Understanding the Long-term DeFi Ecosystem - Everything is an NFT
Level 3 - Virgin DeFi Analyst
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Welcome Avatar! We’ve been quite busy building out the paid substack. And. We think it would be wise to integrate traditional finance, NFTs and even the stock market into a single post. The world is changing fast and the “metaverse” - meaning the Virtual Reality world (similar to Ready Player One) is being built out aggressively as we type this sentence!
Quick Reminder: For those that are brand new, DeFi is software code that is displacing the operations of traditional finance. This means you can now loan your crypto assets out for a yield, you can exchange crypto to crypto without an intermediary and you can create digital contracts that remove middle men (such as gambling on a sporting event).
How NFTs Will Tie to DeFi
Every physical item will become an NFT in the future. And. Once this occurs, you can borrow/lend/exchange anything you would like.
With the big picture out of the way, we’ve found that examples serve as a better step by step walk throughs as they are a lot more tangible. Below, we’ve outlined NGMI friendly examples to understand where this is all heading.
#1 Sports: Right now there are loads of athletes in the NBA, the NFL and more. Each athlete has a contract and this contract can now be *tokenized*. This is particularly important. In fact, NBA athlete Spencer Dinwiddie is working on doing just this with his NBA contract (LINK).
For now the set up is quite simple: Step 1) Mr. Dinwiddie takes his 3-year contract and tokenizes it with a “Security Token Offering” or (STO); Step 2) Since investors know that his three year contract is locked they can invest in this STO; Step 3) in this manner he receives his entire three years of income up front, as his 3-year contract is now a bond that pays interest to the investors and Step 4) he would then pay back his entire 3-year contract and the interest at expiration.
Below is a ***Simplified*** Table That Shows how this works
Sports Explained: 1) If we assume that the STO or “Bond” pays a 4% interest, Mr. Dinwiddie would need to pay out $1.2M per year in interest. 2) At the end of the contract he would also have to pay $30M. 3) For the “Nit-pickers” yes we just used $30M as an example and did not include any tax assumptions etc. This is just a simple explanation to make it clear.
Why Is This Valuable? Investors get an opportunity to earn interest. Mr. Dinwiddie gets his cash up front and can invest it (even if he put the money into the S&P 500 he would have done quite well). Now that this is a real possibility, once the details are ironed out you’ll see more and more of these types of contracts.
#2 Locked Access - Only Fans: The internet is rife with fraud and plagiarism. There is no doubt about this. Unless you have a unique voice it is quite easy to steal and copy pasta to your friends. We have no doubt (we’ve already seen it) that paid info gets stolen rapidly. In fact, on Wall Street, people steal and send around “Equity Research” reports even though they have next to no value. They will certainly do this with real value as well.
Enter NFTs: In the future, you will connect your wallet to each website. Your wallet can then grant you access to different features and functions. Don’t believe this? Forbes already offers a basic version where you can avoid ads (LINK)
“Forbes deployed 2 locks, the first one offers a month long ad-free experience on the Forbes.com, while the second offers the same but only for a week. To purchase a key, you will need to use a crypto wallet such as Opera, MetaMask or Coinbase Wallet. Then, head to The crypto section of forbes.com, and click on the "Unlock an ads free experience" button.”
Ads? Whatever, I Use Brave: Fair argument. Keep pushing the boundaries though. Say you want to tier your customers online: 1) Platinum Tier, 2) Gold Tier and 3) Silver Tier. This is quite common. The problem? In Web 2.0 you can’t really lock it out.
If you look at this from an access perspective, you could have a locked version for creators for more “access”. Take OnlyFans as a great example of this. They recently decided to get rid of pornography… It is only a matter of time before a decentralized version of this is created.
Once this is created you log onto “Only Fans Web 3.0” and there you own an *NFT*. This NFT unlocks either silver, gold or platinum content. Unlike Only Fans, this is decentralized so you can post whatever you like. Also, it makes it infinitely harder to steal. You can’t access information quickly since it doesn’t interact with Web 2.0. It is a 3.0 platform, if you don’t own the token you don’t get to look behind the curtain. A lot better than what we have today.
If your verifiable connected wallet does not have the “access token” you’re out of luck. If you transfer it, you immediately lose access and also have to pay that gas fee tax to send it to someone else.
Final Step: How does this tie to DeFi? It ties directly if we connect example 1 with example 2. If you are a creator and have a fan base of say 1,000 people for your Only Fans account, you can securitize *yourself*. This is a bit nerdy and complex (we get it) just think it through.
If you can securitize a 3-year contract you can also securitize your revenue streams/fan base. It is riskier (not guaranteed like an NBA contract) and would probably require a higher interest rate. That said, the concept is the same.
#3 DeFi Out Your Favorite Producers: This is the last tangible one we’ll give since it is quite hard to type out every single way NFTs will change our lives *and* be integrated with DeFi at the same time (everyone already knows the fractionalized art angle).
Think through your favorite producers. This could be your favorite TV Show such as the Simpsons, it could be your favorite entertainer like a Jake Paul, it could be your favorite musician like Kanye West.
Now we’re not here to argue about your tastes, we’re here to explain how you can bet on the success of your favorite artist and even get a loan against it in the future.
You Invest in Up and Coming Rapper XYZ: Rapper XYZ is new. He is popular. He is growing but really isn’t mainstream. He has a new album coming out. The problem? He only has ~$300,000 to really push the album and market it. How about you help him with this problem by *purchasing* fractional ownership of all the sales/royalties coming from the album (allows him to raise more marketing money than usual)
This is the future. You can own say 1% of the entire album by an up and coming artist or 0.1% of the album from a established star. This “token” gives you royalties/payments as the sales flow in.
Combined Example 1/2 Again…: Now you own a token with the income associated with the album. Say one of them is a massive hit such as Mariah Carey’s “All I Want for Christmas is You” (everyone knows this song).
Well now you can borrow against the income stream when Q4 of every year comes because you will receive part of the revenue.
What This Means for Major Industries
Time to Tie This Together (Assuming You Understand Crypto Already): How does this impact you specifically in the real world? It means you are going to become the product. This is a deeply complex sentence however the few that understand it will likely become fabulously wealthy in the digital age. As you can see from the prior examples the key thread that ties it together is each “individual” effectively becomes its own security.
In the current financial system, we have venture capitalists and hedge funds that generally control the “clout” in the world. They say to buy something and everyone will jump in to buy it even if they are just pumping their own bags (hint: they don’t care about you and never will). Internet Computer was a fantastic example of this (LINK). The incentives are too strong to simply sell your bags (as a VC/HF) as soon as it begins trading as you can see from below.
Now you’re probably wondering, why would they want to waste their time with this niche industry. Luckily you are reading this because you want the truth. The venture capital industry is going to be disintermediated by Decentralized Autonomous Organizations (DAOs). VC model out, DAOs are in. Therefore, they have to understand it to have a shot at becoming part of the various important DAOs over time.
Some Concluding Remarks: You no longer *need* to become a $100M+ revenue company to have optionality in the “Capital Markets”. We’re using quotes because it will no longer be called “Capital Markets” but rather “Crypto Markets”. Each Sovereign Individual will be able borrow/lend/exchange based on what they own and the value they are delivering.
Therefore? It’s time to build out your individual value… Before it is too late.
Disclaimer: None of this is to be deemed legal or financial advice in any way shape or form. You are reading opinions from an anonymous group of Wall Street and Tech Engineers in Cartoon Format.
Q&A: You’re free to ask question as it relates to the big picture of NFTs and DeFi intersecting over time.
Enjoy these framework posts! You know we are incredibly early when seemingly obvious use cases for this new technology have not yet been explored or are in the infancy stages of development.
In your first example, STO sits on top of the NBA contract instead of replacing it? Does this mean the NBA pays the investors instead of the player? If they were to pay the player, what's stopping him from losing it all and having no money to pay the investors? I don't see how it is collateralized unless the players' investment in the S&P is also in token form. Sorry, finding the example a bit confusing.