Sui NFTs: A Major Leap Towards Mass Adoption of DeFi

1. On-chain vs Off-chain Differences

On blockchains like EVM or Solana, the state of digital assets, or NFTs, is stored off-chain. For static NFTs, this is an acceptable model since these NFTs are not transferred or undergo any state changes.

A simple analogy is a Merkle tree, where NFTs are its leaves, and only the root of the tree is published on the blockchain.

If users frequently create new NFTs and do not pay much attention to them after creation, this model is effective; they do not need to modify or transfer them. However, if one of the NFT fields needs to be transferred or updated, it becomes more expensive and requires a longer transaction hash. Since only the root of the tree is published on the blockchain, each update requires a Merkle proof. Even reading the NFT requires a Merkle proof.

A recent paper published by a16z crypto, “On the Limitations of Revocable Proof Systems and Their Impact on Stateless Blockchains”, discusses the concept of stateless blockchains and their trade-offs. This concept arises from a challenge to the blockchain paradigm, where traditionally each validator needs to store the complete state of the entire system. This requirement raises concerns about centralization, as only well-funded organizations can afford the storage costs as the state grows larger.

This leads to the concept of stateless blockchain design, which suggests that validators only store a small portion of the global state (for example, only the root of the Merkle tree). Users initiating transactions must publish proofs to demonstrate that their transactions are valid (for example, a Merkle proof path pointing to the leaves).

The paper identifies a problem: “…when other (unrelated) transactions update the global state, users must monitor the network and regularly update their proofs, which may render their proofs invalid.” Unfortunately, this introduces new security threats as off-chain state management becomes quite cumbersome.

When metadata exists off-chain, calls to smart contracts will be limited. This not only fails to improve product efficiency but also does not enhance distribution efficiency. Fundamentally, it fails to achieve the goal of decentralized infrastructure.

Sui allows us to store NFT metadata entirely on-chain, with the most notable feature being the ability to store large amounts of arbitrary data on-chain. In our previous report, we provided an analogy regarding how traditional storage costs operate.

Let’s illustrate the issue of traditional storage costs with a simple example:

Alice started using the Sui Network at its inception when not much data was stored on-chain, and she enjoyed lower gas fees.

Bob started using the Sui Network after it matured, at which point a significant amount of data was stored on-chain, resulting in higher gas fees for Bob.

Sui's tokenomics model addresses storage costs through a storage fund, specifically by redistributing past transaction fees to future validators. When on-chain storage demand is high, validators receive additional rewards to compensate for their costs, while the opposite occurs when storage demand is low.

It also includes a deletion option, allowing users to receive refunds by deleting previously stored on-chain data. This mechanism ensures that users only store necessary data on-chain. This leasing model, which pays for storage costs on a periodic basis, is very efficient for projects on Sui. When storage costs become uneconomical, it introduces a market-based mechanism to free up storage space.

Storing metadata on-chain ensures the programmability of tokens. Assets may evolve and sometimes combine. Programming smart contracts using Sui's object-oriented language, storing structs on-chain aids in composability. If NFTs can communicate with each other, even those from different formats, it will open up new verticals.

On other blockchains, NFTs are merely ownership records that contain URLs pointing to specific off-chain storage. It is well-known that this limits the comprehensive application of the blockchain significantly.

Unlike other blockchains, Sui can store jpeg images on-chain and has rich mutable and immutable attributes. NFTs are not just what we know today; they become stateful dynamic on-chain applications within Sui. This will ultimately drive more creativity, user adoption, and consumer value enhancement.

2. Dynamic Evolvability

Sui's vision for NFTs provides a different imaginative space for blockchain. Assets are dynamic; they evolve, undergo lifecycles, and sometimes even combine. For this, we need an infrastructure that allows us to accurately simulate the lifecycle of these assets.

If NFTs cannot simulate complex and evolving assets, their use will be limited to static assets, such as currency, static PFPs, etc. The dynamic fields in Sui effectively simulate the lifecycle of dynamic assets; they can store heterogeneous values and are only affected by gas fees upon access, allowing for addition or removal at any time.

Imagine what composability and conditional logic could create:

An NFT that evolves based on your trading activity on DeFi protocols, providing dynamic rewards as your level increases.
An on-chain structured product that reflects changes in our macro environment.
An artwork that changes when the artist signs or auctions it.
A game asset that upgrades when you lead a battle or enter the top ten player rankings.

Sui's programming language allows for modeling these lifecycles at a fundamental level. The evolvability of these assets does not rely on contract updates on Sui, allowing you to make internal state changes within dynamic fields or remove and add child objects.

Let’s look at an example called Tails, which has two functions — key and store. The key defines it as an ownable object, just like an NFT appearing in your wallet. The store function allows for free transfer and encapsulation. The Tail Badge at the bottom is an accessory that can be added or removed when certain conditions are met.

Through dynamic fields, we can achieve the behavior of “wearing badges.” The badge becomes a child object that can be stored within the Tail.

Creating dynamic attributes for NFTs can be done with just one line of code. These dynamic NFTs and their composability will elevate us to a different level of modern on-chain dApps. With the data stored on-chain, validators can know where to look for data without requiring user input.

3. Kiosk Standard

Why hasn’t blockchain brought about more disruptive change?

Digital assets must encode rules, and if these rules cannot be enforced by smart contracts, it cannot achieve disintermediation, as it will rely on central entities to comply with the rules. NFTs should encode rules, such as royalties for secondary sales, copyright verification, and signatures.

EVM chains and Solana cannot simulate assets that evolve with their lifecycle, store metadata on-chain, and enforce rules. Existing frameworks are sufficient to simulate simple, static assets, but they are not enough for disruptive industry change.

Last year, a severe royalty discussion occurred on Solana. Many expressed their needs: artists migrating to Web3 need strong incentives. Without adjusting NFT standards, the market, tools, and artists will lose the incentives established here.

Sui has implemented an NFT standard called Kiosk that addresses this issue. As creators, Sui Kiosk supports strict enforcement of transfer policies and related rules to protect assets and enforce asset ownership. Sui Kiosk enables creators to have better control over their works, allowing creators and owners to manage how their works are used.

This means that digital assets on Sui allow for rules to be encoded, making them executable by smart contracts, creating an excellent creative environment for artists and creators.

4. Composable NFTs

Composable NFTs can more accurately depict consumer needs. These composable parts serve as behavioral indicators, allowing protocols to function without collecting large amounts of data while fully leveraging personalized loyalty systems.

Protocols will be able to discard overly simplistic membership tier systems (like bronze, silver, gold) and provide truly personalized loyalty systems that reflect the uniqueness of consumers.

The new solution is composable NFTs that dynamically evolve based on user interactions. This evolution can be triggered by off-chain data (weather, location, etc.) and on-chain data (transactions with specific protocols). Each NFT will visually reflect your status. Previously unmotivated low-activity users can now immediately see the impact of their activities. Highly active users continue to see rewards reflecting and unlocking uniqueness and privileges.

5. Unlocking Unique Rewards Using NFT Features

NFTs are popular because users can obtain different features, providing a sense of rarity and uniqueness. By replacing traditional bronze, silver, and gold tiers, NFTs will evolve and add different features based on various types of user activities, generating tailored rewards for users.

A good Web 2.0 example is credit card reward systems. Many credit card companies now offer customized reward programs based on users' purchasing behavior.

For example, Alice frequently shops at the mall. The reward program she chooses is a shopping plan in partnership with the mall. The more she purchases at the mall, the more points she accumulates, which can be immediately redeemed for discounts or cash back. On the other hand, Bob travels often and uses the same credit card to purchase airline tickets. The reward program he chooses is a travel plan in partnership with the airline. The more he purchases from the airline, the more points he accumulates, which can be redeemed for seat upgrades or mileage boosts.

Foodies who love using credit cards at restaurants can earn dining rewards, while movie enthusiasts who frequently buy movie tickets can earn cinema rewards. Alice and Bob can freely switch between their chosen reward programs, providing a personalized incentive system.

Composable NFTs can enable frictionless interactions in the Web3 world. Imagine if Bob trades game assets on a DeFi protocol, his avatar would gain a sword feature, and if Bob trades more, the sword's style would change to reflect a higher status. Here, the sword feature represents unique in-game fee discounts from GameFi projects collaborating with that DeFi protocol. For Alice, her avatar would gain a gold chain feature because she frequently provides liquidity by depositing project tokens on the DeFi protocol. The gold chain feature represents unique additional earning opportunities from projects collaborating with that DeFi protocol.

The key point is that there is no need to use a single status marker; each user's status will be reflected through a set of unique features. Therefore, even if Alice and Bob have the same transaction amount, the statuses they represent are entirely different. What connects them is the rarity associated with the features. Not everyone is interested in the same rewards; protocols can offer different rewards by developing various partnerships, each reward accessed and unlocked through the evolution of composable NFT features.

6. What is the Relationship Between DeFi and NFTs?

Composable NFTs can interact with each other and operate like Lego blocks. They open up a whole new world of interoperability between different types of applications on the blockchain. A better analogy is that composability serves businesses like open source serves software development. This creates a new financial infrastructure, making blockchain more capable of entering the public eye as new application scenarios emerge and Web3 becomes more widespread.

The aforementioned characteristics make Sui a superchain for NFTs and game assets. One of Sui's core strategies is to focus on creating an excellent environment for NFTs to drive user growth and achieve mass adoption.

This is particularly important because DeFi protocols cannot achieve mass adoption solely through DeFi itself. As we have seen on other L1s, if it is only DeFi, market heat, total locked value, and liquidity are difficult to maintain in the long term. Instead, liquidity should come from retail users creating, trading, and exchanging digital assets within the NFT community and GameFi projects.

The role of DeFi protocols is to serve as infrastructure that allows assets to be freely traded and utilized.

Sui can store metadata on-chain, making NFTs stateful dynamic on-chain applications within Sui. This dynamic evolvability allows them to become tools within the DeFi protocol ecosystem, providing more creative exploration for projects. Imagine building a fully on-chain DeFi user incentive system through composable NFTs.

Using the Sui Kiosk standard to encourage creators, artists, and builders to create digital assets on-chain. As more on-chain assets circulate, there will be financial demands for asset empowerment and efficiency enhancement. Imagine earning from native NFTs/game assets through options and liquidity pools.

With the establishment of novel Sui features, we are optimistic that Sui can truly bring disruptive change to blockchain. Typus is always at the forefront of implementing new features and is excited about the high composability and cohesion of dynamic on-chain Sui assets and the DeFi ecosystem. Imagine guiding Web2 users to participate in experimental NFT collections through zk login, sponsored transactions, coupons, dynamic attributes, and transaction cookies.

The future is Sui.

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References

https://twitter.com/kostascrypto/status/1668149010861899776

https://medium.com/mysten-labs/announcing-sui-tokenomics-9cb829086e30

https://www.youtube.com/watch?v=yRbajb10lIk

https://docs.sui.io/testnet/build/sui-kiosk

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Related tags

Sui NFTs DeFi EVM Solana Sui Network

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