes NFT has a promising future, focusing on NFT infrastructure, NFT+DeFi, Metaverse, creator economy, Web 3.0, etc.
This interview is conducted by Scarlett, a researcher at HashKey Capital who has focused her efforts in the NFT field over the past six months. She has published the following three NFT industry research reports:
Disclaimer: All of the above represents the personal views of the interviewee for reference only and does not represent any position of HashKey Capital and its affiliates, nor does it constitute any proposals for action.
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