{"id":11331,"date":"2024-03-05T19:00:00","date_gmt":"2024-03-05T17:00:00","guid":{"rendered":"https:\/\/forklog.com\/en\/every-token-is-already-a-micro-pool-erc-404-as-a-frankensteins-monster-in-nft-2-0\/"},"modified":"2024-03-05T19:00:00","modified_gmt":"2024-03-05T17:00:00","slug":"every-token-is-already-a-micro-pool-erc-404-as-a-frankensteins-monster-in-nft-2-0","status":"publish","type":"post","link":"https:\/\/u1f987.com\/en\/every-token-is-already-a-micro-pool-erc-404-as-a-frankensteins-monster-in-nft-2-0\/","title":{"rendered":"\u2018Every token is already a micro-pool\u2019: ERC-404 as a Frankenstein\u2019s monster in NFT 2.0"},"content":{"rendered":"

Back in 2020, NFT 2.0 projects could be counted on one hand. Today, thanks to Uniswap v3, the NFTfi segment and lending protocols such as Blend and NFTX, the topic gets more airtime\u2014usually without much detail. Web3 entrepreneur Vladimir Menaskop<\/a> set out to fill the gap. <\/strong><\/p>\n

Today I want to examine aspects of ERC-404 that concern not the \u201cstandard\u201d itself (not least because it is not a standard at all) but its links to broader trends. First, some primers to get up to speed:<\/p>\n

    \n
  1. Key concepts<\/a> and a description of ERC\u2011404.<\/li>\n
  2. Risks<\/a> associated with it. <\/li>\n
  3. A possible<\/a> evolution. <\/li>\n<\/ol>\n

    We can now turn to the main trends that ERC\u2011404 illustrates.<\/p>\n

    Trend no. 01. The decentralisation of liquidity<\/strong><\/h2>\n

    What unites large bitcoin pools, Lido, the censorship<\/a> of Ethereum blocks by validators, and the more than 10,000 tokens and coins listed on CoinMarketCap? In fact, three trends at once:<\/p>\n

      \n
    1. The evolution of cryptoassets<\/a>, which lets builders create ever more complex instruments.<\/li>\n
    2. The evolution of DeFi<\/a> as a distinct industry, ultimately making the principle of self-embedded dapps<\/span> a reality.<\/li>\n
    3. The evolution of liquidity<\/a>, which boils down to this: it matters not only how many assets are issued (Total Supply) and how many are in circulation (Circulated Supply), but also how much corresponds to their initial liquidity. <\/li>\n<\/ol>\n

      Let me unpack the last point.<\/p>\n

      First, liquidity tends to equilibrate along two dimensions:<\/p>\n

        \n
      1. For any available unit of time (t), to deliver the highest capital efficiency.<\/li>\n
      2. To minimise any transaction<\/a> costs. <\/li>\n<\/ol>\n

        Decentralisation, in one sense, undermines both principles\u2014but separately. The more holders of liquidity (providers, to use the standard term), the higher the transaction costs: on average, 100 people generate more transactions than one. <\/p>\n

        So with efficiency: having 100 bitcoin lets you compound far faster than with one satoshi, if only because of the latter\u2019s atomicity\u2014even in the era of Ordinals. <\/p>\n

        Paradoxically, if you consider decentralisation together with both parameters, it improves each\u2014and both at once. <\/p>\n

        So to make sense of ERC\u2011404, consider how decentralised liquidity evolved before it. A brief excursus, from Bitcoin\u2019s birth:<\/p>\n

          \n
        1. At first there was one network\u2014lacking a central actor to manage issuance and distribution, but having a single chain for transmitting value.<\/li>\n
        2. Because bitcoin had weaknesses, forks appeared. Each affected liquidity in its own way: some prioritised anonymity of ownership (X11), others speed of exchange (Litecoin), and so on. In any case there were now several decentralised networks, but they interacted mostly through centralised protocols and venues (exchanges) and were themselves centralised around a single chain\u2014the blockchain.<\/li>\n
        3. Then, in the BitShares and Ethereum families (and elsewhere, though those are now exotic), liquidity began to blur between the network\u2019s native token (coin) and second\u2011order tokens, even as the chain remained a single skewer onto which liquidity was impaled piece by piece.<\/li>\n
        4. Around 2016 DeFi emerged: the infamous decentralised fund The DAO, the successful ICO<\/span> of Bancor, and so on. In\u2011network exchange became faster and more decentralised, though true cross\u2011network value transfer was still distant.<\/li>\n
        5. Next came a long transition from multichain to cross\u2011chain. Today there is even L0 (LayerZero and the like)\u2014in pure form and via Polkadot parachains, Cosmos hubs and Avalanche subchains\u2014though the EVM family remains paramount. All this decentralises liquidity not only at the network level but, more importantly, between networks.<\/li>\n
        6. In parallel, the move beyond a single, uniform chain has come via DAG\u2011based designs<\/a> and sharding, while liquidity itself has been aggressively optimised. Witness the shift from staking to liquid staking to restaking, and the revival of social points.<\/li>\n
        7. Along the way, centres of gravity such as Lido or Uniswap inevitably emerge, so projects try by all means to persuade users to park liquidity with them\u2014though the answer is obvious: a combination of first\u2011 and second\u2011layer solutions. <\/li>\n<\/ol>\n

          What do L2s do for L1s? They solve the same problems that first\u2011wave altcoins tried to solve for Bitcoin, only now in tandem with a base network (above all Ethereum), which, per the trilemma, acts as a security layer. <\/p>\n

          Thus liquidity is being decentralised along two basic vectors: <\/p>\n

            \n
          1. External<\/strong>\u2014from Bitcoin\u2019s single\u2011chain story to the altcoins\u2019 multichain era, on to today\u2019s cross\u2011chain, and further to the \u201coffline\u2011online\u201d interface via combinations of centralised and decentralised solutions.<\/li>\n
          2. Internal<\/strong>\u2014the liquidity provider is not only a miner, node operator or other super\u2011node, but any holder of an ERC\u201120 token, an NFT, etc\u2014even just an active user of a GameFi app. No wonder Notcoin<\/a> and Hotcoin are so popular. <\/li>\n<\/ol>\n

            On this second vector ERC\u2011404 takes a step forward, leaving external decentralisation to EVM interoperability<\/a>. And that is not all. <\/p>\n

            Trend no. 02. A market for collateralised derivatives<\/strong><\/h2>\n

            Ever wondered why the past 150 years have seen so many crises? Even if you pick just the 20th century\u2019s swings, you get 1903, 1907, 1914, 1929, 1939, 1961, 1972, 1981, 1998\u2014cycles lasting from one to three years to a decade in different regions. <\/p>\n

            There are many problems, but one fundamental one is squarely on point today: derivatives. <\/p>\n

            In recent decades the derivatives market has outgrown the \u201cmoney\u201d market roughly ten to one. What was meant to help us manage the future by hedging the past ends up killing the present, turning it into perpetual bill\u2011paying. <\/p>\n

            What to do? <\/p>\n

            The answer is obvious: build a market for collateralised derivatives<\/strong>. DeFi did precisely that. Perhaps you simply did not notice. A few examples:<\/p>\n

              \n
            1. Uniswap v3<\/strong>. When you create a pool, your concentrated liquidity is bound to an NFT. That greatly simplifies the transfer<\/a> not only of the pool\u2019s assets but of its income. In effect, the NFT is a first\u2011order derivative. If, say, a futures contract on next year\u2019s harvest is backed by the harvest only roughly 50\/50 (hail or frost may wipe it out), an LP\u2011NFT is always backed at the pool\u2019s floor price. Moreover, even if something happens to the actor who opened the pool, the pool can keep working. Terra (LUNA), the FTX token and others are \u201cfine\u201d examples\u2014if not the only ones. Hence the NFT binding became the de\u2011facto standard: look at MonoSwap, which recently launched on Blast testnet. The linkage mirrors Uniswap v3. Go further to Maverick<\/a>, which manages liquidity even more efficiently\u2014still via NFTs.<\/li>\n
            2. Bridge tokens<\/strong>. They are less fashionable than two or three years ago<\/a>, but they epitomise the interplay of external and internal decentralisation of liquidity. Creating, say, xUSTt in one network against frozen USDt in another gives birth to a collateralised derivative<\/strong> of the first order. Hence Wormhole and similar<\/a> solutions, including those built atop them, spawned whole subfamilies of stablecoins.<\/li>\n
            3. Decentralised stablecoins<\/strong>. The evolution of DAI or even Frax\u2014and then a line\u2011up of algorithmic stablecoins\u2014shows that they are themselves derivatives, either of collateral (which sets a price band and a unit of account) or of other quantitative parameters.<\/li>\n
            4. stETH and the market around it<\/strong>\u2014derivatives of the first, second and higher orders. If ETH is the base asset, then stETH is the asset plus a yield stream. From there you can borrow against it, wrap it, bridge it, and so on, spawning ever more intricate models. <\/li>\n<\/ol>\n

              Many more examples exist, but they all point to one thing: DeFi is a native toolkit for building collateralised derivatives. The form they take is another question. I am partial to the NFT 2.0 approach<\/a>. <\/p>\n

              Trend no. 03. NFT 2.0 and DeFi 2.0 as NFTfi<\/strong><\/h2>\n

              Whatever your view of the NFT 2.0 market<\/a>, it plainly exists. Core projects number in the hundreds, and a great many top protocols use NFT 2.0 under the hood: Uniswap, ENS (wrapped decentralised names in v2), Aave insurance, markets for unissued tokens wrapped into NFTs, and much else besides. <\/p>\n

              That is because NFT\u2011isation is simply a way to express the external and internal decentralisation of liquidity:<\/p>\n

                \n
              1. On one side, the more protocols that \u201cattach\u201d NFTs to liquidity and its parameters, the greater and better the external decentralisation.<\/li>\n
              2. On the other, each such NFT<\/strong> is already a micro\u2011pool<\/strong>. <\/li>\n<\/ol>\n

                In this sense ERC\u2011404 packs the best\u2014and the most dangerous\u2014elements of all three trends. <\/p>\n

                Does it have a future<\/strong>?<\/h2>\n

                To answer my own question: I hope not. <\/p>\n

                First, Pandora, which spawned the 404 market, did so a little too swiftly and zealously: with huge, pumped\u2011up liquidity and anonymous creators who clearly wanted to upend convention by choosing \u201c404\u201d, long associated in IT with something that does not exist. <\/p>\n

                Second, there are far tidier\u2014and, crucially, safer\u2014protocols than 404 in any guise. Third, this is hype, froth; the substance lies elsewhere. <\/p>\n

                Yet it would be wrong to deny that 404 had an effect: for a moment, however brief, everyone considered that liquidity could be (a) fractionalised; (b) NFT\u2011ised; and (c) exist in two guises\u2014fungible and non\u2011fungible\u2014at the same time. <\/p>\n

                In any case ERC\u2011404 is NFT 2.0. <\/p>\n

                That said, ERC\u2011404 is far from the whole of NFT 2.0 and certainly not its best exemplar. One more plus of this \u201cstandard\u201d is seldom mentioned: it gives a boost to low\u2011liquidity assets (NFTs). <\/p>\n

                This problem is long\u2011standing, which is why there are so many NFT\u2011related (and not only<\/a> NFT\u2011related) EIPs<\/a>: everyone tries to build either pools (NFTX), or direct bindings (Charged Particles, Envelop) between NFTs and collateral (Collateral\/Vault), or composable<\/a> strategies, or even to prop up the floor price artificially. <\/p>\n

                But the crux is not the much\u2011discussed boost for NFTs; it is making that boost natural, native\u2014intrinsic to the asset a priori<\/strong>. <\/p>\n

                Is that even desirable? Not necessarily. Reputation can serve as collateral, but it is not transferable. A rating can be: one can eat apples or paint them, but \u201cprinting\u201d fiat money is not a great idea. <\/p>\n

                This brings us to the key point of the piece: the digital\u2014more precisely XR\u2014world has, via NFTs, arrived at uniqueness<\/strong>, which it lacked when any digital object could be copied endlessly. Now we must decide which unique properties attach to a given object, and even to a subject: we have never before colonised virtual and adjacent worlds. <\/p>\n

                In that sense ERC\u2011404 is a Frankenstein\u2019s monster that may be human inside but not outside, even if it looks like a human. <\/p>\n

                Once again: an existential, and thus financial, crisis looms\u2014when something that \u201cquacks like a duck, walks like a duck, flies like a duck\u201d is not a duck. In this, ERC\u2011404 is one of the supernovas amid galaxies and other clusters. <\/p>\n

                It is fascinating to watch, but do so at a safe distance\u2014or be fully prepared to plunge into the black hole of hyper\u2011efficient liquidity, where AI bots drive speed and the crowd\u2019s perpetual\u2011motion machine\u2014greed\u2014slashes costs. <\/p>\n

                Postscript<\/strong><\/h2>\n

                If you want to dig deeper, here are a few links:<\/p>\n

                  \n
                1. The liquidity of black holes<\/a>, or a DeFiN interaction model via AdS\/CFT correspondence.<\/li>\n
                2. DeFi risks<\/a> as a driver of decentralised finance\u2019s evolution. <\/li>\n
                3. The positives<\/a> of DeFi.<\/li>\n
                4. Why<\/a> decentralisation matters for evolution.<\/li>\n
                5. wNFTs and the market for collateralised derivatives<\/a>\u2014the future of Web 3.0?<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

                  Back in 2020, NFT 2.0 projects could be counted on one hand. Today, thanks to Uniswap v3, the NFTfi segment and lending protocols such as Blend and NFTX, the topic gets more airtime\u2014usually without much detail. Web3 entrepreneur Vladimir Menaskop set out to fill the gap. Today I want to examine aspects of ERC-404 that […]<\/p>\n","protected":false},"author":1,"featured_media":11330,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"","news_style_id":"","cryptorium_level":"","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[1144],"tags":[1093,1382,1213],"class_list":["post-11331","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-longreads","tag-defi","tag-erc-404","tag-nft"],"aioseo_notices":[],"amp_enabled":true,"views":"44","promo_type":"","layout_type":"","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/11331","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/comments?post=11331"}],"version-history":[{"count":0,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/posts\/11331\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media\/11330"}],"wp:attachment":[{"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/media?parent=11331"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/categories?post=11331"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/u1f987.com\/en\/wp-json\/wp\/v2\/tags?post=11331"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}