This document provides initial features and concepts that the NFT Protocol developer community is developing and/or considering for inclusion in the NFT Protocol. It is intended to serve as a building block that, along with novel inbound concepts from the broader community, can enable the development of a more formal whitepaper for the NFT Protocol.
NFT Protocol Tokens (“$NFT”) represent the value of activity in the protocol, including the creation and consumption of protocol value, as well as the ownership of votes that power decision making for changes and updates to the protocol. It is the right to participate in the network and capture fees generated by the protocol from which the value of the $NFT token is derived.
$NFT is designed to enable the following three outcomes on the protocol:
Payment: payment in $NFT is required to consume protocol-layer applications. Examples may include paying fees for the usage of a data or pricing oracle, or for the creation of synthetic indices that track non-fungible token assets or portfolios
Rewards: rewards may be earned in $NFT for producing protocol benefits. Examples may include rewards for development of the core protocol or applications that utilize the protocol, and for the creation of liquidity pools
Staking: $NFT must be staked to participate in voting on the development and organization of the protocol - such as development proposals, initiatives and governance matters. Staking may also be implemented at the application level by issuers and marketplaces to provide consumers with early or exclusive access to certain non-fungible tokens.
A number of $NFT utility features are either in place, in development or conceptual in nature, as outlined in the sections below.
NFT Protocol developers are creating a decentralized price index for non-fungible tokens that is designed to serve as a valuation tool for non-fungible tokens. It is anticipated to become a fundamental building block for the broader non-fungible token market. Non-fungible tokens are difficult to value. Issuers and sellers have few if any price references on which to price their assets. As a result, auction reserve prices or sale prices often have no basis. In turn, buyers and traders lack the market data to ascertain value. Neither resale marketplaces nor auction systems efficiently enable price discovery: the former are often dominated by bots that programmatically acquire and re-offer assets; and the latter do not encourage early bidding, leaving price discovery to the final minutes of an auction. The reliance on these inefficient marketplaces for price discovery results in a lack of price transparency, limiting the potential for more advanced market applications to be built using non-fungible tokens, such as lending, borrowing, trading, portfolio management or hedging.
The NFT index is intended to represent a dynamic synthetic basket of the highest value non-fungible tokens by market capitalization. It is intended to serve as a price reference for the broader non-fungible token economy. Elements of the index may include:
Market data: it is planned that a data oracle will capture data feeds from on-chain non-fungible token trade, sourced from major decentralized marketplaces
Adjustments: the index is intended to programmatically adjust based on rolling sales and trading data
Oracle: a pricing oracle is planned to algorithmically forecast future index prices based on historical and current sales data
A price index is only possible with accurate and reliable sales data on non-fungible tokens. NFT Protocol’s smart contract system and web3 application framework intends to introduce a price oracle for recording verified price action on all items on all marketplaces that implement the protocol or participate in the development of the protocol. The price oracle also ingests data from other non-fungible token contracts on-chain where NFT Protocol is not implemented.
It is planned that off-chain data will also be included in the NFT index. The trusted nature of introducing exogenous data sources implies a governance requirement set by $NFT holders. Typically this is resolved by an incentivized oracle. $NFT holders vote on oracles or oracle-provided data and curate content sources. Oracles sign all data gathered from off-chain sources and build a reputation within the network by providing accurate and reliably sourced data.
Implementation of an NFT index by third-party applications could immediately result in three new products: NFT investment baskets, NFT futures markets and NFT category indices (such as a gaming index, or digital art index). The price index may also serve as a valuation tool to support the creation of complex markets that enable lending, borrowing, trading, portfolio management and hedging.
It is intended that any holder that stakes $NFT should benefit with preferred, early or exclusive access to non-fungible tokens that will become available for public sale. This system is intended to serve as a decentralized cross-platform “membership” mechanism that could be adopted by any marketplace or issuer. The participating marketplace or issuer in turn could receive locked $NFT for offering such access.
NFT Protocol developers have customized smart contracts that will enable holders of $NFT to stake their $NFT tokens to participate in upcoming sales. Smart contracts “unlock” tiers of access based on staked amount. At the application layer, an issuer or marketplace could implement rewards based on access tier:
Earn. Issuers and marketplaces may contractually receive locked $NFT in return for providing a minimum number of exclusive and/or early access drops for $NFT holders
Stake. Holders of $NFT may stake their tokens to earn early access to “content drops” from issuers or marketplaces that may necessarily want to release their assets to an exclusive audience or a selective group of buyers
Tiers. Smart contract and application layer tools are intended to combine to unlock access or exclusivity based on holding tiers.
NFT marketplaces and issuers implementing the open source NFT Protocol library can add Earned Access while maintaining as a web3 compliant decentralized application. $NFT would be needed to execute a buy using a smart contract to purchase exclusive goods.
Membership tiers, similar to decentralized exclusivity, provide for a broad range of application within any marketplace or by any issuer. This system provides a buyer with an advantage by enabling discounts and access to exclusive goods.
It is intended that the NFT Protocol can be further developed and/or built upon to include applications and features to facilitate the development of more advanced decentralized markets for non-fungible tokens. A number of such potential applications are listed below.
2019 research from nonfungibles.com* indicated that over 80% of the $315 million dollar non-fungible token asset class is illiquid and not active traded. In many cases, the collector of the digital good may not wish to sell the asset, making the asset valuation harder for both the seller and potential buyer to value, when it does become available for sale. In some cases, a speculator may wish to speculate on the value of an asset without taking delivery of the asset. Synthetic indices and synthetic portfolio of non-fungible tokens could be utilized to enable price discovery during buy-and-hold periods.
Single-asset synthetics or portfolio synthetics could be used by either asset owners or speculators. Each synthetic contract would be divided into a certain number of fungible tokens and use a community approved price of the underlying asset as its basis:
Asset owners: non-fungible token owners could lock their own non-fungible token in a smart contract, with or without $NFT collateralization, to enable the issuance of a synthetic asset (i.e. single or dual collateralization)
Speculators: a speculator or liquidity pool could create a synthetic non-fungible asset or portfolio by locking $NFT collateralization equal to a fixed multiple of the most recent sale price, in return for a pro-rata share of the fees generated from the trading of the asset.
Digital goods represent a massive yet untapped collateral pool for lenders and borrowers. The prevalence of digital goods adds to the potential for substantially improved economic outcomes for the average household. However, existing lending facilitated by non-fungible tokens is non-existent or not optimized for broad adoption:
Owner / lessee structure: a rental marketplace for non-fungible tokens
Marketplace structure: facilitating order matching on-chain of borrowers and lenders
DAO / governance structure: where governance makes all decisions on the ability to lend and borrow assets
Each of the above structures is useful but independently insufficient to facilitate broad adoption and market efficiency. Owner/lessee structures rely on specific interest in a rare item. Order matching relies on general interest in an asset, and may only serve the highest value assets. And DAO/governance could deploy prices that do not suit either party. If combined however, each system could provide a complementary toolkit for lenders and borrowers. For example, a lending marketplace that order-matches borrowers and lenders with final execution governed by community governance. If combined with the NFT Protocol price index to peg valuation against a trend, the risk of DAO/governance mis-pricing could further be mitigated.