NFTs and DeFi expansion
Decentralized networks have received a lot of attention over the last two years, primarily due to the rise in popularity of DeFi platforms and the NFT wave causing paradigm shifts in how creative work is monetized. Digital assets have always been a somewhat speculative asset class, but NFTs take it to a whole new level.
NFTs are non-fungible, meaning every single one is unique and cannot be duplicated. This brings an element of scarcity to a digital token — something we’ve never seen before on the Internet. From authentic digital art to representative collectibles, NFTs are pushing us into a creator economy, but their utility is far broader than just fun and games.
There are thousands of cryptocurrencies in existence, but not all of them run on their own blockchains. In fact, other than a handful of blockchain projects, most NFTs and other digital assets in the DeFi space run on the Ethereum network, but different tokens abide by different standards.
Ethereum is a platform that enables developers to deploy decentralized applications to the blockchain and to make transactions on these apps easier, each application issues its own token. Most DApp-specific tokens adhere to the simple yet comprehensive ERC-20 standard, which has many benefits for both individual smart contracts and the DApp ecosystem as a whole.
The standard specifies six functions for each token designed to benefit other tokens on the network. This ensures all Ethereum tokens have a place on the system, and with how widespread the use of ERC-20 tokens has become, nearly every wallet in existence supports holding them. Tokens that follow this standard are fungible, meaning anyone can readily exchange them for another token of its kind, and NFTs follow a completely different standard known as ERC-721.
Non-fungible tokens have existed for quite some time, with the first work associated with blockchain-based authenticity certification being Kevin McCoy’s ‘Quantum’ animation in 2014. After realizing how non-fungible tokens could be created and traded at different prices, CryptoKitties was born a few years later, ushering in an era of collectibles games on Ethereum.
Eventually, so many NFT-based platforms began emerging that it made sense to standardize the tokens used, and this was the birth of the ERC-721 standard we know and love today. Like with traditional ‘fine’ art, people are willing to pay extreme prices to ensure authenticity, and ERC-721 NFTs can be minted and verified with ease on the blockchain while ensuring artists are compensated fairly. However, NFTs offer a lot more than just the ability to support creators around the world.
ERC-721 tokens provide digital proof of ownership over any asset it represents, including real-world assets like real estate, as well as virtual assets like digital collectibles or exclusive membership passes. But like ERC-20, Ethereum’s NFT token standard isn’t perfect. With its inefficient design, large carbon footprint, and slow transfer capabilities, ERC-721 is a relatively rigid standard that wasn’t made for the creator economy we’re headed to. However, having a single standard to create fungible, non-fungible, and even semi-fungible tokens could change what blockchains are capable of, and that’s where the ERC-1155 standard enters the scene.
Raising Standards
As a borrowing aggregator, FujiDAO is required to map its internal positions relative to the protocol. When experimenting on the testnet version of the network, they found that using the Aave debtToken standard — an ERC-20 token — was the easiest way to map its positions.
However, the ERC-20 standard introduced all kinds of complications to the network, like needing more smart contracts, approvals for each transaction, and expensive gas fees. Further, since the Aave debtToken asset was non-transferrable and bearing the borrower’s interest, they needed a better solution.
The ERC-1155 standard is a token framework created by the blockchain-based gaming platform and asset marketplace, Enjin. Unlike ERC-20 and ERC-721, teams can use the ERC-1155 standard to create both fungible and non-fungible tokens on Ethereum that are secure and tradable. Furthermore, this hybrid standard allows for more efficient trades by bundling transactions, making transfers less expensive, and lowering the industry’s environmental impact.
NFTs derive value from what makes them unique, and with ERC-1155, NFTs can hold unique metadata that is adjustable over time. This allows for, say, a CryptoKitty to store information about its lineage, or in the case of artwork, prior ownership and source data. However, the ERC-1155 token also allows for creating a ‘semi-fungible’ token, which is breaking barriers with what blockchain can accomplish.
These semi-fungible tokens take aspects of both fungible and non-fungible tokens to bring the best of both worlds to application developers. They could be used in a myriad of use-cases, most popularly as coupons that are redeemable only once. In this case, the token acts as a fungible coupon until redeemed, after which it becomes a non-fungible asset.
Batch Operations, a closer look:
To understand better the benefits of this standart, let’s use schemes.
Let’s first compare the swap operations of ERC20 and ERC1155:
This scheme shows the different operations to swap ERC20 currencies, you must approve each transaction, and then approve the swap operation. This is not efficient and it results in gas price spikes during periods of volatility, when many users are swapping their assets.
Now using ERC1155, here is what a swap operation looks like:
By bundling assets, the standart is able to swap multiple currencies, or any kind of assets at once. It also improves the user’s experience because of the “approve once” method, and it lowers the gas spent during the operation.
It also works with transfers:
One transfer operation can bundle multiple assets and send them to different addresses. Again, reducing the gas spent, and allowing for a smoother internal accountability of protocols.
The Best of Both Worlds
NFTs are evolving, and being adopted by several major platforms, including Uniswap V3, where liquidity positions will no longer be represented as fungible ERC-20 tokens in the core protocol due to per-LP custom price curves.
Learn more about Uniswap V3 and NFTs here.
Real estate tokenization platform RealT also adopted the standard, with many more DApps have announced plans to implement it in the future. However, this token standard isn’t just beneficial for NFTs. Unlike ERC-20, where each token requires a new contract to be deployed, ERC-1155 is much more suited for multi-token economics and allows developers to create several tokens under the same contract.
Check out what RealT is creating here.
In fact, using the ERC-1155 standard, each smart contract could govern up to 2256 non-fungible tokens and up to 2256 copies of each one. It will also allow for tokens to be owned by multiple addresses and for each address to own multiple copies of each token. If ERC-721 was a vending machine that dispensed a single item once, ERC-1155 is a vending machine to infinitely issue an infinite number of items.
This increases the surface area for designers to create financial applications for both NFT and non-NFT-related blockchain systems while also bringing a huge boost to efficiency. For example, using ERC-1155, FujiDAO was able to map its internal positions while also removing the “approve for each” transaction limits previously imposed by the ERC-20 standard.
Now, when a user borrows funds from Fuji, its ERC-1155 smart contract mints a debt token after the collateral is deposited. These assets accrue interest over time, mapping user positions and the interest they earn or owe.
Using double mapping, the system can now store different assets, collateral, and debt and use them to derive user positions. It also brings scalability improvements because smart contracts can batch transactions, and lower gas fees for transactions. The implications of the ERC-1155 standard are seemingly endless, and from shared ownership to immutable online content, NFTs are revolutionizing entire industries.
Semi-fungible tokens could find a lot of use in the derivatives space, where tokens could act as fungible contracts until the moment of expiry. This could also extend to insurance and credit firms, as well as the gaming, lending, and identity industries.
Deep dive in our docs to learn how FujiDAO is using ERC1155.
A Solution in Progress
NFTs are one of the most exciting applications of blockchain technology, causing waves in all sorts of domains, from digital art and gaming to real estate and financial services. Platforms offering NFT-collateralized loans are gradually becoming more commonplace, and with how quickly projects are adopting the ERC-1155 standard, more diverse applications are en route to the DeFi space.
Currently, the relatively low transaction volumes prevent broader institutional adoption, but the shift to ERC-1155 could bring the scalability needed to afford the high volumes the space could potentially attract.
There are still many features of ERC-1155 tokens yet to be unearthed, but with time teams will invent new ways to bridge the gap between fungible and non-fungible assets, allowing the two markets to complement each other. As the ecosystem evolves, so too will its token standards, and this isn’t even its final form.
The main challenge surrounding both DeFi and NFTs will be adoption. Users can’t constantly deal with changing standards, and interfaces need to become more user-friendly before the space can truly flourish. FujiDAO is continually discussing ways to improve its user experience, and the team is currently developing its protocol to help bring the worlds of fungible and non-fungible assets together and create more attractive products. However, there is still so much work left to be done.
Blockchain interoperability could bring more assets to individual platforms, enabling users to mitigate risks by choosing a diverse range of products. In addition, by making integrations simpler, projects could more easily access liquidity, enabling better, more innovative applications on the blockchain.
The current ERC-721 standard works for the moment, but as NFTs continue to expand their utilities, the standards we use need to scale accordingly. As NFT collections become more commonplace, the greater efficiency and multi-token handling capabilities of the ERC-1155 standard are bound to be helpful.
Tokenized real-world assets open up a wide range of possibilities for blockchain as the adoption of NFTs grows, and with so many platforms and tokens out there, it’s essential to do your own research before jumping into anything. As digital assets, it’s also important to store them securely and learn about the different ways to safeguard your holdings.
ERC-1155 represents the next generation of multi-token standards, allowing for applications with inventive solutions to modern needs. In time, the entire world will be using NFTs without even realizing it, bringing increased transparency and security to retail supply chains, save countless hours of administrative work, and bring greater opportunities to independent artists, creators, and entrepreneurs.
