INTRODUCTION
We’re excited to introduce a new NFT collateralization tool: DCNT Vault Wrappers (Decentralized Creator Non-fungible Token Vault Wrappers).
DCNT VWs significantly expand the utility of NFTs without compromising their proven value as a digital collectible and reputation instrument. They offer a fungible financial layer that can be valued independently of the artwork and create new opportunities for speculation. Owners can preserve the integrity of NFTs’ individuality and contribution to wallet identity while earning alternative yield via wrapped NFT ERC-20 tokens staked into various DAOs and protocols.
Importantly, this mechanism exists entirely on-chain, so the redemption of locked ERC-20 tokens is not dependent on the solvency or benevolence of any one entity.
MECHANISM
DCNT VWs distribute tokens based strictly on one’s percentage ownership in an NFT collection, eliminating the need for a snapshot, manual split entry, or Merkle tree (IRL examples include Uniswap’s Merkle Distributor, Mirror’s Splits, and OpenZepplin’s Payment Splitter). These NFTs can trade hands after the vault unlocks, and whoever the current owner is can claim their respective ERC-20 token share.
For example, suppose a collection of 100 NFTs are minted. A DCNT contract can then be created with a time horizon of one year to wrap this collection. If, for example, 10,000 USDC is deposited into the embedded vault over the duration of the lock period, at the end of the year, each NFT could “unlock” and redeem a percentage of the vault (in this case 100 USDC per NFT).
CODE
Github Repo can be found here (feedback is welcomed!)
APPLICABILITY ACROSS ECOSYSTEM
DCNT VWs can 1) easily provide treasuries and facilitate governance for NFT collections 2) enable NFT collections to be used across DAOs and 3) create a futures market for any NFT collection.
- One framework for DCNT VWs is a “DAO-in-a-box”. We like Cooper Turley’s definition of a DAO, “an internet community with a shared bank account and cap table.” This is a clean definition for an otherwise messy structure. Among other questions, it can be difficult to identify who is in the DAO, what their role is, what their financial interest in the DAO is, and how to build for long-term sustainability (vs. cash grabs or ponzi games). DCNT VWs tie DAO membership and identity to ownership of NFTs and guard against short-term profiteering by locking financial upside for fixed periods of time. By way of comparison to legacy corporate structures, DCNT NFTs are DAO W-2’s, and our ERC-20 vaults are employee vesting schedules.
- The same NFT collection could be wrapped across several DAOs or shared treasuries. This expands the financial layer of NFT collections without jeopardizing the integrity of the art. For example, 100 different DCNT Vaults could wrap BAYC NFTs. BAYC would continue to trade as it currently does; however, a secondary financial layer would emerge where the minimum value of BAYC NFTs should not dip below the combined value of the 100 DCNT Vaults predicated on BAYC. This offers a novel layer of speculation, amplifying the value of BAYC without systemic risk to the NFT collection.
- Creating futures contracts encourage investors to take long-term views on protocols, while maintaining momentum-based short-term trading opportunities. This type of derivative product represents a healthy addition to the ecosystem.
MOTIVATION (& ABOUT DECENT)
The original design and motivation for building DCNT VWs was for our platform: decent.xyz. Decent enables fans to invest in musicians by purchasing royalty-backed NFTs. Our model aligns artist and fan incentives to reinvent funding, IP protection, and discovery (our core focus).
Decent uniquely enables artists to list their future royalties for a fixed period of time — e.g., 20% of royalties of an album for 3 years. We believe the extractive nature of music’s economics is rooted in rent-based perpetual agreements (Music as Work-to-Rent). Therefore, we had to solve for time-bounded listings to solve for artists’ real needs. Additionally, this model massively benefits both artists and fans/investors by enabling royalties to become a speculative asset class. Investor utility with our royalty-NFTs does not rely on ancillary perks that ultimately devalue the core product or distract from the mission, which is ultimately to the benefit of artists.
Existing NFT lending, staking, fractionalization, and whitelisting solutions can effectively facilitate certain aspects of the Decent platform; however, they were insufficient due to either reliance on a single-point of off-chain trust or a bond-type asset structure — incentives rooted in dividends. Dividends are not well suited for NFTs collateralized by future value as each payment erodes the expected value and, therefore, price of the NFT. Ultimately, this approach would negatively impact creators receiving secondary trading royalties and investors, as each NFT should be sold at a discount post the initial dividend.
Our project required a mechanism for trustless, time-bounded assets optimized for creator monetization and investor utility. Note: while DCNT VWs allow for vaults to wrap any pre-existing NFT collection, we will also be releasing DCNT VNFTs. This mechanism contains vaults embedded in the NFT contracts themselves. We are introducing DCNT VaultWrappers first as their applications across the ecosystem are more versatile.
While our initial motivation may appear niche, we have structured these vaults to be interoperable and believe this primitive can serve important functions across an array of DeFi projects and DAOs.
THE CURRENT STATE OF NFTS x DEFI
NFTs found product-market fit as collectibles in 2021, registering over $23bn in sales. However, applications unlocking the full potential of NFTs as a powerful asset class and utility component within DeFi are still nascent. To position DCNT VWs within the NFT x DeFi ecosystem, we’ll briefly contrast them to incumbent solutions (that we are also very excited about!).
Lending
Staking
- NFTX
- Oneessus WhenStaking
- Only1
- Couple of solid blogs on the space & challenges: Exodus, Hacker Noon
These protocols enable NFTs to earn yield but require lockups and are rooted in dividend models. Additionally, we view equity-based approaches as significantly better than their debt-based counterparts for creators and fans due to unique incentive alignment and little upfront risk.
Fractionalization
Admittedly, it is somewhat of a stretch to group these together into fractionalization; however, we would argue the core premise of each is to let multiple people own the same NFT. In practice or in theory, these protocols effectively provide liquidity to NFT holders but are best suited for the most expensive NFTs. Additionally, this approach generally provides asymmetric value to NFT holders vs. creators.
CONCLUSION
We are excited by DCNT VWs’ ability to introduce novel assets to the crypto community and the creative applications and trading strategies that will emerge. Our initial implementation will produce NFTs with a fundamental value and enable fans to build their own labels by speculating on artists’ popularity. We hope and expect applications falling into the three categories listed above will be created. We’re excited by the future of Decent but even more excited to see what you all create using DCNT VWs!
Please reach hop in our Discord to chat through any recommendations, questions, or concerns. This is an early product we hope to make better with your help. We look forward to hearing from you!
wagmi,
Will Kantaros, Charlie Durbin & The Decent Team
