NGC: This is how we understand the essence of NFTs and investment opportunities

This article is sourced from keyahayek.medium.com, authored by Kay F, Butian Li, and Pang Yao Her, investment managers at NGC Ventures.

NGC shares the latest observations and thoughts in the NFT space in this article.

Metadata Containers in the Era of Web 3.0

What are we talking about when we talk about NFTs?

From the inception of Crypto Punk, to the peculiar CryptoKitties, the little creatures of Axie Infinity, to Beeple's $69 million artwork, or the LP NFTs of Uniswap V3, the role of "NFTs" varies greatly, yet we discuss them collectively.

But in the midst of this extensive discussion, what exactly do we mean when we use the term NFT? In other words, how should we positively define NFTs as a concept that is the opposite of Fungible Tokens?

Our definition is: Metadata containers in the era of Web 3.0.

If you can write code, you must interact with a lot of JSON and XML files in your daily CRUD work. These files provide necessary metadata information. Of course, if you can't code, that's fine too. For example, using the API provided by CoinGecko, we requested the Public Treasury information for Bitcoin, and the returned fields include totalholdings, totalvalueusd, marketcap_dominance, companies, etc. For instance, within companies, we can further nest information such as name, symbol, country, etc.

Each NFT can essentially be understood as a unique JSON file. You can describe an NFT like this:

• Digital art NFTs: including metadata such as issuance quantity, artist information, storage address (HTTP/IPFS), etc.
• Game item NFTs: including metadata such as attributes, levels, rarity, etc.
• Uniswap V3 NFTs: metadata such as ID, Pair, Min Tick, Max Tick, Easter egg stars, etc.
• ……

TL; DR

As a crypto-native investment institution, it would be unprofessional to conflate the various aspects mentioned above. We particularly favor the following directions:

• Digital art, especially Eastern digital art
• Blockchain games, especially those that combine entertainment and economics, card games => RPGs
• Asset liquidity solutions, from native digital art NFTs to anything in the real world

In specific discussions, this article will try to avoid using the generic term "NFT." In fact, in the implementation of these categories, NFTs often do not exist, such as blockchain games that may not require NFTs, or asset liquidity solutions where digital art NFTs are merely one type of object, while unlisted equity in companies and tokens in lock-up status are also suitable objects.

Digital Art

The traditional digital art market has always faced several major issues. Firstly, digital art transactions and negotiations rely on traditional centralized exchanges, and the transaction fees for Ethereum payments are extremely high. Moreover, artists can only participate in the revenue share from the initial NFT sale, and thereafter have almost no control over the pricing of their artworks, which entirely depends on collectors or intermediaries. Lastly, artworks may face risks of being destroyed by buyers, lost private keys, or other reasons that prevent them from circulating in the market.

The emergence of TopBidder provides a remedy for various issues in the traditional digital art market. TopBidder combines radical market theory with an auction protocol, implementing a production and issuance mechanism for non-permanent ownership assets. Any bidder can gain ownership of the asset as long as they bid at least 10% higher than the previous bidder.

Uniswap for Digital Art

We have high expectations for TopBidder, as we believe it possesses many characteristics of Uniswap-level innovation in the Digital Art field. If we look back, Uniswap was not the first pioneer in AMM DEXs, but it managed to rise to prominence. We believe there are two main reasons for this:

1. In Uniswap V1 and V2, an arbitrary price curve of x*y=k was established. Although this was not the case in past transactions—market makers do not provide liquidity evenly (for example, Curve, DODO, and of course Uniswap V3 all differ significantly from this model)—the on-chain performance, when unable to support order books, can provide round-the-clock liquidity for any ERC-20 altcoin.

2. In Uniswap V1, ETH was chosen as the basecoin for trading pairs, which has several obvious advantages:

• Low transaction fees
• Compared to the AMM pioneer Bancor, which chose BNT as its initial basecoin, users are more willing to HODL LP pairs against ETH to provide liquidity
• Imagine a scenario: if for several blocks, a trading pair on Uniswap has no transactions, and that token only has liquidity in the ETH pair on Uniswap (or has the main liquidity), if the external ETH price rises by 5%, the token price will also rise accordingly—generally, the liquidity of tokens on DEXs is highly correlated with the price of ETH, making it easy to achieve a positive spiral in a bull market.

Similarly, TopBidder is not the first digital art auction platform, but we have identified three points of potential similar to early Uniswap:

1. There are already many platforms providing digital art auctions in the market, with various auction methods (curves) to choose from. Therefore, the prices of digital art often vary significantly due to different pricing strategies. By arbitrarily establishing a piecewise function price curve (starting at 0.05 ETH, increasing by 0.05 ETH for each bid below 0.5 ETH, and increasing by 10% for bids above 0.5 ETH), although this auction method may not suit every type of NFT (for example, game items may not be suitable), it can provide perpetual liquidity for digital art in the context of subjective pricing.

2. Perpetual liquidity: Because modifications were made at the ERC-721 standard level, users can directly purchase and transfer the digital art NFT from the previous owner by paying a higher price according to the given curve—other auction protocols may have similar auction curves, but auctions are time-limited. Once the auction time ends, the digital art NFT will no longer circulate in the market, leading to a mismatch between purchasing demand and supply.

3. Choosing ETH as the auction's basecoin has three obvious benefits:

• Low transaction fees
• Positive spiral in a bull market
• This point is somewhat tricky—the impact of pricing units on consumer psychology: the group consuming digital art is largely composed of crypto natives who made profits during the bull market. For these individuals, spending 1 ETH or $2500, despite the current price being similar, leads to entirely different consumer psychology.

Eastern Digital Art

The social attributes of artworks are not a new product of the social platform economy in recent years. Since the 14th century Renaissance, one of the means by which the emerging bourgeoisie in Italy emulated the nobility to elevate their social status was by purchasing artworks for their homes, giving rise to humanistic paintings that pursued secular pleasures. The Renaissance was, in fact, a product of commercial revival. The Medici family, possessing incredible wealth as the richest family in Europe, firmly held power in Florence, making it a significant cultural center and opening countless doors for Italian artists. The circulation of artworks reflects social demand, while the value of artworks is a manifestation of social consensus and attention. The flow of art and wealth has historically aligned, which is understandable; money and price merely quantify social attention, i.e., traffic. When digital assets accumulate to a certain level and attract billions of users, the flow of New Money opens the door to new digital artworks and new trading forms.

Historically, every world-class economic entity has had corresponding world-class cultural dissemination and influence during its peak, typically occurring when per capita GDP reaches around $10,000.

NGC: This is how we understand the essence of NFTs and investment opportunities Source: https://ourworldindata.org/grapher/gdp-per-capita-maddison-2020

• In the 1970s, the United States had cultural icons like Disney and Superman, along with the counterculture movement and hippie spirit.
• In the 1980s, Japan exported anime, Nintendo, and bushido to the world, a period known as "Exciting Showa."
• From the late 1990s to the early 2000s, South Korea had K-POP, Korean dramas, and girl groups, referred to as the "Miracle on the Han River."

Especially CJK (China, Japan, Korea) are often mentioned together, and their development trajectories are quite similar, generally starting from the first Olympic Games leading to economic takeoff—1964 Tokyo Olympics, 1988 Seoul Olympics, 2008 Beijing Olympics—after about 10 to 15 years, per capita GDP reaches around $10,000, beginning to export culture. As of the 2020s, China, as one of the world's top two economies, should naturally have the capacity for world-class cultural output. We believe that digital art NFTs may be one of the prominent carriers and forms of Chinese culture in this grand era.

As an investment institution, we prefer to establish pipelines rather than just flipping buckets, such as investing in digital art trading platforms like TopBidder that have protocol-level innovations, or potentially investing in early works of outstanding young artists in the future.

Blockchain Games

The Practical Application of Algorithmic Stablecoins?

Players of algorithmic stablecoins will find many similarities with algorithmic stablecoins in blockchain games like Axie Infinity, but most algorithmic stablecoin "perpetual motion machine" experiments have failed, whereas NFT games have not. AXS is similar to the Share in the three-coin model of algorithmic stablecoins, while SLP serves as the floating exchange rate Cash. Synthesizing Axies requires staking SLP and burning AXS, with the synthesized assets used for mining and battles, providing good services, and players pay for a good experience, creating a positive cycle, whereas algorithmic stablecoins only generate assets without consumption.

Looking back, this does not mean that the inspiration for blockchain games comes from algorithmic stablecoins, but rather that the experience with algorithmic stablecoins helps us better understand the game-theoretic models in games. In fact, the essence of game design (since the advent of internet games) lies in the design of the game mechanics, which is a crucial source of playability. Traditional game development teams also require a large number of psychologists and data scientists. Compared to traditional games, blockchain games have created a new play-to-earn model. Players who spend money still do so, but not all income goes back to centralized companies like Blizzard or Tencent—excellent players can earn substantial amounts. Currently, there are about 100,000 daily active Axies breeders on Axie Infinity. After Bitcoin dropped from $60,000 to over $30,000, the prices of pets on Axies have remained above $100, indicating that blockchain games are one of the few sectors not affected by Bitcoin, with immense opportunities and potential for future development.

From Card Games to RPGs

If card games are the crystallization of game theory, then RPG games are the product of technological advancement and the elevation of sensory experience. Big Time is a multiplayer online RPG game where players can create their characters, choose races and skills, explore maps, and engage in various social interactions such as teaming up, battling, producing, and trading. Players need to traverse different civilizations in time and space, collect game equipment NFTs to enhance their characters and obtain rare skins, and can customize their portals, with rare NFTs making their portals look cooler. Just like in the real world, players can rent, buy, and trade their NFT goods.

Big Time is expected to launch dynamic equipment NFTs and VIP early bird tickets on Binance NFT Exchange on July 15. Binance's NFT exchange greatly promotes the career prospects in the play-to-earn industry. In many developing countries, many professional players earn a living through play-to-earn NFTs, especially during the pandemic, where their income far exceeds that of local gig jobs.

OpenSea is "Xianyu," Blockchain Games are "JD"

The trading volume of the NFT category is in blockchain games, not on traditional NFT trading platforms like OpenSea. To outsiders, the leading NFT trading market, OpenSea, mostly features digital art and some outdated NFTs, resembling a second-hand market similar to Xianyu. To some extent, the so-called poor liquidity of NFTs refers specifically to these outdated NFTs as "bad assets" on OpenSea.

Asset Liquidity Solutions

Convergence

The emergence of Convergence Finance provides an entry point for individual investors into the high-end art market. Fragmented NFT investments allow expensive yet high-yield quality digital collectibles to penetrate the retail population, significantly enhancing the liquidity of art assets and capital.

Convergence benefits the public by simplifying early capital investments through asset securitization, improving capital flow efficiency. It addresses issues such as the difficulty of selling old shares typically seen in the primary and secondary markets: VC funds must exit once their fund term ends, but the shares held lack liquidity because the company is not publicly listed. It also addresses phenomena faced by cryptocurrency funds, such as project lock-ups. ConvX can bundle private placement quotas into Convergence's liquidity pool, allowing DeFi users to purchase shares of startups like SpaceX on Convergence.

Fragmented NFTs and Wrapped Security Tokens (WSTs) serve as new asset trading containers, opening new channels for asset liquidity.

Conclusion

In the progress of Web 3, NFTs are the meta-concept born from the metaverse. Their emergence marks our exploration and validation of value carriers and interaction models in the initially chaotic new economic ecosystem.

Disclaimer: This article is for reference only and should not be considered investment advice. NGC Ventures may hold some tokens or equity in the companies discussed in this article.