Circular NFTs: Redefining Value and Impact in the Age of Digital Ownership
Let’s start by defining what an NFT is. The term NFT stands for Non-Fungible Token, meaning the token cannot be broken up into smaller pieces. It’s a packet of data created and recorded on a secure, public, shared information network. Once created, it is immutable — its data cannot be altered or manipulated.
The traditional model of NFT distribution involves paying to create such a data token, a process known as minting. Once created, an NFT may hold value based on demand in the open market, influenced by factors like rarity and utility. Items from collections in demand often sell for higher prices than their original creation cost. Owing to this those familiar with the space often use the term price floor, which describes the lowest sale price of an item in a collection, this price floor can fluctuate with supply and demand.
Circular NFTs operate differently, offering a more sustainable approach to NFT implementation. When a Circular NFT is created, it is attributed with a predetermined principal value, providing a solid price foundation for the item. The unique aspect here is that this principal value is refundable! The NFT owner can return the item to the contract that created it, burn the item, and receive a refund of the principal value attributed to it.
Now, let’s explore the key ways Circular NFTs diverge from the traditional model:
Principal Value: To ensure an item has a principal value, during its NFT creation transaction a deposit is made to Aave, a decentralized finance application that allows automated P2P lending and borrowing secured by overcollateralization*. This process is fully automated and non-custodial, ensuring the owner’s assets are secure throughout. Only the Circular NFT owner can redeem its principal value.
Interest Generation and Purposeful Use: Circular NFTs leverage Aave to generate interest on digital assets by providing assets to a pool that others can borrow from. The Circular NFT’s interest generated is then employed for a stated purpose. How this interest is utilised is shifting the concept of purchasing away from a “you pay us” approach to a “we all benefit” notion.
Examples of Circular NFT implementations in action:
Wombat Reverties: Introducing Gaming For a Cause (GFC). The first instance of an item that enhances gameplay and is fully refundable for the duration if its existence. These items enhance a player’s abilities in Wombat Dungeon Master. The interest generated by items is used to buy back and burn Wombat tokens, reducing the token’s supply and benefiting all holders. A portion of the interest also supports the WPSA, furthering the social impact of the Wombat community.
My-Chance: A zero-loss lottery game where Circular NFTs are implemented as prize bonds. These fully refundable NFTs provide entry to weekly lottery draws, and the interest generated from the NFT’s principal value is used to distribute prizes and raise funds for social and environmental causes. The prize bond owners benefit through the prize distribution mechanism and by contributing to important causes without making a direct donation.
One of the most significant criticisms of the NFT space has been its environmental impact. Critics argue that the energy consumption associated with NFT transactions contributes to carbon emissions and exacerbates the climate crisis. However, a Circular NFT model presents an innovative solution that can address these concerns while benefiting both creators and collectors.
With a Circular NFT model deployed on energy-efficient infrastructure, such as the Avalanche network, collections can have a net positive impact on the environment. This means that eco-friendly NFT collections can be used to raise funds for environmental causes, making them a valuable tool for supporting sustainability initiatives.
One of the key benefits of Circular NFTs for creators is the concept of “principal value.” This feature allows creators to extend the utility of their creations by leveraging interest generation. This enables creators to tailor their offerings and fund their project objectives and operational costs. As a result, the expense for minting an NFT can be reduced, providing a more attractive approach for creators.
For collectors and community members, Circular NFTs offer some unique advantages: the value of the item will never decline below its price foundation. This means that collectors can have more confidence in the value of their NFTs, reducing the downside risk typically associated with traditional NFTs. If a project does not perform as stated its supporters have the ability to withdraw their value and future support from a project by refunding their Circular NFT.
*Over-collateralization is the provision of an asset that is worth more than a loan’s value to enhance the loan’s security. This process enhances a borrower’s credit rating as in the event of default the asset the borrower provided can be sold to recover the value of the loan. This process protects lenders from suffering a loss.
