Detailed Explanation of Verse: Super Exchange Protocol

Original Title: 《Verse: The Hyperexchange Protocol》

Author: Kiran

Compiled by: Jason, H.Forest Ventures

Preface

2021 is known as the first year of NFTs, and NFTs are considered the vehicle for Crypto to break into the mainstream, which reflects the rapid development momentum of NFTs and their important position in the entire Crypto ecosystem. However, as "unique" digital items, NFTs inherently have disadvantages in liquidity compared to fungible tokens and homogeneous goods. Currently, there are many solutions in the market to optimize NFT liquidity, including large centralized trading platforms represented by Opensea, as well as projects like Gem.xyz NFT aggregators that enhance the user NFT trading experience. In this article, the author introduces the concept of "super contract pairs," which can, on one hand, allow NFT transactions to "break free" from exchanges, achieving true instant trading; on the other hand, it enables "fragmented" trading of NFTs, lowering the trading threshold. Therefore, the author's idea can enhance NFT liquidity from two aspects. Even though Verse has not yet developed a product, this article at least allows us to understand the conceptualization of cutting-edge solutions in the industry.

Thoughts

In the past few months, I have been fascinated by the concept of NFTs as digital items and how this framework necessitates a completely new paradigm for the exchange of internet-native objects.

Let us first consider the limitations of physical entities. You could say that, literally, anything made of atoms is an "object (entity)," but trying to define this specifically is unhelpful. However, we can focus on an important characteristic of physical entities (as opposed to digital items) that will help us understand the true potential of "digital objects": ownership.

The core innovation of blockchain as a public ledger separates the concept of digital ownership from physical ownership, which lacks any decentralized consensus mechanism. Yet, despite having created this powerful infrastructure to redefine the nature of ownership of digital items, we still rely on transaction systems established for physical entities.

In the physical world, any form of entity exchange requires a market. In this market, entities temporarily exist within the range of their owners. As we know, traditional markets require liquidity from both supply and demand sides to succeed. For Uber, the "liquidity providers" are passengers and drivers; for Airbnb, they are guests and hosts; for StockX, they are sneaker buyers and resellers. In any of these markets, if one side runs out, the other side will soon follow, leading to the collapse of the entire market.

In the past year, we have witnessed the explosion of the NFT market as the first true market for digitally ownable objects. NFTs come in many forms, with functionalities that can include: membership cards, access tokens, interactive games, status symbols, artworks, certificates, and more.

Corresponding to the rapid development of NFTs is the rise of the NFT market, although the current market structures are very similar to those of physical entities and services.

For example, on Opensea, the structure and design of the market are what you would expect from a typical physical goods giant like eBay. This traditional market structure creates a winner-takes-all environment where success is binary: If you have the most liquidity from buyers and sellers, you may win. If not, you may suffer a painful demise.

It is no surprise that OpenSea and Magic Eden have consistently held over 90% of the NFT trading volume market share, despite their fees and downtime being higher than many competitors. Of course, there is much to discuss regarding aggregation theory and its nuances in cryptocurrency, but that is beyond the scope of this article.

It is not hard to imagine that, over time, today's large aggregators will gradually disintegrate within the NFT market ecosystem. We have already seen a surge of niche markets designed specifically for small-scale NFT trading, such as Catalog Works. Undoubtedly, specialized markets will become the go-to place for trading certain types of unique collectibles.

However, in all current cases, all NFTs are traded using some form of auction model and are economically tied to third-party markets. Regardless of market size, we must go to the market to trade and still need to search for prices. The economic outcome remains a competition for locked liquidity. Ultimately, despite having these new, internet-native digital items, we still exchange them as if they were physical entities, subjecting them to the same centralization, dependency, liquidity, and inefficient pricing constraints.

But what if there were another way to exchange digital items—one that truly makes digital objects autonomous and decentralized? What if objects did not need a market to trade? What if the objects themselves were their trading medium?

Introduction to Verse: The Hyperexchange Protocol

The Verse protocol gives each digital item an embedded, autonomous exchange. Structurally, this means that every ERC-721 NFT created through Verse is supported by an underlying ERC-20 market. Let’s analyze how it works in detail.

Through this protocol, creators deploy a pair of contracts consisting of an ERC-20 trading contract and an ERC-721 super object contract. The dynamic price and supply of the ERC-20 token are managed by a bonding curve acting as an AMM. Simply put, this means anyone can buy and sell tokens at any time, with instant liquidity, and the contract will programmatically adjust prices based on circulating supply. Anyone holding at least one atomic unit of the ERC-20 token can redeem their tokens. Redeeming tokens transfers the holder's ERC-20 to the paired super object contract, which mints a new NFT and transfers it to the redeemer in exchange.

For example: Suppose I am a creator who has created a digital basketball court NFT called "Swich Court" through Verse. On Verse, I deploy a pair of contracts that include the ERC-20 SWISH contract and the ERC-721 SwichCourt NFT contract. Then anyone can immediately buy and sell SWISH tokens. Anyone holding at least one SWISH can redeem their tokens and receive a SwishCourt NFT in exchange for one SWISH.

Thus, digital items serve as their own trading medium, possessing an autonomous market. Since the item essentially provides its own liquidity, it can be exchanged without the jurisdiction of intermediaries.

This new exchange structure offers numerous benefits for both NFT creators and consumers.

Consumers now have instant liquidity to continuously buy and sell NFTs. Those who might have been deterred by fixed prices for NFTs can now purchase a small portion based on ERC-20, while whales can still buy and hold larger quantities. Therefore, this mechanism allows trading along the price curve, maximizing market efficiency.

Additionally, creators have absolute control over the pricing of NFTs throughout their lifecycle. Creators can specify the underlying reserve ratio and the initial slope of the ERC-20 price curve, slightly adjusting how they want NFTs to be priced in response to demand changes. In this way, creators can set a practical limit on the supply of NFTs and ensure a certain degree of scarcity.

Perhaps most importantly, Verse enables digital items to exist autonomously anywhere on the internet without needing to connect to a market. Imagine browsing information on a website and seeing an NFT created by Verse, allowing you to trade it at that moment and location. It’s like walking down the street and seeing a pair of Nike Dunks, which you can put on your feet in an instant, rather than having to track down the lowest price, go to a store, and buy them. Thus, the protocol catalyzes a new form of discovery, enabling items to be exchanged instantly where consumption occurs.

What excites me most is the new utility that can arise when ERC-20 mechanisms are combined with NFTs. Compared to physical entities, digital items have three core characteristics that open up a world of possibilities. Digital items are stateful, programmable, and networked. Digital items can represent anything you can code, and having an embedded exchange within the item not only facilitates better forms of trading.

For example, consider a Web3 media network like Mad Realities. Imagine a future where there is a "Mad Realities Episode Idea NFT" created by Verse, where the NFT owner can set the tokenURI to their idea for a new episode. Then, all underlying ERC-20 token holders can stake their tokens to different NFTs, effectively curating their favorite ideas and choosing which ideas make it into the show. As the show becomes more popular, more people will pitch their ideas to the relevant NFTs, driving up token prices and rewarding the curators for their efforts.

Or consider a digital Kith hoodie, which is a blank NFT at minting. Instead of minting a random pattern (similar to the traditional 10k PFP project model), you could customize the pattern of your digital hoodie based on limited attributes in the contract and "build your own NFT." Then, suppose each owner's design could be purchased in a virtual marketplace, and you could use the underlying ERC-20 as NFT-specific currency to buy designs from other creators to display on your hoodie. Such a system would incentivize the establishment of an economy around NFTs and create value for token holders without needing to separate from the asset.

Suddenly, you have an item, market, and social aspects all wrapped together in a tapestry. Each object becomes its own micro-economy, with native incentive mechanisms that encourage builders to develop space and systems for the item’s ecosystem. Through recent projects like OKPC, we have seen innovative experiments treating NFTs as items with their own state and operating systems. Verse is designed to enhance these concepts at the protocol level.

It is worth noting that Verse is best suited for digital item NFTs that are not necessarily unique or do not have varying degrees of "rarity." In the long run, I believe this protocol will incentivize the creation of NFTs that feel more like usable items rather than mere collectibles. While it is a cliché to say "we are still in the early days," I genuinely believe we have yet to touch the level of what digital items can truly achieve. By introducing a better way to trade digital items, I firmly believe Verse will expand the use cases for NFTs and promote the overall development of NFTs.

Today, we are excited to open the Verse beta and begin collaborating with NFT creators and builders to explore the best projects that Verse can help realize. (If you are a creator interested in establishing a new NFT paradigm, feel free to reach out. If you are an elite full-stack engineer, Solidity developer, or community leader, please email me.)

The scope of digital items is immeasurable, but one thing is certain. They will fundamentally change the structure of the internet, affecting our relationships with media, culture, digital infrastructure, identity, and more. Verse is a hyperexchange: a trading protocol that enables the autonomous trading of digital items and creates a composable and infinite internet.

Translator's Note

The degree of marketization has always been an important indicator of the prosperity and maturity of a specific commodity or asset ecosystem. For instance, both gold and stocks have highly prosperous ecosystems due to their continuous supply and demand, along with a high degree of marketization. Even when there are occasional short-term arbitrage opportunities, they are quickly smoothed out. However, when focusing on digital assets like NFTs, their "non-fungible" attributes grant them uniqueness but also leave some "hidden dangers" regarding liquidity and marketization. Excluding extremely high-quality and top-tier NFTs, most other NFTs lack liquidity.

However, the marketization of NFTs must keep pace with the comprehensive development speed of their ecosystem. Fortunately, even though many projects exist to optimize NFT liquidity, various explorers in the industry are still actively thinking about providing better and more innovative solutions. At the same time, I believe the core value of NFTs lies in utility rather than mere collectibility. The author's proposal of "fragmented" ownership of NFTs makes me ponder whether fragmenting ownership, while providing more liquidity, might, in some sense, harm the utility that NFTs symbolize and compromise their non-fungible characteristics.