DappReview Founder: A Brief Discussion on My Understanding of NFTs and the Metaverse

Ethereum is a Metaverse without fancy front end.

(This article is authorized to be reprinted from ChainNews, with the original title "DappReview Founder: A Brief Discussion on My Understanding of NFT and Metaverse". The original article can be found here)

Note: This article is highly subjective, personal opinions are for reference only and not intended as investment advice.

Approximately three years ago, I wrote an article titled "A Shallow Talk on Blockchain Games You Don't Understand at All," attempting to organize some of the brainstorming and ideas that could be thought of at that time. I discussed many scenarios of games combined with blockchain, including user ownership of in-game items, scarcity, cross-game use of items, economic incentives, governance between project teams and players, incentives for Creators, which are strikingly similar to the NFT features widely discussed today. I once mentioned if Minecraft were a blockchain game, the works of the national architect team could be issued and traded as NFT game assets, and recently seeing news of the national architect funded by Metaverse Capital about to issue NFT assets, it feels like a dream, as if I had envisioned it three years ago, and what was imagined then is gradually coming to fruition.

As an old investor, going through a cycle of bull and bear markets from 2017 to 2021, my understanding has undergone some iterations. This article is essentially the 2.0 version of the article from three years ago. On one hand, I am upgrading and supplementing the shallow views from three years ago, and on the other hand, I am attempting to make some judgments about the next cycle.

Below are some personal viewpoints:

• NFT is not a race for application layer, but a component of the protocol layer, which is still in the stage of going from 0 to 1
• What NFT needs now are carriers and scenarios, not constantly minting new assets. Most projects have not thought through why they should be in the form of NFT assets.
• Ethereum is a Metaverse without a flashy front end. A Metaverse without a blockchain as the underlying data and information layer is a centralized Metaverse, with low imagination space.
• Interoperability is the most invincible feature of NFT and Metaverse, without a doubt.
• Future apps do not need separate login logic. Virtual assets of an address/user are interoperable across apps.

NFT itself is a technical term referring to non-fungible tokens on the chain, as a token standard, it can be applied to various vertical applications, whether it's art, game items, certificates, etc. From this perspective, NFT is not a vertical application race, for example, if you develop a blockchain game using NFT as in-game items, then the game is the core, and NFT is just a tool. Even though Uniswap V3 LP tokens are in NFT form, Uniswap is still a DeFi application.

Essentially, NFT is a protocol layer or middleware between the application layer and the blockchain infrastructure layer. When a project says they have created an NFT project, it is as vague as an internet entrepreneur saying "I have created an internet application." While this judgment may sound a bit nit-picky, I want to emphasize that projects issuing NFTs should focus more on the carrier itself, that is, what problem is being solved in what scenario, as NFT is just a technical means, not the end goal, otherwise it would be a case of putting the cart before the horse, making NFT meaningless for the sake of NFT.

At this moment, both inside and outside the industry, we still widely use the term NFT to refer to a series of on-chain assets created using protocols such as ERC721/ERC1155 (or similar on-chain protocols), indicating that we are still in the early stages, far from achieving large-scale application or even basic PMF. A common interview question for programmers: What are the protocols needed to access a website through a browser?

For the average user, the answer to this question is completely irrelevant. Users only care about the content of the website they are visiting and the user experience. Once NFT as the foundation protocol for virtual assets is widely used, users do not need to know what NFT is, they only need to know what assets they have, what they can do with them, and where they can use them. As for the features brought by NFT assets, such as ownership, scarcity, interoperability, composability, etc., users will take them for granted, without delving into the technicalities of how these things are achieved.

The infrastructure for NFT is still in its early stages, with few protocols available. ERC721, ERC1155, and some modified versions of them can only meet very basic needs. There is no problem using static images and videos, but for more complex asset interactions, existing protocols cannot be directly used. For example, interactive and programmable NFTs, Async.art has only made simple modifications and has not abstracted a more universal new protocol. If others want to create different interactive NFT assets, they still have to reinvent the wheel. In the foundational protocol layer of NFT, I believe there are still many entrepreneurial and investment opportunities.

Previously, in a podcast with Mable, I discussed:

NFT Value = Intrinsic Value + Utility Value + Premium

Intrinsic value refers to the various costs of creating the NFT asset, including time costs, transaction costs, minting costs, etc. Utility value refers to where the NFT asset can be used in specific scenarios to bring value to the owner, such as a ticket to participate in an event, a game item that can be used in a game. Premium includes many elements, such as the premium brought by IP, speculation, and low liquidity, which are relatively difficult to accurately assess and judge.

"Intrinsic value" and "utility value" are the fundamentals of NFT assets, while "premium" mainly manifests in secondary market trading. When the secondary market is hot, the premium naturally becomes exorbitant, like the NFT asset trading market 1-2 months ago. After the market returns to rationality, prices and transaction volumes naturally return to value. Currently, the majority of the value of NFT assets comes from the "premium," with relatively lower "intrinsic value" and "utility value," or even zero, meaning there is little fundamental value. In other words, there is not much foundation, and once the market calms down, it will enter a state of having value but no market, and at this moment, it has almost reached that state. Transaction volume and value will significantly decrease.

Recently, many people, whether inside or outside the industry, have approached me, excitedly discussing NFT-izing virtual assets, with most views being: "If I turn this XXX into an NFT asset, it's awesome because it's decentralized, immutable, user-owned, and rare." Such views are not entirely right or wrong. What needs to be understood is that NFT is not a panacea. Is it automatically superior to turn centralized virtual assets into NFT form? Ultimately, it is important to understand what value NFT and blockchain provide to virtual assets.

Breaking down the value of NFT assets from a different perspective, the value of NFT assets = virtual assets + rights protection brought by smart contracts + economic incentive mechanisms brought by blockchain + interoperability brought by blockchain.

What we talk about regarding NFT asset ownership, provable rarity, immutability, etc., are all constrained by smart contracts. The difference from centralization is that smart contracts act as an open legal document telling users how these attributes are designed, what the rules are, and how adjustments can or cannot be made within the limits defined by the smart contract. In the execution process, the smart contract runs according to the rules of the smart contract. In centralized products, these rules can be opaque, or even if they are public, users do not know how they are actually implemented. It's also worth noting that NFT assets are not necessarily immutable or rare; these attributes can be fully defined by smart contract developers within the contract, as seen in the frequent issuance of new parcels in cryptovoxels or the periodic release of new cards in GodsUnchained. Smart contracts provide a more transparent mechanism to convey information to users, transforming from a completely black box to a somewhat blurry glass box, the degree of blurriness being defined by developers.

The economic incentive mechanisms brought by blockchain can be divided into native economic systems and derivative economic systems. Native systems refer to defining a complete economic model within an application, rewarding user participation through certain behaviors, such as Play to earn, stake to earn, etc., designing token distribution and incentive methods based on specific application scenarios. Derivative economic systems use interoperability, allowing NFT assets to generate value not only within the application but also to obtain incentives in other applications.

The interoperability brought by blockchain, or also known as composability, is what I believe is the most magical and imaginative value. Interoperability can be understood as tokens/assets/NFT assets/addresses/smart contracts on the blockchain being natively referenced by any application on this chain. In the world of DeFi, this feature has been fully utilized, yet in NFT-related projects, it is just the beginning. Currently, we can browse and trade different NFT assets on various NFT trading platforms/wallets, but these NFT assets do not effectively combine to create greater value. The fundamental problem is that NFT assets need carriers and scenarios; currently, the vast majority (over 90%) only have two application scenarios: display and trade, or have a certain logic of use only in their own product scenario. Because of the lack of carriers, the "utility value" (fundamentals) of NFT assets is very low.

Many projects are exploring the financial attributes and derivatives of NFT assets, such as NFT fractional trading, NFT collateralized lending, etc. I believe these directions have long-term value, but it might be a bit early in timing, as financial tools may be just castles in the air without a solid foundation of the underlying asset's fundamental value. Carriers and scenarios, in simple terms, refer to whether the NFT assets I own can be useful in various applications. For example, why can't a CryptoPunks be used as an avatar in various game/social dapps to prove that I am a "distinguished" punks holder? Just imagine some scenarios, could there be an NFT Battle Royale? Let punks and CryptoKitties PK, bringing all NFT assets into the game for a fun play.

On a practical level, even though there are many operational details to handle, such as how different styles of NFTs can appear in a game without feeling out of place, or how to give additional numerical logic to different categories of NFTs, the key is to utilize interoperability. Not only can this activate the utility value of existing core high-value NFT assets, but it can also leverage the industry OGs behind these NFT assets to become your seed users, smoothly completing the cold start.

Just as in the DeFi world, why mining projects often involve UNI/AAVE/SUSHI tokens, as those who hold these DeFi tokens in their wallets long-term are usually core value users of DeFi. Early on, participating in liquidity mining can accurately attract seed users. At this stage, creating an interesting NFT asset carrier and scenario is more valuable than issuing a new set of assets, and leveraging existing assets to mobilize core users is the best timing.

Speaking of interoperability, let's talk about my understanding of the metaverse. The concept of the metaverse has been incredibly popular in recent months, yet the definition of metaverse in the context of Web2.0 is different from that of Web3.0. In the logic of Web2.0, a large company creates development tools, the entire framework and rules of the metaverse world, under which developers create scenes and content through UGC, and operate by attracting C-end users through traffic logic. I won't delve into that, as there are many articles on that topic.

I would rather imagine the metaverse in the context of Web3.0, where at least:

• The infrastructure layer is open, permissionless, developers can develop not only scenes but also middleware and protocols for use by other developers
• User data and information do not belong to any centralized entity, developers (anyone) can freely analyze/use this data
• Multiple metaverses of different styles can be combined into a larger metaverse, and user identities/data/assets can be natively synchronized across metaverses

Undoubtedly, only with blockchain as the underlying layer can the above vision be realized. It seems that the description of the metaverse's features above is too abstract, so let me imagine a day in the metaverse in the world of Web3.0:

I sign in with my private key to Dland, first opening my DeFi panel, collecting rewards from several liquidity mining projects, loading the Uniswap component, selling some project tokens, keeping the tokens of the projects I believe in, creating an LP in Uni V3 to provide liquidity, receiving Uni V3 NFT as proof of liquidity provision. These NFTs look pretty good, so I open the Billion Wisdom card game and immediately change the card back to the V3 NFT style. After playing a couple of games and winning, I finally achieve the 1000th victory achievement medal and even draw two legendary cards. I hang this medal on the first row of my personal profile achievement page, counting that I now have 15 platinum game achievements and 10 platinum DeFi achievements. A few days ago, a card game from a V company released its closed beta version, allowing all users with the 1000th victory achievement medal from Billion Wisdom to participate directly in the test. As expected, with today's achievement, I can now participate in the test, first building a card deck. Besides the in-game card system, there is an external card pool, where you can use up to two legendary cards from Billion Wisdom as external cards. My intuition tells me that the prices of Billion Wisdom cards will rise, so I immediately open Opensea exchange and find that the average price of legendary cards has already risen by 30% over the past few days.

The above account includes several key points:

• After a single login, all other applications no longer require separate logins. User identities/data/assets are all recorded in blockchain addresses
• Assets generated by one application can be reused in various ways by other applications (the result of asset reuse can be a win-win situation)
• By analyzing data on the chain and user profiles, seed users can be targeted

For readers who have not used centralized applications, the above might seem like a pipe dream. Indeed, in the world of Web2.0, this is a dream, as user data is a moat that cannot be opened; how could it be open? In Web3.0, the logic of value capture, business models, production relationships, and organizational governance will be reconstructed. In the past year, the three key points mentioned have become commonplace in the DeFi world.

For DeFi veterans, the first thing they do every morning is to open Chrome, log in to Metamask, open several tabs, claim tokens from different DeFi projects (claim tokens mined overnight), sell tokens on Uniswap/Sushiswap, find new projects, participate in some project governance, etc. Throughout the process, you only need to log in once, and every decentralized application page you open will automatically log in, changes in your assets in one application are seamlessly synchronized in another application.

Four years ago, I always felt that private keys and mnemonic phrases were too inhumane, but now I feel that every application needs to use an independent account system, which is inhumane. Moreover, everyone has different password requirements - some may only need numbers and letters, while others require uppercase + lowercase + numbers + symbols. If it weren't for 1password storing hundreds of account password records, I would probably receive hundreds or thousands of password reset emails in a year. Once you get used to the experience of an account traversing N applications, you can never go back.

Every operation a user performs on the chain is recorded in the form of transactions on the blockchain. Anyone can easily view all historical operations under an address. This serves as an aggregated database of user behaviors across all decentralized applications. It's as if an internet company has publicly released all its user behavior logs. Not only can you view data/analyze data, but on the blockchain, you can also directly interact with these addresses (users). Nowadays, it's almost standard for a new project to airdrop tokens to users; the airdrop targets are often selected based on the user's historical behavior as conditions, finding the most suitable seed users. On-chain data analysis and achievement systems will be essential components of the metaverse, drawing a user's identity, user profile, and behavior patterns.

Each smart contract is a piece of code logic, like a "Lego block," developers can create new "blocks" and combine existing "blocks" to build their "house," a specific application scenario. Each "block," each "house," is a part of the metaverse. The blockchain at the bottom carries the storage of data and information, and the transmission of value. In a sense, Ethereum and its on-chain applications have already formed a Metaverse without a flashy front end. (It seems that all EVM-compatible public chains have formed a higher-level Metaverse).

Ultimately, the form that meets the user experience may be:

• Several application carriers, some with AAA game-level visuals, like the world in Ready Player One; some may have pixel art styles; you can find a world that suits your style.
• You can shuttle through any world, using the same account/address system, sharing assets and data seamlessly
• Not just games, any type of application, whether financial/social/e-commerce, can seamlessly integrate into this world

From the current standpoint, it is inevitable that everything is moving towards the metaverse version of Web3.0, perhaps in 3 years, maybe in 5 years, to enter large-scale applications, and in between, there will be an intermediate state between Web2.0 and 3.0.