DeFi-infrastructure innovations for utility NFT

The current market of utility NFT is growing gradually. Many of them fall within the sphere of play-to-earn games (such utility assets are called GameFi and their value is based on the internal market and game tokenomics). New projects and platforms are coming out to the market to make the user’s (traders, borrowers and creditors) lives more comfortable and secure. The market mechanisms quite often look too complicated which leads to problems in understanding and other issues. Thus, new protocols are needed to help them out.

Innovative projects

Although the system of utility NFT as a ‘proof of ownership’ is widespread and was not ‘born yesterday’ there are still some issues in realization of this function. On the other hand, there are several innovative projects which made steps forward to solving it. They have their benefits and issues, but can make a good match. Among them there are the following:

• NFTFi. The project was launched at the beginning of 2020 and allows NFT owners to use their tokens as collateral for borrowing coins (such as ETH). Certain NFT assets can be deposited as bonds to take credit at a certain platform. Credit time and interest profit margin are set up by the creditor and if the borrower breaks the terms of the ‘contract’ the creditor is able to hold back the bond. The platform is realized on the basis of smart contracts with quite simple closing mechanisms (for instance, if the bond does not cover the credited sum, the deal is closed right away). That is to say, the platform provides an ‘access to liquidity on security’. However, the price of NFT comes into question here, as the NFT market is extremely volatile and the minimal price can drop any time and provoke liquidation. To avoid it the borrowers are advised to have a huge buffer stock, which brings down the efficiency of the application of funds. So, the NFTFi is a good decision but not an ideal one.
• reNFT. It is a kind of leasing system, where NFT owners can lease their assets and get profit during the whole lending period. It looks attractive for those users, who need specific NFT assets for a period of time. They need not buy them out, but can just ‘borrow’ them at the platform. The future borrowers agree on the leasing schedule, then hand in a rental payment and a caution sum (a bond, which equals the NFT active price). This data is stored in a special escrow smart contract. In case if the borrower holds back the NFTs, the leaser can hold back this bond in return. This project solution helps to raise the value of idle NFTs and motivate the funds movement. It also supports the security of the both sides (the lender and the borrower) due to merging their assets by means of the escrow smart contracts. On the other hand, the bonds are quite high, which may not be very convenient from the ‘expenses’ point of view. Moreover, both sides must come to an agreement over the schedule and the preliminary payment is needed. Leasing is also a P2P contract, which may be not convenient in all cases.
• IQ Protocol. It is a ‘brand-new’ DeFi protocol, which platform PARSIQ (a specific platform for blockchain monitoring, which allows users to create ‘smart triggers’) suggests. It provides the monitored assets leasing system in a form of wrapping for a limited time (it can turn wrapped NFTs ready for leasing into WNFT). The wrapped asset can prove the ownership only being in leasing, which provides the borrowers only with right of exploitation without the rights of trading or passing. The risk of losing the basic NFT is prevented and, thus, there is no need for any mechanism of liquidation. It serves very well the practical needs of utility NFTs (such as transfer of exploitation rights with reservation of ownership rights at the same time). It looks more efficient than the P2P system as long as the crediting approach is realized through the WNFT liquidity pool. On the other hand, WNFT has a short lifetime period, the leasing contracts forces both sides to agree on the leasing schedule and hand in the rent payment in advance. There is another ‘annoying’ issue, which concerns the third-party applications, which write all data related to assets with NFTs in blockchain. The process of wrapping and unwrapping of NFTs may sometimes lead to data loss or data damaging on the blockchain.
• AFKDAO. This solution was invented in 2021 and announced in 2022 at Github. It is based on a new ERC-4610 protocol, fully compatible with the popular ERC-721 format. The owner of the ERC-4610 standard can share the right of exploitation to someone else without using third-party platforms or smart contracts. It can also manage NFT assets in the network and profit distribution. In play-to-earn games this protocol allows lending the assets to other users, at the same time all the rewards distribution is run by a specific smart contract and the rewards may be given to several parties in shares, whose amount is settled in advance. AFKDAO consists of three modules (NFY Launchpad, AFK Aggregator and Lending Pool) which created the pricing model for utility NFT. All assets used should be compatible with ERC-4610 when launched at the Launchpad. AFK aggregator is a protocol which rules the funds and it combines utility NFTs ‘in a decentralized way’. In games it allows single players and the whole guilds to increase the NFT value for getting profit and shared use by creating a special storage and defining the details of the increase. An NFT owner needs just to place a bet to delegate the assets to the guild. The profit will be written into a delegator’s smart contract which makes it possible to avoid sharing a private key with anyone. Moreover, neither bond, nor advance payments are needed. Lending Pool is a combined solution for lending and borrowing liquidity of NFT assets. Those assets might be put in a Pool for getting profit and the borrowers can lend them whenever they like without any bond (if there are enough assets in the pool). The borrowers have to hand in special tokens as ‘intakes’ and the interest costs will be withdrawn from this amount. The interest rate is calculated by a specific algorithm, based on the ‘demand-and-supply’ data in the Pool. When the sum handed in by the borrower runs out, the rent is automatically over. AFKDAO is a complex infrastructure DeFi solution for utility NFTs. It contains a solution for pricing and interest determination for utility NFTs, and offers strong access control to distinguish between exploitation and ownership rights. However, it is used mostly within the sphere of games.