NFT Composability : Engineering Product Market Fit
Thesis: Currently, the emergence of NFT’s and their popularity in the market represents a paradox of value. This value exists in a quantum state, as the technology behind NFTs are immensely promising, with artistic NFTs being the “killer app” many in crypto were hoping to see after bitcoin and smart contract layers (such as ethereum). Just as the next iteration of gold should naturally should embody the properties and technology of bitcoin, art should also have properties of NFTs (providence, verifiable authenticity & ease of ownership transfer). Most other crypto projects/verticals (apart from DeFi) utilize distributed ledger technology to create products which should ideally be built around a centralized database.
However, the opposing truth that co-exists with this notion of NFT value is evident on virtually all NFT marketplaces. Illiquidity. Given the nature of art, and the lack of established reputations for most NFT artists, NFTs as an asset class suffers from wide disparities in terms of what buyers & sellers believe to be the fair market value of a piece of art to be(which is evident in wide bid-ask spreads on most pieces). We believe the abstraction being, these NFT’s value proposition appeals at the individual level, but not at the community level (aside from the few popular projects, such Ape NFTs/NBA topshots etc.).
We believe that the underlying NFT technology should ideally be applied towards new industries in addition to art, such as finance, (derivatives, contracts, and vested financial interests) & law (copyright/IP).
With that being said, it is not resoundingly clear if the financial products of NFTs (*that currently exist*) will be the “killer apps” within the NFT vertical. Let us explain why..
Illiquidity- A Feature of Non-fungibility
As mentioned previously, most NFT’s & NFT marketplaces tend to suffer from illiquidity. If you venture onto OpenSea, Rarible and dozens of other NFT market places, you will notice that most pieces listed have 1–3, if not 0 bids. It is virtually a seller’s market (aside from the minority of famous artists/projects).
In terms of financial NFTs, there are also projects which appeared promising at first, such as Premia (also visor, rocket nft..the list goes on), which utilizes NFT technology to create a robust options market (calls/puts etc..). The protocol and technology was impressive, however, the project suffered from one problem…you guessed it….illiquidity. This is in part due to the complex nature of financial NFTs, paired with a significantly smaller audience of investors for this market (options) as compared to options markets in traditional finance & global capital markets.
We believe the problem with most NFT projects (and crypto in general) stems from one obvious problem….technology is being built in search of a customer, rather than finding a customer/need in the market place, and focusing on reverse engineering towards product-market fit.
The nature of non-fungibility gives rise to this illiquidity problem, as bespoke contracts/products requires a wide customer/investor base of individuals with specific needs, rather than a collection of investors coming together around a central vision/project/token/investment which as a by-product, creates liquidity.
So how does one solve the liquidity problem?
Fungibility vs. Non-Fungibility
If there is one truth which virtually everyone can agree upon about the dynamics of crypto, it is that millions of investors and communities have come together to achieve one end in particular, finding financially rewarding opportunities.
ICOs, AMM’s/Yield Farming/hodling “moonbags” are all methods of achieving the aforementioned goal.
The enabling force behind these opportunities has been fungibility. By having a universal token/asset, the subsequent liquidity allows robust markets to be created.
However, as outlined in the LitePaper of Revest Finance, fungibility has several drawbacks, friction of transferring complex value (such as vested value) being the main one(side note: M&A via NFT locked team funds is really cool).
So then the question becomes, how can one create a product that embodies the features & incentives of universal fungibility, while leveraging the technology of non-fungibility (bespoke) to generate an offering that only an ERC-1155 can offer. In other words, what market value (at scale) can this technology create & capture, that was not possible before this ERC standard?
From our perspective, this comes down to two elements. The first being individual & community appeal, the other being the composability aspect of the ERC-1155 standard.
Universal-Bespoke Concept (UBC)
The “Universal Appeal” of an asset/investment in crypto we believe comes down to two things in particular (amongst others):
- Central Vision/Goal that creates a community of believers (investors)
The “Bespoke” appeal derives from two things as well:
- Uniqueness Of Concept/Appeal at the individual level
- Exclusivity Of Investment Opportunity at the individual & subsequently the community level
In order to embody the spirit of the “Universal-Bespoke” appeal, one must first find(or create) a need/desire in the marketplace, and engineer a protocol that caters to distinct sectors of the market while offering liquidity.
Reverse Engineering Product Market Fit Into The Protocol Layer : Composability
While researching the basics of the ERC-1155 standard, along with the features of the Revest Protocol, the value proposition became quite clear. This new protocol/NFT standard creates new opportunities around a wider composability set.
Currently, the most basic composability set dominant in the crypto market is as follows:
Consideration(Input): $$ Investment
In other words, this composability set involves a payment in exchange for tokens at various time intervals.
Given the flexible nature of ERC-1155 tokens, new composability sets can be created.
1. “Capitalizing Creatives”- Royalty NFT (RNFT)
Creating A Community of Patrons Financing Unique Artists
Variable: Value & Trading Velocity of art NFT
Consideration: $$ Investment
The value accrued to NFT’s by renowned artists (& projects) vs. all the rest follows a Pareto Law distribution. In other words, a small % of artists account for the majority % of value/liquidity of NFT sales($).
At the same time, unless one is able to buy one of these NFT’s (early) and resell them, making significant profits on the majority of traditional art NFTs is a challenge to say the least. For most individuals, making money in the NFT vertical, despite its popularity & scope, is not as clear as buying into IDO’s that return multiple X’s.
Additionally, artists searching for capital and resources to create new masterpieces has also been a challenge in the real & virtual world. However, as history has shown us, the patrons who identified artistic talent early on and funded these individuals profited substantially (Medici Family, Royal Families, Churches etc..).
The ideology of creating a Patron class of investors is timeless, and presents a “Unique-Bespoke” opportunity for investors.
By bringing together communities of art/NFT enthusiasts (or just opportunistic investors), artists with bold visions and talent can receive funding to create masterpieces, while investors receive a % (or all) of the royalties. Such a FNFT (RNFT) would derive it’s value from the NPV of future royalties.
A very rough and non-technical illustration of how this would look like as a product (the technical details need to be ironed out of course). Please ignore the handwriting, and follow along the numbered workflow steps :)
In essence, the Revest platform would leverage ERC-1155 standards along with price oracles to connect patrons with artists. We would imagine the RNFT would embody the Multiple Deposit NFT or “MDNFT”. Ideally, the Revest platform could initially be the creator of one “Meta” RNFT that onboards new NFTs, Artists & Investors.
If we understand the composability feature of the MDNFT correctly, then an entire project could be created around ONE RNFT “Plan A”! It would be a rinse & repeat process of the workflow illustrated above, for new artists/collections, and also new investors.
In such a scenario, the Meta RNFT creator (Revest), would program the following:
- Multiple art NFTs to be added/burned from the Meta RNFT (as sales and new creations occur)
- Add addresses/wallets ( of investors) to the Meta RNFT for (input)seed investments +(output) royalty payouts on a pro-rata basis.
- Revest’s Meta RNFT would list the art works under the Meta RNFT’s wallet and use this wallet to receive payouts (principal + royalties).
- The very first payment from OpenSea (principal) would go directly to the artists, and following royalty payments would go to patrons (and artists if so desired.)
- Every individual investor in the pool would receive a “INFT”, investor NFT (for a lack of a better term), which represents a pro-rata % of the royalties paid (this is so that an investor can resell their share of the Meta RNFT on the market, so the buyer of this INFT will receive the future pro-rata% of royalty payments (payout history will be displayed on INFT GUI).
Or, instead of making one Meta RNFT “Plan A” to encompass the Patron product, Meta RNFT’s can be constructed on a case-by-case basis per artist/collection “Plan B”
This would be a sort of programmed product. We assume creating the first Meta RNFT would require some complex coding/construction, however, once it is completed, it can be easily replicated for future Meta RNFTs “Plan B”(or just one Meta RNFT to rule them all “Plan A” with repetitive changes such as adding new investors + art NFTs).
If this RNFT product is standardized, then artists themselves can mint RNFTs and carry out the entire process on their own with their own community! This would bypass the need for an artist to launch their own community token for fundraising, rather it would require simply minting an RNFT from Revest’s platform!
Side Note/Secret: Similar to how investors mainly buy tokens of projects at IDO or on listing to have partial ownership of a company, a means of buying into the future success of a world-class artist does not exist (apart from paying thousands or millions to buy their NFT). With the Patron Meta RNFT, investors get a chance to buy into a talented PERSON, by acquiring a share of ownership of the artist’s NFT future royalties, while providing them valuable resources (capital + marketing + community) upfront. The Meta RNFT would derive it’s value from BOTH the velocity + value of NFTs as they are resold.
The following rough draft of the product proposal, RNFT, is the first of many potential use cases for Revest’s ERC-1155 FNFT’s. The goal of us elucidating this product was to demonstrate that in addition to “building it & they will come”, Revest has the unique opportunity to create TARGETED products within the protocol layer itself, rather than relying on a “user-generated” model where it is up to the consumers to find their own use cases (which is why most financial NFT platforms are illiquid).
*Furthermore, we believe the success of Revest is heavily dependent on finding valuable use-cases for the protocol, whether it be through partnerships with other projects, or finding product-market fit ourselves (RNFT).*
This article is a very, very rough draft (surely with grammatical errors), just to put our brainstorming process on digital ink & paper :). Thank you for taking the time to read it!
-Abe, Associate — The NewField Fund
As a new investment fund focused on the disruptive technology of tomorrow, we hope to share our world-view and mental frameworks in which we derive our theses. We welcome change and progress, but also strive to understand truths that remain constant and are timeless.
Disclaimer: Nothing written in this research article, or any article by The NewField Fund should be considered as financial, legal, or investment advice of any kind. Investing in crypto is highly risky, do your own research. #DYOR