Kay F, Managing Director @ NGC Ventures, w/ Butian Li & Pang Yao Her
In this article, we are sharing NGC’s latest observations and thoughts around NFT.
Metadata Container for Web 3.0
When discussing NFTs, what exactly are we talking about?
There are a multitude of NFTs, from CryptoPunks to the cute cats of Cryptokitties or the chibis of Axie Infinity. There are also more traditional art projects like those sold by Beeple for a record-breaking $69M USD, or more functional NFTs in the case of Uniswap V3. Let us further delve into the world of NFTs to explore the possibilities they can bring.
NFT has been overused in a lot of discussions, but what is it really referring to? In other words, as the negation to Fungible Token, how should NFT be defined positively? Before we start our discussion, perhaps it would be appropriate to talk about what NFT means.
Our definition of NFTs would be: The Metadata container in the Web 3.0 era.
If you have been coding or doing programming work, you have definitely encountered a bunch of JSON/ XML files since these types of files supply the necessary metadata information that is needed for all your CRUD work. But don’t worry if you don’t understand anything about metadata or programming jargon.
We take the simple API provided by CoinGecko as an example. In this case, we are looking at data from Bitcoin’s public treasury, such as total holdings, total USD value, market cap dominance, companies holding BTC, etc. When looking at the sea of information that is available, all of this can be gotten from a single unique JSON file, in which an NFT can encapsulate the information.
There is then multiple different types of NFTs, which can be categorized in several ways.
- Digital Art NFT: Includes metadata such as the number of issuances, artist information, storage address (HTTPS/IPFS), etc.
- Gaming NFT: Includes metadata such as attributes, levels, rarity or type of item/ character.
- Uniswap V3 NFT: Includes metadata such as ID, pair, Min Tick, Max Tick, easter eggs, etc.
As a professional investment institution in the crypto space if we were to view all these NFTs as the same it would be a lapse in our judgment. Although they are all labeled as NFTs, they are clearly not the same. We are then optimistic about the prospects of a certain type of NFTs:
- Digital art pieces, especially in the Eastern art scene
- Blockchain games, where they are both fun and economical such as Card games to RPGs
- Asset Liquidity Solutions, from native digital art NFTs to anything in the real world.
To engage in the discussion of specificity, in this article we try to avoid using the general term “NFT”. In fact, when it comes to classification, the actual implementation is often separated from the existence of NFT. For example, blockchain games do not necessarily need to use NFT, or to give another example, NFT used as a mean of representing liquid assets, or the digital art NFT, or tokenized equity of an unlisted company or a locked position, etc., all of which are subsets of the general term.
Digital Art Assets
There have always been several major problems in the traditional digital art market from being reliant on centralized exchanges to the auction and bidding process. When approaching from the blockchain angle using Ethereum to facilitate transfers results in high transaction fees. Furthermore, artists and creators can only profit from the first time it is sold and cannot receive any revenue downstream. Since there is no control over the pricing of artworks, it is almost entirely up to middlemen or collectors. Works of digital art may then also be destroyed by buyers through loss of private keys resulting in art pieces not being able to be traded on the market further.
The emergence of projects like TopBidder then provides a solution to the problems above. TopBidder introduces the concept of radical auction where it is an incentive auction mechanism. This mechanism motivates bidders to make the bids of the artworks so that they can reach the market’s reasonable pricing at the fastest speed. The price of the artworks increases monotonously according to the bonding curve model set by the protocol, and the bidders who bring the price discovery can get the subsidies corresponding to their risks.
“Uniswap” for Digital Art
We are highly optimistic about TopBidder as we think that they fit the criteria of being called the Uniswap of the digital art space. If we were to look back at Uniswap, they were not the first to come up with the idea of an AMM DEX, but it still is the most popular and arguably the best now. We think that the success of Uniswap can be narrowed down to 2 main points:
1. In Uniswap V1 and Uniswap V2, the price curve is arbitrarily defined as x*y=k (constant). Although it was not the case in the past, market makers did not provide liquidity evenly (for example, Curve, DODO, and of course Uniswap V3 are very different from this model). When there is not enough volume on the order book, the new swap mechanism can provide liquidity for any ERC-20 Altcoin 24/7
2. In Uniswap V1, using ETH as the basecoin trading pair provides two obvious benefits:
2.1 Low transaction fees
2.2 Compared with the forerunner of the AMM model-Bancor, by using BNT as the original basecoin, users are more willing to exchange HODL against the LP pair of ETH to provide liquidity
3. Imagine this scenario: if there is no transaction in a Uniswap trading pair in the next few blocks, and the token has some liquidity (or provides the most liquidity) in the Uniswap ETH pair, if at this time, the external ETH price rises by 5%, the token price will rise accordingly. Generally speaking, the price correlation between the DEX token and ETH liquidity is extremely high, and it is easy to achieve an upward spiral in the context of a bull market.
Similarly, Top Bidder is not the first Crypto Art auction platform. We also discovered 3 similarities to the early Uniswap potential:
1. There have been many platforms that provide digital art auctions on the market. There are roughly a variety of auction methods (curves) to choose from. Therefore, the price of digital art is often given arbitrarily depending on the various pricing strategies and very different prices obtained accordingly. An arbitrary price given by the price curve (starting at 0.05 ETH, increasing by 0.05 ETH every time below 0.5 ETH, 10% every time after 0.5 ETH), may not be suitable for every type of NFT (such as games), but in the context of subjective pricing of the artwork itself, this pricing mechanism can provide perpetual liquidity for digital art
2. Sustainable liquidity: Because the ERC-721 standard has been modified, users can directly purchase and transfer the digital art NFT from the previous owner as long as they pay a higher price according to the given curve──another auction agreement may have a similar auction curve, but the auction time is limited. When the auction is over, the digital art NFT will no longer circulate in the market, and there will be a mismatch between purchase demand and supply.
3. Using ETH as the basecoin for auction provides 3 obvious benefits:
3.1 Low transaction fees
3.2 The upward spiral of the bull market
3.3 A slightly tricky point — the impact of price benchmark on consumer psychology: Most people who purchase digital art are crypto natives who make money in the bull market. For this type of people, 1 ETH and 2500 USD are not created equal. Although the current price is almost the same, it is a completely different psychological perception
East Asian Digital Art
The inherited social aspect of artworks isn’t some new product of the social networking economy that has flourished in recent decades. Ever since the Renaissance period in the 14th century, in Italy, the bourgeoisie used artwork such as paintings to decorate their properties, as a mean to mimic the lifestyle and social scene of the aristocrats. As a result, a new genre of Avant-guard oil-on-canvas paintings was born out of the new era, featuring human lives instead of religious tales. The art renaissance was, in fact, the revival of capitalism. The Medici family was the wealthiest family in Europe back then. With great wealth comes great power, the family built up a banking system in Florence where soon became the center of art and culture and the gateway for Italian artists. Actively traded artwork has long been serving social needs. Yet the value of art as assets has been a good manifestation of social consensus and attention. Art and wealth always go hand in hand towards the same general direction. Simply put, price and monetization are quantitative measures of social attention, a.k.a. traffic. The adoption of crypto assets exceeding billions of users has inevitably led to the adoption of digital art where the new money has been flowing to.
From a historical perspective, every super-power economic system, at its most prosperous stage, was also a super influencer of its culture and art globally. The tipping point of prosperity was most observed around $10k USD GDP per capita.
- In the 70s, the US witnessed the emergence of Disney, Marvels and the counterculture movement, and hipster culture which quickly spread globally
- In the 80s, Japan became the birthplace of animate culture, exporting the Nintendo, Bushido, the soul of Japan, and Gekido no showashi ‘Gunbatsu’
- From the 90s to the 21st century, Korea was known to the world for its K-POP, Korean Drama、Korean Girl Group, and the so-called “Miracle on the Han River”
The CJK (China, Japan, and Korea) developed following an astonishingly alike historical script. It was not by coincidence that the above-mentioned countries have their economies were set to an accelerating trajectory starting by hosting the Olympic Games, namely the 1964 Tokyo Olympic Games, the 1988 Seoul Olympic Games, followed by the 2008 Beijing. GDP per capita all reached $10K USD within 10 to 15 years since the Olympics, and the economic entity started to export its unique culture to the rest of the world. Now that we are in the 2020s when China has become the second-largest economic entity in the world, we have all reasons to expect world-class culture output from China, and NFT happens to be one of the prominent vessels or forms to host artwork at this point in time.
As an institutional investor, we are more interested in setting up pipelines as opposed to investing in specific art pieces, being a pipe worker. Therefore, we took great interest in investing in innovative protocols and digital art platforms such as the TopBidder, although it is also possible that we may sign exclusive deals with young artists at the early stage of their art career.
Use Case of Algorithmic Stablecoin?
The use of algorithmic stablecoins in blockchain games such as Axie Infinity has seen great adoption among players, even though most of the experimentation of algorithmic stablecoin as a “perpetual motion machine” has failed. NFT games are the exceptions. AXS is similar to the Shares in the algorithmic stablecoin model, and SLP is Cash with floating exchange rates. Synthesizing Axie requires staking of SLP and burning AXS. Synthetic assets are used for mining and battles. Axie provides good services and experiences that players are willing to pay for. Gamification achieves a positive circulation cycle, while algorithmic stablecoins only generate assets that cannot be consumed.
Taking a step back, we are not saying that the inspiration of blockchain games comes from algorithmic stablecoins, but that the algorithmic stablecoin model can help us see the gaming logic better. In fact, the design of the game, ever since the invention of games, lies in the skillful incorporation of the game theory. Traditional game development teams also require a team of psychologists and data scientists. Compared with traditional games, blockchain games have created a new play-to-earn model. Krypton players are still krypton, but not all of their income is circulated back to centralized companies like Blizzard and Tencent── Good players can make a lot of money. Axie Infinity currently has about 100,000 daily Axies breeders. After Bitcoin dropped from $60,000 to more than $30,000 U.S. dollars, the pet price on Axies was still kept at $100 USD. To the very least, we see game remain as one, if not the only, sector that is not affected by crypto market ups and downs, with huge potential for future development and long-term value creation.
From Card to RPG
If card is game theory reduced to its minimum, then RPG game is the fruit of technological progress, the ultimate entertainment experience. Big Time is a multiplayer online RPG game. In its Metaverse, players can create their own characters, select skills, explore maps, and interact with various social engagements such as forming teams to battle and trading. Players travel through time and space in different civilizations, collect game equipment NFTs to build up their characters or to obtain rare skins. They can also customize their own portals. Rare NFTs can make their portals way cooler. Like in the real world, players can rent, buy and sell their own NFT products.
Big Time is planning to launch an animated NFT and VIP early access pass on the Binance NFT exchange on July 15. Binance NFT marketplace has greatly promoted the prospects of the play-to-earn. In many developing countries, some professional players make a living by playing and earning NFTs, especially during the COVID, their income can be more promising than taking up a local job.
OpenSea is the Craigslist for second hands, whereas Blockchain Games are the Amazon
The majority of NFTs trading volume lies in the blockchain games not traditional NFT trading platforms such as the OpenSea. Although for outsiders, OpenSea seems to be THE marketplace for digital art, the long tail of outdated NFT on OpeaSea makes it look more like the craigslist. To some extent, the so-called low liquidity problem with NFTs is mainly referring to those outdated “distressed assets”.
Asset Liquidity Solution
The emergence of Convergence Finance opened doors for individual investors to the high-end art market. Fragmented NFT investment enables expensive, high-yielding high-quality digital collectible assets to penetrate the retail population, greatly improve the liquidity of digital art assets.
Convergence has benefited the public by simplifying early-stage capital investment through asset securitization, improving capital efficiency. For example, it tackles the pinpoint of selling stocks via private placement: VCs sometimes must liquidate when the funds mature, but there might not be a market to sell the shares if the company has not been listed. Same with crypto funds when they are faced with project lock-up periods. ConvX solves the problem by wrapping private placements in Convergence’s liquidity pool. DeFi users can also buy wrapped stock shares of startups such as SpaceX on Convergence.
Fragmented NFTs and wrapped security tokens (WSTs) are used as new types of asset transaction containers that open a whole new world of asset and capital liquidity.
As we are stepping into the Web 3 Era, with the development of the Metaverse comes the meta-concept NFT, embarking on a newly invented socio-economic order out of chaos. Here we are at the infancy stage of this new order, to observe and experiment with a new tool to create and exchange values and beliefs.
If you are interested in the topic, please also join our sponsored upcoming webinar on the Metaverse & virtual assets.
Register to attend! https://bit.ly/3wupHNn
Crypto Roundtable Ep3 will cover:
- The investment thesis of a digital real estate fund
- Metaverse opportunities & the role of NFT & blockchain
- Gamified social experiences in the Web3.0 era
More to come!
NGC Ventures is one of the largest institutional investors of blockchain technologies, and has been a key contributor to a number of leading projects.
Disclaimers: This article is for informational purposes only and should not be construed as investment advice. NGC Ventures may hold positions in some of the tokens and/or companies discussed in this article.