NFT 2.0: the Era of Programmable Assets

Introduction, or running ahead of the locomotive

So, the first article about the connection between two DAOs showed that the topic of NFTs has not faded in the hearts of readers. Therefore, today we will try to delve deeper into the forest and uncover the most interesting vector of Web 3.0: the market of programmable assets and, in particular, NFT 2.0.

How to absorb NFT new formats?

I understand that not everyone is interested in an academic format as it can be tedious, boring, and lengthy. However, if you are a true netstalker, I recommend the following research on the topic (just in case?):

1. Non-Fungible Token (NFT): Overview, Evaluation, Opportunities & Challenges;
2. NFT 2.0 — The Interactive NFTs;
3. MetaFi: Unlocking NFT Liquidity;
4. Wrapped NFTs;
5. NFTs & DeFi. A Deep Dive into the Financialization of NFTs;
6. A Beginner’s Guide to Wrapped NFTs;
7. What is NFT 2.0?;
8. A Brief Overview of NFT 2.0;
9. NFT 2.0: New Era of NFTs.

Certainly! Now that you understand that the topic was not created by me, but has been researched by me for the past three years, let's dive deeper. Shall we? Let's do it!

Projects

Here are some projects that I was able to study before writing this text: Abacus, Arcade, Bailout, Bend DAO, Cally, Cardinal, Charged Particles, Drops, DAO Envelop, Floor DAO, Fuku, Hook, JPEG’d, JpeX, Meta block,s Mimicr,  Mnemonichq, Mycelium, Nested, Nextround, NFT2point, NFTembe,  NFTfi, NFTftrade, NFTperp, NFTx, NIFTY, Options, OpenLand, Opensky, Optic.xyz, PartyBid, Putty, reNFT, Reservoir, Rmrk.app, Solv protocol, Spicy, Stater, SudoSwap, Swap.net, Taker, Themis, Theos, Triber3, TrustNFT, UpShot,  Vinci, YAWWW. "In total, over the course of three years, there have been more than 50 such projects.

And I present this list to you for one purpose, so that you can finally understand that this is indeed a trend, not just a collection of thoughts on the subject. Well, knowing this, let's try to answer the first important question: "what types of NFT 2.0 are there?" Shall we try? Easily!

NFT 2.0 types

It seems that all the articles listed above lack depth and detail in terms of practicality, and therefore realism. Shall we try to fill this gap? Yes, of course!

The following terms can be considered as general (collective):

• NFT 2.0 (sometimes mixed with NFT 1.5, such as financial NFTs);
• Interactive NFTs (although sometimes a subset called dNFTs is understood under this term);
• Smart NFTs (there is also no standardized approach here);
• Programmable NFTs;
• There are also a number of rarer categories.

There are also several other less common categories. Of course, this list will be open-ended, but here is a list that appears in the overwhelming majority of research, which tries to divide NFTs by functionality:

• Fractionalization (Fractional, Unic.ly, NFT20, etc.);
• Landing (TrustNFT, BendDAO, JPEG'd, etc.);
• Indexes (Envelop, NFTx, BridgeSplit, Index, etc.);
• Investment DAOs (The LAO, Flamingo, Palm, Pleasr, etc.);
• Marketplaces (OpenSea, Rarible, Gem, etc.);
• Derivatives (Envelop, Fuku, Putty, Nifty Options, etc.);
• Financial NFTs (Axie, Sandbox, StepN, etc.);
• Rental (Unitbox, Rentable, Prom, reNFT, etc.);
• Pricing (UpShot, Taker, SudoSwap, etc.);
• Analytics (Dune, NFTgo, Nansen, etc.)

The problem with this approach is that it mixes NFT 1.0 (on OpenSea, for example), NFT 1.5 (NFTx), and NFT 2.0 (Envelop, JPEG'd, etc.) together. Moreover, there are many projects that will always be at the intersection of these categories: example.

Let's try to categorize specifically NFT 2.0.

Dynamic NFT (dNF)

Example: chain.link/education-hub/dynamic-nft-use-cases.

Many GameFi projects are developing this type of NFT (such as SharkRace through controlled smart contract updates, Unitbox through NFT rental cycles across different services, and so on), but the most interesting vector appears to be at Chainlink: verifiable data change is crucial for industries such as weather forecasting or insurance, and even more so if they are combined.

Therefore, the essence of dynamic NFTs can be defined as follows: these are NFTs whose metadata can change depending on external (or occasionally internal) conditions.

There are several types of dynamic NFTs:

• Sports-related:
  • The Association;
  • LaMelo Ball;
• Art-related:
  • Jackson NFT;
  • Ogcrystals;
  • Botanicatrees;
  • NFTofDAY;
• Game-related:
  • Aavegotchi;
  • SharkRace;
  • Major League Baseball (MLB)
• Real-world sector:
  • The Eternal Pump;
  • Regenerative Resources (RRC);
  • Gold Change NFT;
• Many others.

However, a more nuanced categorization of dNFTs can be based on a deeper basis:

1. dNFT, where metadata changes through an oracle (Chainlink and its analogs)
2. cNFT, where metadata changes through joint creation and multisig signing (NFTof.day);
3. gdNFT, where metadata affects gameplay and changes on-chain rather than off-chain entities.

As for cNFT, these are so-called "community NFTs" that are created gradually and by different actors, and then changes are sent to the blockchain. This is a kind of synthetic act of creation.

In this sense, the evolution from static NFTs (sNFT) to dynamic ones (dNFT) can be achieved in several ways:

• through cNFT;

• through changeable metadata (including with Verifiable Randomness Function (VRF));

• by adjusting smart contract variables (SharkRace).

  
  

So, a dynamic NFT (dNFT), or a "living NFT", is an NFT that can change depending on external conditions. In the static NFT model, each NFT can be distinguished from another using a single token identifier and a unique contract address. Metadata, such as images, video files, or other data, can be attached to it, which means that you can own a token that represents a unique digital object.

If you want to learn more about dNFTs, I recommend this article and this supplement, or alternatively, this “material”. Let's keep going!

Wrapped NFT (wNFT)

Despite the fact that different projects call these NFTs differently, it is still worth acknowledging that they all have the same essence in the process: by wrapping interchangeable tokens and/or coins, as well as other NFTs, assets of a completely different order are created.

And the term "wrapping" should be strictly technical and organizational, as we all know:

• wBTC as a custodial solution for transferring BTC to the Ethereum network;
• Wrapped assets of first-generation cross-chain bridges;
• Various derivatives created using this technology;
• Other assets.

Among the projects that specifically create wNFTs, I would highlight:

1. DAO Envelop (2020 - idea, 2021 - MVP, 2022 - release);

2. Charge Particles (2020, 2021, 2022);

3. Solv Finance (2021-2023).

   
   

It should be noted that the emergence of these small projects has influenced much older and larger services, such as Rarible, which since June 2021 has requalified from an NFT marketplace to a protocol; AAVE has tested its approach to programmable assets; and even in the Ethereum ecosystem, the ERC-3525 standard was born. Not to mention much smaller initiatives (but no less important at the same time).

Initially, wrapping is the process by which a token is locked on the blockchain through a smart contract, and its equivalent is "recreated" on the destination blockchain. Token wrapping is the replacement of one set of token interaction standards with another set.

As for wNFTs (wrapped NFTs), these are modernized NFTs with extended functional capabilities such as economic setting, on-chain royalties, rental mechanism, time/cost/event locking, protection against devaluation, and fraud protection system.

Hence, I call wNFTs - NFT 2.0, because this approach seeks to change the principles and rules of fundraising in particular and some other industries as a whole. An example of a general explanation.

Approaches related to wrapping are generally similar, although details can always be distinguished: example №01, example №02, example №03. And on these examples, we clearly do not finish, but we need to take one more step. Forward!

Financial NFT (fNFT)

This passage discusses financial NFTs, which can be classified as both NFT 1.5 and 2.0 depending on their usage:

• If NFTs are used as collateral for services, then they fall under the 1.5 category,
• whereas if they are programmable to create innovative practices, then they are considered 2.0.

Financial NFTs are an improved version of NFTs with a new token standard that allows for multidimensional asset attributes to be expressed in token form.

Several projects have used NFTs in financial applications, such as 88mph for fixed-rate lending, Armor Finance for insurance token coverage, and NIFTEX for financing NFTs using ERC-20. The most well-known implementation of financial NFTs is probably the LP token of Uniswap v3, which allows for transferring NFTs with pre-embedded liquidity, high trading ranges, and uncollected fees, making it easier and also providing protection against vampire mining.

NFT x DeFi encompasses fractionalization, lending markets, investment DAOs, derivatives, and pricing, among other things. This market is evolving rapidly and has a lot of potential. For instance, the growth of lending markets that utilize NFT mechanics has led Uniswap to enter into negotiations with leading NFT protocols for loans and credits in 2022.

The reasons are:

• Firstly, the obvious conclusion is that evolution is inevitable.
• Secondly, we can move from a general statement to specifics: for example, the gradual growth of credit markets involving various NFT mechanics has led, in particular, to Uniswap starting negotiations with leading NFT protocols for loans/credit in 2022 (see link).

From here, we can discover an obvious discrepancy in indicators. What kind? I will show it now. Let's compare Graph №01:

Where we see a clear increase in the "Utility" category.

And in this case, the priority remains explicitly with another category, namely, "PFP", which indicates a discrepancy between existing (widely accepted) and emerging (unnoticed) trends.

The data can be verified at this link: nftgo.io/analytics/market-overview.

But the question is becoming increasingly irrelevant. A lively and innovative sub-market, known as NFTFi (Non-fungible-token + Finance), emerged around NFT financing - regardless of how creators want to classify the nature of their projects.

It is hardly surprising that such a market has emerged. In 2021, the trading volume on the NFT market was $17.6 billion. This is a staggering 27% of the sales volume in the world's traditional art markets ($65B) in the same year. You know what happened next. But there is something that not everyone pays attention to.

For example, one can imagine that NFTFi is simply DeFi applied to NFT. It allows for more efficient forms of NFT trading - from swapping, hedging, fractionalization, and valuation - to full-fledged, automated rentals.

Let's look at the largest sub-sectors in NFTFi: loans/credits.

Financial applications and tools have emerged on the market that address NFT issues aimed at increasing liquidity and improving certainty in asset pricing, as well as improving the use of funds on NFT markets by combining NFTs and other finances to create a better user experience on the NFT market, collectively referred to as "dAPPs NFTfi".

Until 2022, almost nothing was heard about NFT lending/borrowing, but it gradually began to appear in conversations. There are two main ways of NFT lending/borrowing: P2P (peer to peer) and P2Pool (peer to pool).

Representatives here include protocols such as NFTfi and BendDAO. They differ in transaction frequency, volume, and price discovery efficiency, but these are details. The main thing is that the overall market is still relatively small compared to the market for interchangeable tokens. And coins.

Current NFT lending/borrowing remains in the realm of "blue chips"; as for low- and mid-level NFTs, they have not yet gained wide recognition in the market due to high price volatility and the lack of oracles.

In short, NFTs are becoming suitable for various financial instruments such as collateral, staking, and leverage for exchange tokens or stocks. And? In the future, when the accumulation of historical trading prices gradually complements the NFT quotation mechanism, the NFT market will become more liquid than ever.

\But a couple of important theses are still to come.

NFT-based lending

The Rocket LP DAO cryptocurrency lending platform once issued a loan secured by the brantly.eth domain name of the Ethereum Name Service (ENS).

In turn, the press service of the NFT marketplace X2Y2 announced that from October 9, 2022, users could use their own NFT digital collectibles as collateral to borrow Ethereum (ETH) from other lenders.

And do you know what all this is about? That the lending market in the DeFi segment will never be the same again. Interesting? Then here are three more articles: one, two, three.

But this market is not the only one going through harsh turbulence. What else? You will find out now!

Royalties 2.0

Creators of Ethereum-based NFT collections have earned over $1.8 billion in royalties. Impressive, right? By the time this article is published, the figure will likely be even higher. But if a billion dollars doesn't impress you, then there's not much that can.

At the time when the staggering sum of $1,800,000,000 was reached, just 10 organizations accounted for 27% of all royalties earned, while 482 NFT collections accounted for 80% of all royalties earned at that time.

Since then, much has changed. The DeGods ecosystem removed royalties from all of its affiliated NFT collections (DeGods, y00ts), even though DeGods founder Frank had defended royalties on Twitter and still believes that royalties are the best mechanism for aligning incentives between operators and holders of NFT collections.

Fast-forward to 2023 and the showdown between OpenSea and Blur. Interesting, right?

"Some marketplaces have also changed their royalty payouts (or removed them), for example, x2y2, while the largest marketplace, OpenSea, has not". First of all, now everyone is following suit.

In addition, the largest Solana NFT marketplace, Magic Eden, made a controversial move by making all royalties on its platform completely optional. Magic Eden's latest move to eradicate royalties is especially noteworthy given that they announced MetaShield, a controversial tool aimed at improving royalty control, back in September 2022.

Royalty supporters are worried that normalizing their removal will return the NFT space to the dark ages of traditional creator incentivization structures, as happened with Van Gogh.

On the other hand, opponents of royalties claim that mechanisms for compulsory collection are impossible on a chain without serious compromises, which negate many of the advantages of permissionless blockchain.

If you're interested, I recommend reading this thread. And as for us, let's move on!

Fractionalization

There are quite a few services here: Fractional.Art, Teller, and others. But personally, I'm interested in why so many are focused on a special feature (fractionalizing indivisible assets), when in reality, it's just a small spectrum of the possibilities of NFT 2.0 as a whole.

Rent

There are two fundamentally different vectors:

• Renting through (w)NFT;
• Renting actual NFTs.

These processes are interconnected but can still be separated as distinct. Prom & Unitox, for example, offer similar but different approaches to solving the integration of these processes.

In turn, BendDAO and JPED'd have implemented an efficient liquidity model called "peer-to-pool", which connects supply and demand in a customizable liquidity pool, eliminating the need to make bids and wait for requests.

Another example is Cyan, the largest and brightest BNPL protocol. Additional information can be found here, here, or even here. But the furthest in the connection of these mechanics is Unitbox - a project based on the DAO Envelop protocol.

And what about us? Let's try to combine all the ingredients together and taste the NFT 2.0 dish.

NFT 2.0 as understood by ChatGPT

Of course I couldn't help but give the floor to one of the protagonists of the start of 2023. Here's what he thinks of NFT 2.0.

NFT 2.0" is not an established or standardized term within the NFT (Non-Fungible Token) space, and there is no widely accepted definition of what it encompasses. However, it generally refers to new and innovative developments in the NFT ecosystem that aim to improve the technology and user experience.

Some possible features that could be included in an NFT 2.0 include:

1. Interoperability: The ability for NFTs to interact with each other and other blockchain-based assets, allowing for more complex and integrated applications.
2. Programmability: The ability for NFTs to have embedded functionality, enabling them to perform specific actions or operations when triggered.
3. Sustainability: The ability for NFTs to have a smaller environmental impact, through the use of more energy-efficient or carbon-neutral technologies.
4. Decentralization: The ability for NFTs to be more decentralized, removing the need for centralized authorities or intermediaries.
5. Fractionalization: The ability for NFTs to be divided into smaller parts, allowing for greater accessibility and liquidity.
6. Dynamic and Adaptive properties: The ability for NFTs to change or evolve over time, through smart contracts that allow for dynamic or adaptive properties.

It's worth noting that these features are not exclusive to an "NFT 2.0" and many are already being developed and implemented by various NFT projects and platforms. NFT technology is still evolving rapidly, and new features and innovations are likely to emerge as the ecosystem continues to grow and mature.

Problems

Does this market have problems? Plenty.

Firstly, there are standards: what we call them are not actually standards (take this example or this one, or many others). Secondly, there are no leaders, which is good for business, but for the user... they will have to make an effort not just to understand the trends, but also to "taste them" in practice. Finally, there is a lot of chaff in this market, connecting hype with hype (insignificant NFT collections with liquid markets... tokens that are of little use to anyone, for example).

But none of these problems is evidence that the market will not continue to develop. Rather, they are a consequence of the evolution of this sphere.

Outlook

I can't tell you about all the vectors in this article, so I've chosen the ones that are closest to me.

Unstoppable NFT

Now there are already solutions (example) where NFT connects with decentralized, tokenized storage, but it is much more interesting when the programmable NFT itself pays for storage of its metadata for IPFS/SWARM and other nodes. So far the solutions require oracle and centralization, but I believe the next 2-3 years will see a move towards decentralization.

ОТС

Not using such solutions for OTC trading is strange: the secondary market for tokens is highly in demand and reaches tens of billions of dollars, but there are not so many full-fledged solutions yet, and funds are quite conservative in their practices, so here too we will have to wait for at least 2-3, or even 4-5 years.

ZKP

For me, this is probably the most promising direction, as bridge hacks (Wormhole, Allbridge, Binance Hub, etc.) and CEXs are all about liquidity centralization, and achieving its normal decentralization can be done through cross-NFTs, which require different approaches: both oracle software and oracle verifiers (humans), and improvements to existing concepts.

Add in cross/multi-chain mechanics and you get a lot of interesting things. By the way, if this topic turns out to be in demand, I'll talk about it, but for now that's all.

Bye!