The Troubled Marriage Between NFTs & DeFI

It is hard not to have heard about Decentralised Finance in the World of NFTs, which project is worth it ?

besancia2020-10-27

Introduction

Once upon a time in a large enchanted forest called Niftyland, many small tribes lived in harmony. This was thanks to a magical sap contained in all the forests plants and the leaves of the trees had commercial value.

Each tribe had their own individuality which sometimes could make them incompatible with neighbouring communities, but since the trees’ resources were abundant they easily found harmony.

One day, a traveler entered the forest and shouted to anyone who could hear him, “In a few days a Unicorn will appear and will be able to bring you what you need to prosper even better together”.

The first person who met with the Unicorn returned feeling somewhat unsatisfied with their experience. The process was lengthy, being necessary to freeze the magic leaves in a large rainbow patterned cauldron and waiting to see if they regenerated.

Even though the way the magical sap functioned was still not understood, some of the tribes noticed two things, the magical sap was needed to activate the freeze and also a great quantity was needed.

The tribes have evolved by having individual technical and artistic experiences and, through their ancestral knowledge, have invoked a new tool and several golems have risen from the ground, each focussed on generating more. 

How is this new strength being harnessed by Niftyland and what are the stakes for the tribes?

NFT x DeFI

It is hard not to have heard about Decentralised Finance in the World of NFTs, especially with gas prices being so high for months.

We analysed the entire market over this time in one of our previous articles but the term DeFi has become very generic and represents several different definitions. 

The truth is that as soon as a financial exchange system is set up on a decentralized blockchain, it becomes de facto decentralized finance and we can confirm that since the birth of the ERC721 standard, DeFi has existed within the very nature of NFTs themselves.

Several projects have tried out a beneficial  economic model: Axie Infinity and the Small Love Potion ($SLP), My Crypto Heroes and the $GUM, Decentraland and $MANA..the common point of all these games is the manual interaction necessary to obtain rewards. 

In 2019, Chain Guardians tried an experiment ahead of their time by setting up an “NFT mining” system. Thanks to the projects that are part of their Cryptoverse Alliance, every hour it’s possible to send NFTs to mine blocks of Chain Guardians ‘$CGC’ for a chance to receive a mining reward.

Farming & Mining with NFTs

Then everything stopped because of the intensive use of decentralized exchange Uniswap.
‘Liquidity mining’ consists of producing cryptos dedicated to the project when using a DeFI service in which the user must make investments. The rate of return is determined by the smart contract.

Many took the opportunity to ‘grow’ money thanks to some very fast, very high but above all very risky returns. When passions for farming began to subside, the world of NFTs drew inspiration from farming for their own projects.

Being able to generate a decentralized and automated economy in addition to or thanks to NFTs, was going to become a reality. This year the first to have this feature in place was Niftymoji and their $MEXP on September 24th but then without explanation, the team performed an exit scam a few weeks later.

This first dramatic event was followed by another very soon after.

It is the sad story of Blue Kirby who promoted $YFI for several months until becoming an important emissary of it.

Building on this success, they took the opportunity to promote it on Rarible while publishing works on the platform where the community offered the project a great deal of support. Maybe it was for the $RARI, maybe for the quality of the works, in the end no one will know because overnight, Blue Kirby sold all their $YFI and closed their Twitter. 

These experiences have shown several things:

  • It is possible to easily generate liquidity through an NFT project
  • Users have shown a real interest in the NFT x DeFI combination
  • Scams take on another dimension and the amount of mischief has greatly evolved

Even though these events were noticed, it is interesting to note that the marketing of projects wanting to use the Liquidity Farming x NFT combination quickly succeeded in eclipsing these breaches of trust.

In order to try to understand as objectively as possible the mechanisms of this emerging mixture of genres, we have chosen two projects with completely different approaches: Aavegotchi, Cargo and Biffy.

Aavegotchi, the ghost to maintain


Aave is a stablecoin savings and borrowing platform. Although the project became known thanks to its innovations such as Flash Loans, a form of Liquidity Mining has developed in parallel.

For example, If you deposit $100 DAI on the platform, $100 aDAI will be created.
This can be used as collateral on Uniswap, obtaining on one hand interest generated by the deposit of $DAI but also a percentage from exchanges using the $aDAI.

As this system is not within everyone’s reach, Aavegotchi aims to make their experience more interactive and accessible. Currently in development, we were able to see how the project would work thanks to the team’s testing on the testnet. 

It all starts with the project’s fungible token, the $GHST. It is possible to obtain it via Uniswap or directly from the site by passing a KYC. This token is a pivotal element of the project:

  • Value backed by a “bonding curve” between $0.1 and $0.8
  • Can be stacked to generate $FRENS
  • Can be placed in the liquidity pool
  • Allows you to open a portal to generate your Aavegotchi

The next step is to generate $FRENS, a token having only one purpose: to buy tickets that allow you to participate in a lottery to obtain wearables. These wearables will be NFTs that will influence your Aavegotchi’s statistics, so they can be directly attached to it or exchanged separately.

It is also possible to participate in the liquidity pool by freezing its $GHST to generate others. 

Next comes the Aavegotchi summoning step!

After opening a portal for 100 $GHST, you get to choose  between 10 ghosts in the colors of the collateral that are dedicated to them with a random rarity level. This level of rarity will determine the amount of collateral needed for its summons. 

Once the payment is made, all you have to do is personalize it to make it more rare and therefore more efficient. The Aavegotchi is an NFT that can be traded on secondary markets and wearables are linked to it.

Biffy: technical experimentation

At the start of 2020, several teams of tech enthusiasts carried out original experiments with NFTs:

  • Words

It all started with the generation of a three-letter word. To be able to generate longer words, it was necessary to merge already existing syllables. If you were the owner of one of the syllables used, you earn a % of $ETH

  • Maths

The same concept as Words but with numbers

  • RGB

Creation of 8bit images where each pixel is a metadata registered in the NFT

  • Chainfaces

Random generation of emoji in ASCII

  • Bitsforai

Random generation by pixel algorithm in 8bit

  • Metaglitch

Merge of a chosen glitch effect and another NFT to generate a new NFT

The total cost for minting each of these NFTs was always under 0.05 ETH (including transaction fees) A ridiculous price which clearly proved the desire to want to experiment and have fun all in the technique of the game.

These projects have no connection between them, other than the fact they evolved out of a similar experimental space. 

Despite a sometimes non-existent user interface, the community quickly showed an interest in these projects and each one sold out soon after their publication on the mainnet. 

Of all these projects, it was Bitsforai who was chosen to carry out a new experiment that began in May but was postponed due to transaction costs: the emergence of Biffy

Unlike Aavegotchi that comes from DeFI, Biffy is a100% NFT community initiative. The concept is simple, to be able to use your Bitsforai to generate $LOVE, which will then be used and sacrificed to maintain Biffy!

The goal? Have the first customizable artistic robot thanks to a community governance token. Without a token pre-sale, it would seem that the project does not put forward the financial aspect but rather a real co-construction of Biffy between the developer and the community.

The way in which the project will evolve will be carried out in 4 stages:

  • The mechanics stack and generate the $LOVE
  • Body without organs:  sacrifice of $LOVE for the benefit of Biffy’s hearts. Unique works will be distributed as badges to the biggest priests of $LOVE each week.
  • Machine Desire Stack up Bitsforai to obtain $LOVE
  • Autocatalysis The smart contracts all become improvable thanks to a transfer of their governance to the community.

Details of each phase can be accessed from the “read me” section in the project’s Github.

Cargo & Polyient Games Founder Key: transferring ownership

Among these new projects combining NFTs and DeFI, there is a problem that Cargo and Polyient Games want to solve, the change in portfolio when an NFT is linked to a liquidity mining activity.

To answer this, Cargo found a solution that competes with Rarible, a marketplace that based its business model on token generation through the creation and exchange of NFTs on its platform. Several aspects differentiate it, in particular, you must buy credits to mint NFTs but many NFTs can be batch minted thanks to ERC-2309.

Where Cargo innovates on one hand with the possibility of staking NFTs to generate $GEMS the platform’s governance token also allows the transfer of the link between the reward in $GEMS and the NFT to the new buyer. 

On October 15th Polyient Games announced the possibility of staking $GEMS in their own NFT the Polyient Games Founder Key $PGFK. $PGFK, a non-fungible token, can be sharded or fractionalized into an ERC20 a fungible token, $XPGP for liquidity mining and as currency on their own upcoming DEX. Learn more on their blog!

It can be a confusing space to dive into for many but this is a vital key that is the cornerstone of a larger universe allowing  you to link to other liquidity mining projects for rewards.

Conclusion

These projects are only three examples which are well advanced in their realization, nobody can say if they will reach their finalization. 

These new features are still extremely young in the ecosystem and it is therefore difficult to know which direction the use of Liquidity Mining by NFTs will take. 

The question of the usefulness of such a function must be considered very carefully with an informed response from the team. If this only serves to generate money, we may as well say that the intrinsic value of the project is non-existent.

Thanks to the increasing integration of a second layer such as Matic Network, in the various projects to pay less costs for so-called ‘complex’ transactions, it is very likely that future DeFI x NFT experiences will increase in time to come. 


Because even though today the risks of scams are high, the possibilities of Liquidity Mining opens the door to further sustain the decentralized ecosystems and economies that we build every day. 

Undoubtedly this new use of NFTs is extremely interesting and paves the way for crypto-savings that are fully owned by users, more liquidity in the markets and endorses the positioning of NFTs as a store of value.

This last point is essential to underline, especially for assets based on a technology which is less than 3 years old.

Sources : Illustration coverIllustration NFT x DeFI

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