Why Combine NFTs and DeFi?
One of the first question people ask me about Degen Dogs is: why? They want to know the reason for wanting to combine decentralized finance (DeFi) and token-streaming with non-fungible tokens (NFTs). The answer is twofold, but primarily it is an exploration of what is possible.
Composability
The term composability is web3 and smart contracts refers to ability to connect separate protocols and service together to build something new. In the context of DeFi, the term Money LEGOs is also used to illustrate this connecting, this stacking of protocols together to build something else.
The Top Two Use Cases for Web3 (so far)
The first major use case for smart contracts was finance. Smart contracts that can hold tokens opened up the possibility of creating decentralized versions of financial instruments and markets, and for going beyond what was possible before. Much later, NFTs became the second major use case, primarily consisting of (but not limited to) the trading of JPG and GIF images while providing verifiable proof-of-ownership.
But DeFi and NFTs mostly stick to their own thing. While some NFTs have introducing staking and other interesting features, for the most part DeFi is DeFi and NFTs are NFTs. Leveraging the composability of Ethereum smart contracts, I thought it would be interesting to combine them.
So I set out to create an NFT smart contract that automatically connected to decentralized exchanges (DEXs) and yield-providing protocols, taking the proceeds from NFT sales and trading/investing them. An early version of Degen Dogs — a submission to the ETHOnline hackathon — traded ETH proceeds on Uniswap for DAI, then deposited the DAI on Compound, where it started to earn yield. All of this (and more) happened in a single transaction that also sent the NFT to its new owner.
Streaming Rewards as Incentives
The second major reason for creating Degen Dogs was to explore the possibilities of direct community incentives.
If an NFT collection provided direct financial incentives to NFT owners, how might enable or enhance community building and engagement?
This question remains unanswered, but it fascinates me. Before starting on the hackathon project, I learned of a DeFi primitive called token streaming, enabled by the SuperFluid protocol. Using a single transaction, you could stream tokens from one address to another, with balances updating each second. While there are many interesting use cases for token streaming, I was very interested in learning how vesting token rewards over time — using streaming — could enable sustained community engagement, as compared to one-time rewards. When you have to stick around (hold the NFT) for at least a year to receive all the rewards, how does that effect your behavior? Are you more likely to be active in the community? Are you less likely to sell on the secondary market?
The question of how to structure streaming reward incentives is something that I find fascinating. The options are (almost) limitless, and each structure has different game theoretical implications. In my opinion, this are is ripe for experimentation. I call it Streamonomics.
Exploring the Possible
In summary, Degen Dogs are different because they can be. I wanted to explore what is possible when combining things that are not supposed to go together. The composability of smart contracts enables interesting combinations and experiments. And Degen Dogs is one such experiment.
