Dialogue with Meng Yan: The Future of NFTs and Token Economy

This article is an original piece by Chain Catcher, authored by Alyson.

As an expert in token economics, Meng Yan has conducted in-depth research on digital assets, focusing on areas closely related to the currently booming "NFT" finance. This time, Chain Catcher uses his initiated NFT project Solv as an example to explore his thoughts, research, and judgments on NFTs and DeFi, offering both depth and breadth, hoping to inspire you.

Chain Catcher: In a bull market, the value of various fields, tracks, and projects is more easily highlighted. What areas have you been focusing on recently?

Meng Yan: I wasn't an industry researcher or an investor before; I have been more focused on the research of digital assets and token economics. Therefore, I don't spend all day scanning for targets.

In the past six months, I have been concentrating on entrepreneurship with my team, choosing the new direction of digital tickets. The research and exploration tasks themselves are quite heavy, so I have paid less attention to unrelated tracks and fields.

In this situation, I can only choose to form an overall understanding of the entire industry and then delve into one area, without looking around. Within my focus, NFT financial applications are the biggest highlight, and related lending, NFT trading, and related derivatives have been my main research and thinking areas over the past six months.

Chain Catcher: When it comes to NFTs, people often discuss areas like crypto art, gaming, and voxel 3D; the DeFi track also has many blue oceans. What opportunity led you to consider a project in the area of ticket tokens?

Meng Yan: Choosing a strategic direction must align with one's own characteristics and advantages. We are not dismissive of areas like gaming and storage; we are also very interested in new fields like the Polkadot ecosystem and Web 3.0. However, the team's inherent qualities and the experiences and knowledge accumulation of several founders lead us to focus more on the application direction of tokens and digital assets, which is clearly closest to DeFi.

Of course, as you mentioned, even within the DeFi direction, there are many "blue ocean" tracks. Our choice of ticket tokens is a careful decision based on long-term thinking about the "token" issue.

Compared to many talented individuals in the "crypto circle," I consider myself relatively dull, not fast, and not quick to react. My strengths do not lie in rapidly switching directions to seize opportunities; rather, I am more suited to persist in a chosen direction for ten years without wavering.

I began focusing on the "token" direction in 2017 and have not wavered in four years. In December of that year, I exchanged views with Teacher Yuan Dao on the issue of tokens and published a series of articles, subsequently forming a small group that called itself the "Token School," with Wang Wei among them.

From 2018 to 2019, most of my attention was on the research of token economics, specifically thinking about how to set up token incentive systems to organize large-scale network collaboration in a decentralized manner. Essentially, it is a matter of governance system creation and capital budgeting. This direction is very promising, but due to limitations in infrastructure, regulatory environment, and industry atmosphere, its true potential may not be fully realized until five or even ten years later.

By mid-2019, under the guidance of Teacher Zhu Jiaming from the Digital Asset Research Institute, I shifted my research focus to digital assets, studying the significance, nature, creation, programmatic management, and valuation of digital assets.

Transitioning from digital assets to DeFi is not a change in route. DeFi is entirely based on digital assets, so the rise of DeFi poses no knowledge or understanding barriers for us, and we quickly became eager to engage. However, until last August, we couldn't come up with any "good ideas." As for copying, cloning, or adopting a bit of the Chinese community model, that is not our strength, and from what I have seen and heard over the past few years, not to mention doing well, there are not many who can avoid being harmed by it.

So we remain relatively patient; after all, we have been lurking in the industry for several years, and fluctuations do not depend on the moment. Our mindset has always been relatively calm.

The turning point was last August when Wang Wei recommended that I read an article by Ross Ulbricht, the founder of the original dark web "Silk Road," published in prison about how to improve MakerDAO. This article mainly pointed out that there is room for improvement in MakerDAO's token incentive system. I do not take a position on its main conclusions, but this article changed the way I researched DeFi projects.

Before this, like most DeFi players and investors, I was quickly skimming through a large number of new projects every day, which is not my strength, so it was quite laborious. This article reminded me that even for mature projects like MakerDAO, there are still many issues that remain debatable and in need of improvement.

If one is looking for entrepreneurial directions, it is better to deeply study one or two mainstream protocols and thoroughly understand their pros and cons. Deep thinking is something I am relatively good at.

So, based on Ulbricht's article, I further delved into MakerDAO. After about a week of research, I proposed six improvement points. Besides the issue pointed out by Ulbricht, I listed several other problems, one of which is the issue of "illiquid collateral."

I clearly identified this problem and proposed the idea of using tickets to represent collateral assets, thereby regaining liquidity. Then I had in-depth discussions with Wang Wei and Zhou Zhiqiang. Zhiqiang has very strong industry research capabilities; he quickly analyzed the entire market situation and concluded that this problem indeed exists and has troubled many projects. At the same time, he did not find other projects making efforts in the ticket token track.

Wang Wei, with years of experience in traditional financial system development, thought deeply and systematically about the problem. He quickly grasped it and then led the team to conduct in-depth research at the code level on Compound and Aave, roughly assessing the solvability of the problem. Therefore, we ultimately reached a consensus to focus our exploratory direction on digital tickets.

This circle is filled with exceptionally smart people who move very quickly. This is both an advantage and a disadvantage because the speed is so fast that for a new project, one must decide on an action strategy after just a few hours of review before moving on to the next project. Such a pace does not allow for deep thinking, and thus very few people can have "big ideas" during a bull market.

I evaluated the situation at that time and felt that there was no need to rush into the digital ticket matter; it was essential to first clarify the theoretical issues. Therefore, the entire month of September was spent on theoretical research, and the research results were compiled into an article published in early October last year titled "What is a Digital Asset."

The article is lengthy, and not many people have the patience to read it, but it is very important for us as it is an essential thinking process. In this article, we pointed out that the entire digital asset landscape currently lacks an important category, which is digital tickets. From that moment on, we decided to position our innovation direction as digital tickets.

Once the direction was determined, the specific technical solution design and implementation were entirely thanks to Wang Wei and our technical team. Objectively speaking, the vNFT they developed greatly exceeded the initial expectations of Zhiqiang and me.

So, it can be roughly said that the direction of Solv was proposed by me, designed and implemented by Wang Wei, verified and confirmed by Zhiqiang, and then iteratively improved through a process filled with disagreements, debates, entanglements, and confusion, though surprises were the main theme. This experience itself made me realize that innovation must also be an iterative process of team collaboration.

Chain Catcher: What application scenarios do digital tickets in DeFi have? Taking Solv as an example, what problems can it solve?

Meng Yan: Tickets are one of the oldest commercial and financial tools, appearing long before paper currency itself. In China, the so-called "heqian" appeared during the Warring States period, known as "feiqian" in the Tang Dynasty, and became "huipiao" in the Ming Dynasty, evolving into what we now call bills.

In contemporary times, various tickets play an indispensable role in commerce. Kazuo Inamori once proposed a one-to-one correspondence principle when introducing his practical management, which states that in business activities, money, goods, and tickets must correspond one-to-one. This shows that tickets themselves are an essential basic element in business operations.

The "tickets" referred to by general financial institutions are still narrow, only including commercial bills issued by banks and enterprises, promissory notes, bills of exchange, checks, etc. Just this part alone had a total national transaction amount exceeding 130 trillion in 2019.

Upon closer examination, I could list dozens of types of tickets. Just for bills of exchange, there are commercial drafts, accommodation bills, collection bills, bills payable on demand, inchoate bills, and so on, with a wide variety and flexible applications.

This is not even exhaustive. In the aforementioned article, we provided a broad definition of tickets:

A ticket is a special type of standardized contract.

The prominent feature of tickets is their brevity; they can often be printed on a single page or even a small piece of paper. This does not mean that the contractual terms of tickets must be short; rather, it is mainly because tickets are more standardized, embodying a broader consensus, so many terms related to the use of tickets do not need to be printed on the ticket itself but are placed outside the ticket, established by convention or explicitly regulated.

For example, for invoices, checks, promissory notes, bills of exchange, time bills, and other tickets, as well as identification cards, household registration, and academic certificates, the state has specific legal provisions to regulate them, which do not need to be printed on the ticket, allowing the ticket itself to be very concise.

According to this broad definition, we can even categorize some financial instruments traditionally not referred to as tickets, such as forward contracts, futures, swaps, options, bonds, ABS, and some atypical financial rights proofs, such as property deeds, land contracts, tickets, ownership certificates, qualification certificates, etc., all as tickets. This way, tickets directly encompass most rights and debt proofs as well as financial derivatives.

The vNFT developed by Solv is a universal digital ticket description protocol capable of describing the vast majority of tickets. We can make an analogy: ERC20 can describe digital currencies, points, and other homogeneous tokens; ERC721 can describe unique individual objects; ERC1155 excels at describing standardized industrial products, while vNFT specializes in digital ticket tokens, or simply digital tickets. We define digital tickets as a special type of token, a token with an advanced data structure.

Solv's digital tickets should possess five characteristics. The first is programmability, which is a common feature of all tokens, but it is this aspect that distinguishes them from traditional tickets. Notably, blockchain is inherently a time series, and programmability on the blockchain means that digital tickets come with a unified timeline.

The second is heterogeneity, meaning that each ticket issued under the same contract can be different, having independent states that can change individually, which is different from ERC20. The third is that it contains quantity information, is divisible, and can circulate partially, which ERC721 cannot achieve.

The fourth is composability, which includes both merging several homogeneous digital tickets and packaging several heterogeneous digital tickets. These two combinations can support different application scenarios. The fifth is upgradability; the information of a digital ticket cannot be altered, but new information and data can be added.

The introduction of digital tickets to the blockchain may not be about "what problems can it solve" or "what scenarios can it be used in," but rather it expands a vast category of digital assets. Once you see the categories and characteristics of tickets, with a little imagination, you will immediately recognize that its application space is limitless. Here, I will provide four examples.

First, we can create a digital ticket that locks a certain amount of underlying assets and programs it to have the ability to automatically unlock and release at a set time. This can create a new asset that can bring a "positive asset flow" to the holder in a predetermined manner in the future.

Such a digital ticket can simulate time deposits, bonds, forward and futures contracts, and investor shares. Solv's first application, IC Market, uses such digital tickets to represent investor shares, facilitating the liquidity of locked project shares. If we add a condition to such a ticket that a certain price must be paid to unlock the underlying assets, then this becomes a call option.

Second, we can combine several assets into a "asset package" digital ticket and then homogenize and split it to obtain a ticket representing the share of the asset package.

Unlike traditional financial fund shares and ETF indices, this share ticket genuinely contains those underlying assets, so you can independently request those underlying assets, and of course, you can also recombine them. We can also layer and split such asset packages to create "senior" and "junior" structures in ABS.

Third, we can combine installment payment contracts, asset subjects, and debt balances into a digital ticket, setting up programmatic clearing and interest rate mechanisms, thus obtaining a mortgage installment contract digital ticket, which can support businesses similar to housing mortgages.

Fourth, we can create a digital ticket representing partial ownership, thereby supporting "group buying" of digital assets.

There are countless such examples, but we do not intend to do them all ourselves. The core of Solv is to create a factory for digital tickets, a trading circulation infrastructure, and a cross-market liquidity pool. Solv is not limited to specific platforms; we are willing to support everything from public chains to industry and alliance chains.

For specific digital tickets and applications, we will try to open them up to ecological partners to complete. For example, if there are blockchain partners capable of using Solv for accounts receivable tickets and warehouse receipts, and promoting industry-level supply chain finance, we will provide the vNFT standard and solutions to support them for free, and even offer ecological incentives and subsidies in the early stages of Solv's development.

Chain Catcher: NFTs have opened a "door" for real-world assets to be put on-chain. In past blockchain practices, the combination of NFT and STO as an innovative model for the future on-chain asset value cycle seems to be the most likely path to success in the current market environment. What advantages does it have in terms of economy and compliance? What would be the biggest obstacles? How does Solv specifically implement and operate the NFTization of physical assets?

Meng Yan: Regarding NFT + STO, the main idea is to import real-world physical assets into the blockchain through compliance processes, corresponding to NFTs. After the rise of NFTs, there is a new approach to putting physical assets on-chain, which is certainly a good thing. However, I must remind you that despite the years of blockchain development, why has the on-chain of physical assets not been successful? There are reasons for this.

For example, the often-discussed hard link issue: how to ensure that off-chain assets and on-chain tokens form an unbreakable and unforgeable correspondence? Once there is a flaw, who will be responsible for it? Can legal and financial infrastructures recognize on-chain assets? When there is a contradiction between consensus on the blockchain and legal recognition, which one prevails? NFTs have not solved these problems. Therefore, putting physical assets on-chain remains fraught with difficulties.

Thus, we see that amidst the NFT craze, the first to be favored are still some artworks that exist purely in digital form. For example, Beeple's paintings, Musk's NFT song, etc. The famous incident of burning a painting and putting it on-chain essentially involves abandoning the physical form and completely transforming it into a digital form. Contrary to many interpretations, this act of art does not point out a path for putting physical assets on-chain; rather, it starkly demonstrates how difficult it is to put physical assets on-chain.

The on-chain of physical assets requires the combined efforts of both the establishment and the grassroots, the integration of the Internet of Things and blockchain, and more importantly, time to build consensus and unity. Solv has no intention and cannot solve this alone. However, in specific areas, Solv can indeed make a difference.

For example, for security tokens, whether the off-chain supporting assets are equity, debt, or individual asset rights, as long as they are issued through compliance procedures and form a "hard link" through legal means, they can be issued as digital tickets within Solv. Of course, as relevant laws and regulatory mechanisms gradually improve in the future, we would be more than happy to see people skip unnecessary intermediary processes and directly create vNFT digital tickets based on physical assets. I believe corporate users will quickly realize the advantages of vNFT in this scenario.

I am actively participating in the design of the model related to the equity token of the first STO project in China, Xiamen Huiguanche. How to incorporate digital tickets into the STO is also one of my primary concerns.

Chain Catcher: What are the innovative points of Solv's token economic model, and how does it capture value? How does it differ from the economic models of other tokens in the NFT track?

Meng Yan: The token economic model of Solv is currently under confidentiality. I can only discuss the general ideas here.

A DeFi project must have innovation, but its token economic model does not necessarily need to be innovative. On the contrary, under the premise of meeting governance and incentive goals, the token economic model should adopt proven mature solutions as much as possible.

The reason is that the essence of token economics is to establish a certain programmatic investment mechanism that incentivizes the entire ecosystem to make key contributions to the project, thereby achieving growth in market value and token price. It is important to note that the central issues studied daily in traditional corporate finance are financing—deciding how to raise funds, capital budgeting—deciding how to invest, and risk management—how to manage risks. These three are central topics in token economics and are not new concepts. Tools such as market value balance sheets can also be applied in token economics.

However, token economics has several new propositions that traditional corporate finance has not considered:

First, the main investment behavior in token economics is to directly incentivize users to contribute to the ecosystem;

Second, token economics uses project tokens rather than currency for investment;

Third, because token economics uses tokens for investment, traditional corporate finance tools such as Net Present Value (NPV), Internal Rate of Return (IRR), and Cost of Capital (CoC) are no longer applicable or require significant modifications before they can be used;

Fourth, investments in token economics must not only increase total market value but also enhance the price of individual tokens. These two are almost the same in traditional stock markets, but token economics often issues new tokens for investment and incentives, creating a conflict between the two goals that requires careful consideration;

Fifth, a significant portion of investments and incentives in token economics is programmatic and automated, with the programs being public and transparent.

For these reasons, academic research on token economics, as far as I can see, is just beginning. It can be said that there is still no theoretical framework that can be called a theory. Since token economics is crucial to the success or failure of a project, it requires getting it right as much as possible on the first try. In this case, only successful experiences and lessons learned can guide the design and practice of token economics, meaning that the design of token economics is entirely empirical.

The token economic models in the industry are mixed, especially in a bull market, where various pseudo-success models confuse the audience, necessitating careful discernment. Truly excellent token economics are effective, controllable, and sustainable, and are not meticulously designed but often summarized from extensive practice. After many attempts, there will inevitably be a few instances where timing, location, and people align, yielding excellent results that can withstand market fluctuations. Such good models are rare and should be optimized and reused as much as possible, avoiding unnecessary cleverness.

In practice, I often see people designing token economic models in a haphazard manner, most of which stems from their lack of understanding of the difficulties involved. The designs they produce are riddled with flaws, often without their awareness. Although my Solv economic model design cannot be disclosed yet, once it is made public, you will certainly find it familiar.

Chain Catcher: Solv is a platform that can support multiple applications, but there are many NFT issuance platforms currently. What are your barriers and competitive advantages?

Meng Yan: Solv is built on the vNFT standard we created, establishing a multi-application platform, which is the core difference from other NFT platforms. We use our own digital ticket protocol at the base layer and some innovative application products at the upper layer.

In the future, I believe there will be digital ticket protocols competing with vNFT, and many teams will build applications competing with Solv based on vNFT. However, I want to say that based on the logic and culture of DeFi, we actually welcome such competition. Although blockchain has not been around for long, it has been over a decade, and we have only seen projects fail due to strategic errors or unethical intentions, not due to competition.

Chain Catcher: How do you view the current development stage of DeFi? Where do you see the greatest imaginative space in the combination of NFT and DeFi? And from what perspective do you view NFTs?

Meng Yan: I study digital assets, so I would like to answer this question from the perspective of digital assets. As DeFi has developed to this point, what digital assets have been created and circulated? How many more digital assets can be created and circulated in the future? I would like to express our views on the future with the following diagram.

I believe that in the next 4-5 years, the digital assets on the entire DeFi platform will exhibit a power-law distribution based on trading volume. The very left end of the curve, which is thin and tall, represents digital currencies and ERC20 tokens, corresponding to real-world stocks and currency markets, with the largest trading volume but a very high concentration. There may be fifty to a hundred assets with extremely high trading volumes, while the rest cannot be compared.

On the far right end of the curve, the rapidly emerging ERC721 NFTs, such as artworks and collectibles, represent the "long tail," which corresponds to personal handmade products in the real world. There are numerous types and quantities; everything can be an NFT, and everyone can create countless NFTs, but the vast majority have zero trading volume.

Therefore, although NFTs are currently very popular, due to high trading friction, this type of asset is destined to occupy a very small proportion of the entire trading market.

The middle section of the diagram, which is thick and robust, belongs to industrial products, bulk commodities, gaming assets, and digital tickets. They are diverse, have a massive total volume, and are highly standardized with low trading friction, resulting in substantial trading volumes, corresponding to standardized industrial products and tickets in the real world, thus constituting the largest area in the entire digital asset market. Gaming assets are suitable for representation using ERC1155, while Solv's vNFT digital tickets focus on digital financial tickets.

If my judgment is correct, then from the perspective of asset types and trading volumes, DeFi may have completed less than 5%, leaving immense room for development. In the short term, the areas with the most imaginative potential, as mentioned in the diagram, are gaming assets and financial NFTs, which represent entirely new territories.