NFT + DeFi Integration for Metaverse Commerce Applications

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An NFT (Non-fungible Token) digitally represents numerous functions, rights and obligations of an (digital or physical) asset with a unique economic value. Because each NFT is unique and contains its own value, it cannot be traded or exchanged equivalently. NFTs can provide authenticity, verification, and exclusivity. ERC-721/1155 are the open standards that describe how to build NFTs on Ethereum compatible blockchains. According to MarketsandMarkets Research, the global NFT market size is expected to grow from $3 billion in 2022 to $3.6 billion by 2027, at a Compound Annual Growth Rate (CAGR) of 35.0% from 2022 to 2027[1].

DeFi (Decentralized Finance) is an ecosystem of decentralized applications that provide financial services built on top of blockchain with no governing authority. DeFi has grown to an $80 billion industry in 2021. According to Cointelegraph, DeFi market can be 100 times larger than 2021 in 5 years[2]. Thus, a synergetic integration of the NFT and DeFi has a huge market potential that can create the new economic values, especially, through applications for the metaverse commerce.

NFT Rights and Obligations

In general, the rights that accompany an NFT are determined by the NFT creator who owns property or IP (Intellectual Property) rights of the underlying asset. Usually, the NFT rights include ownership of NFT. An NFT ownership does not translate into ownership of the underlying IP rights automatically. NFT holders can acquire a license of these underlying IP rights.

For an NFT of a real property, transfer of the NFT can be used as a proof of ownership transfer of the real property: Legally, whoever is named in the NFT and has possession of it, owns the property by some contractual agreements.

An NFT could be considered as “commodity” (for representing a commodity) or “securities“ (fractional NFT where an investor would share a partial interest in an NFT with others: an “investment contract” under the Howey Test in the US) under the federal laws. Thus, you need to check your national laws for finding the NFT legal obligations.

NFT for Metaverse

NFTs can represent the values of various assets that construe the metaverse world (e.g., game items, virtual goods, digital arts, virtual real estate etc.). Thus, you can buy and sell game items, digital goods, digital arts and virtual real estate using NFTs. According to The Financial Times, NFTs enable the growth of societies through the metaverse economy within immersive virtual worlds[3]. For details about projects regarding the NFT for metaverse, please see author’s summary[4].

DeFi Money Market & Bonding Curve

An individual can send/receive the digital asset tokens they wish to lend/borrow into a DeFi “money market” using a smart contract (bonding curve) without any governing authority. Compound is an example DeFi borrowing and lending protocol built on Ethereum that functions as a DeFi money market.

A bonding curve is a mathematical formula used to set a relationship between a token’s price and its supply. A bonding curve allows the continual liquidity of a token with the price changing depending on how much ‘buying and selling’ activity is conducted (automatic liquidity pool formation (automated market maker (AMM)) and operation through bonding smart contracts).

Figure 1 shows four types of bonding curves in the Bancor protocol[5]. In the figure, the x and y axis represents a token supply and a token price respectively. For a specific token supply (and thus, a specific token price), the area under the bonding curve between 0 and the total token supply represents the liquidity pool balance. In Figure 1, Token Price = Liquidity Pool Balance / (Total Token Supply x CW), where CW (Connector Weight) = Reserve Ratio = Value of Reserve (Collateral) Token Balance / Total Token Value (Total Supply (minting of token) × Current Unit (Quoted) Price (denominated by the reserve token value)) = Configurable Constant.

Figure 1. Various bonding curves based on the Bancor protocol.

In general, for a token price function like F(x) = mx^n, where x is the number of tokens in circulation (total minted tokens), n = exponent parameter, m = slope parameter of the price formula, F(x) = Liquidity Pool Balance / (Total Token Supply x CW). Thus CW = 1 / (n + 1) CW defines a family of curves:

CW = 100%, n = 0 ——> F(x) = m,
CW = 50%, n = 1 ——> F(x) = mx,
CW = 10%, n = 2 ——> F(x) = mx^2, and
CW = 90%, n = 0.5 —–> F(x) = mx^(1/2)

NFT + DeFi Integration Design

An NFT holder can stake his NFT as a collateral value in a DeFi money market for borrowing cryptocurrency against its collateral value. NFTX is a platform for creating liquid markets for illiquid NFTs. Users deposit their NFT into an NFTX vault and mint a fungible ERC20 token (vToken) that represents a claim on 1:1 a random asset from within the vault. vTokens can also be used to redeem a specific NFT from a vault.

A real asset holder can tokenize his/her assets (e.g., LuxFi launches the asset-backed NFT marketplace for luxury goods) as a NFT (ERC721/ ERC1155 tokens). The NFT holder can put it into a specific bonding curve (smart contract), and anyone can buy the shares in the ownership rights (fractional ownership) by sending collateral and receiving a fungible (ERC20) token. The price can be set by pre-selecting a bonding curve that makes sense for the NFT/underlining asset.

NFT + DeFi Money Market for Mataverse Commerce Applications

Figure 2 illustrates an application of the NFT+DeFi money market for automotive sales through a virtual showroom[6]. A virtual showroom environment that allows a consumer to virtually visit a virtual showroom and receive detailed vehicle information in a variety of manners. A consumer can use augmented reality to highlight a vehicle and receive information regarding it. A consumer can walk through a guided showroom tour or walk through an interactive showroom tour.

A consumer and sales person can visit the virtual showroom using their avatars with DID (Decentralized Self-Sovereign Identity) for a metaverse commerce activity. Once an agreement for the automotive sales has reached (automatically using a smart contract), the consumer received an NFT that represents an ownership of the automotive after payment (using a cryptocurrency). The NFT for the automotive ownership can be used as a collateral to finance from a virtual bank[7] that operates the NFT+DeFi money market.

Figure 2. Application of the NFT+DeFi money market for automotive sales.

Conclusion

Metaverse is a new digital revolution that combines physical and digital world to form an immersive and augmented metaverse world. Metaverse has the potential to become a multitrillion-dollar part of the world economy[8]. NFTs can represent the values of various assets that construe the metaverse world (e.g., game items, virtual goods, digital arts, virtual real estate etc.). Thus, you can buy and sell game items, digital goods, digital arts and virtual real estate using NFTs. NFTs can be integrated with DeFi money market by designing a bonding curve that makes sense for the NFT/underlining asset. NFT + DeFi money market can be applied for various mataverse commerce applications.

TechIpm, LLC is a professional consulting and incubating firm in digital technology innovation and related IP development. TechIPm’s current focus is to develop a metaverse enterprise platform and its applications in ESG/sustainability digital transformation (e.g., next generation solution for dynamic carbon net-zero management). TechIPm’s business includes technology/IP analysis & development, technology commercialization & monetization, strategic business development and project management in the field of AI, blockchain, IoT, big data, cybercecurity, digital twins, sustainability and metaverse.

Alex G. Lee, Ph.D., Esq., is a CEO and principal consultant at TechIPm, LLC. Alex is an emerging IT/digital technology innovation and sustainable business strategy expert with 30 years experience in the High tech industry. Alex is, a partner at Vincula Group, a New York State attorney, a US patent attorney and a CLP (Certified Licensing Professional). Alex is also a founder of the online forums: Enterprise/Industrial Metaverse Forum and ESGDX Forum. Alex holds a Ph.D. degree in physics from the Johns Hopkins University, a J.D. degree from the Suffolk University Law School and executive certificate in strategy and innovation from MIT Sloan School of Management.

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