How do NFTs plug into Defi?
Beyond art and collectibles…
2021 has been another extraordinary year in the web3 ecosystem — and many of the mainstream headlines have understandably focused on the stratospheric price rises of NFTs.
While this momentum shows no sign of slowing any time soon, with high-profile drops happening on a daily basis and many crypto OGs replacing their social media profile images with PFPs (personal profile pics in the form of NFTs), some of the more interesting developments are happening away from the headlines.
Not only are NFTs being used for many different purposes than for art and collectibles (see our earlier post on NFTs with Superpowers), but the integration of NFTs into the world of DeFi is proving to be a catalyst for innovation.
We at Boson Protocol recently had our attention grabbed by this post on Bankless by David Hoffman, which highlighted the importance of NFTs for drawing mainstream interest into the decentralized space and included this quote: “Not all humans are finance geeks, but all humans are culture animals. NFTs are the marketable surface area that Ethereum needs in order to go mainstream.”
Similarly, we see Boson Protocol’s Commitment NFTs and Thing tokens as the marketable surface area that dCommerce needs to go mainstream.
To enable decentralized commerce with minimal arbitration, Boson Protocol’s Commitment tokens are NFTs encoded with game theory. They each represent a type of forward contract that incentivises a buyer and seller to transact honestly. This means that one of the most exciting aspects of Boson Protocol is this ability to connect virtual spaces and the real world without participants needing to trust each other.
Each type of Commitment NFT can be purchased with a specific Boson Thing token, which is a standard ERC20 token. In this way, we can draw a parallel between buying goods and services in the physical world (represented in the digital world by Commitment NFTs) for money (represented in the digital world by Thing tokens, which are ERC20 tokens).
But before we talk in more detail about Boson’s approach to NFTs and the difference between Commitment tokens and Thing tokens, let’s take a closer look at the existing integration points where NFTs are plugging into DeFi infrastructure.
Collateralized, fractionalized and wrapped NFTs
One of the enduring problems with physical collectibles and/or valuables has been not just with liquidity but with their inability to generate passive income. Platforms such as nftfi allow borrowers to collateralize loans with their NFTs in the same way that other platforms allow the collateralization of traditional cryptoassets.
Meanwhile, Aavegotchi gamifies the DeFi experience by offering direct staking of Aavegotchi crypto collectibles to earn income via a mechanism known as rarity farming.
Given the meteoric rise in NFT prices, the ability to invest, trade or collateralize fractions of NFTs is also becoming popular. DAOs such as JennyDAO offer collective ownership of a curated selection of NFTs, while Niftex and other similar platforms offer NFT owners the chance to shard their NFT and sell fractionalized shares.
At a slightly more complex level, charging or wrapping NFTs enables swapping one set of token standards for another, which can mean opening up the opportunity for a whole lot of new interactions, liquidity and income generation.
Charged Particles and Wrapped CryptoPunks are probably the best known examples of this:
Charged Particles describe their product as “Interest-bearing Non-Fungible Tokens (DeFi NFTs)”, which allow users to generate programmable yield by depositing any ERC tokens (whether straightforward ERC20s or even other ERC721 or ERC1155 NFTs) into their NFT.
Meanwhile, it is possible to wrap CryptoKitties, CryptoPunks, MarbleCards and other NFT collections, either individually or in bundles, in order to create a new fungible asset out of the original non-fungible token. This fungibility increases the liquidity of the original asset and enables it to plug into existing DeFi protocols in a more flexible manner.
Boson Protocol — a DEX for anyThing
So, how does Boson Protocol’s open, tokenized economy for commerce and its different token types relate to the above examples that are operating at the intersection point of NFTs and DeFi?
In the words of David Hoffman in the Bankless post referenced above: “NFTs are DeFi-native assets, and thus spurs DeFi-native commerce”. Boson Protocol is the perfect vehicle for DeFi-native commerce because Thing tokens effectively bring a layer of abstraction and liquidity to the whole commerce ecosystem.
While the game-theoretic rules of Boson’s Commitment NFTs govern the rules that incentivize buyers and sellers to behave fairly, Thing tokens provide a similar layer of abstraction to the wrapping or charging processes described above, and allow for effortless integration of any type of asset into existing DeFi infrastructure.
This is why we describe Boson Protocol as a DEX for Anything, whether the items for exchange are on-chain, off-chain, physical assets or a mixture of all three.
Because Thing tokens are standard (ERC20) tokens — ‘generalized unisocks’, in the words of Boson Protocol advisor Dr Michael Zargham — they can be transferred and traded using standard crypto infrastructure such as wallets and exchanges.
Most powerfully, Thing tokens plug into DeFi infrastructure to enable liquid digital markets for anyThing. This includes using decentralized exchanges such as Uniswap to enable price discovery and yield optimization of existing products, and crowdfunding of future products via Initial Thing Offerings (ITOs).
About Boson Protocol
At Boson Protocol, we are creating a decentralized commerce ecosystem that everyone can use and anyone can trust.
Boson Protocol is a decentralized infrastructure for enabling autonomous commercial exchanges of anyThing, specifically off-chain items. Boson is a peer-to-peer system which replicates the benefits of a market intermediary, without the disbenefits of centralized systems.
Keen to learn more?
Enjoy the dCommerce Stack outlining the services we’ll need to build a dCommerce ecosystem.
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