Fundamental Insights Weekly 2022.05.29

Investment Chapter Author: FL Research Team

Fundamental Insights

#1 Financialized NFTs: evolving opportunities in an early space

The technology behind non-fungible tokens unleashes a good chuck of untapped economy and enables ownership of digital assets. What we have today of our non-fungible tokens are mostly PFP, which is categorized in art and collectables, that so far have limited potential for yield generation but nevertheless great for building communities and social status. The technology of NFTs is much more versatile and the possibilities are endless when the technology is applied to different industries, both in the physical and virtual worlds.

Figure 1: NFT Category Market CapSource: NFTGO, data as of May 2022

In traditional finance field, securitization has been a long-time practice. Before modern era of securitization began in 1970, there were a number of precedents, including farm railraod mortgage bonds in the 1860s, the morgage-backed bonds in 1880s and a form of securitization of mortages before the 1929 Wall Street Crash. The Department of Housing and Urban Development created the first modern residential mortgage-backed security when the Government National Mortgage Association (Ginnie Mae or GNMA) sold securities backed by a portfolio of mortgage loans.

What is securitization?

According to Investopedia, securitization is the procedure where an issuer designs a marketable financial instrument by merging or pooling various financial assets into one group. The issuer then sells this group of repackaged assets to investors. Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace.

In theory, any financial asset can be securitized—that is, turned into a tradable, fungible item of monetary value. In essence, this is what all securities are.

However, securitization most often occurs with loans and other assets that generate yields such as different types of consumer or commercial debt. It can involve the pooling of contractual debts such as auto loans and credit card debt obligations.

The benefit of securitization?

By transforming illiquid assets into tradable securities, securitization has helped channel cash flow to borrowers and fund significant economic development. Securitization has also helped issuers and investors diversify risk across asset classes and across the globe.

And how do we crypto builders and investors can learn from our fellow great minds from traditional finance? Let's take a look at our current market landscape of NFT Financialization and dig deep into how those protocol works in different verticals and where the opportunities we can all explore in this sector.

Figure 1: NFT Category Market CapSource: NFTGO, data as of May 2022

Figure 2: NFT Financialization Market Landscape

Stay tuned!

#2 How to construct a sustainable DAO?——Introduce a DAO construction model applying the collaborative economic framework

(based on the sustainable management of commons theory of Nobel Prize winner Elinor Ostrom)

This set of patterns is divided into six steps:

  • STEP 1: Inspiration of a DAO

    In the collaborative economic model, one person must first "centrally" put forward their own ideas before a DAO can be implemented.

  • STEP 2: Build a Community

    Take the dual-token system (reputation token and liquidity token) built by Token Engineering Commons (TEC, a company designing for Token Ecosystems) as an example.

    The reputation token system can be understood as "impact hours", which are used to reward the contributions of labor and professionals in the community. The system adopts the method of self-recommendation. The members of the DAO publicly recommend people who have made important contributions in a decentralized manner. Those who are recommended will receive points, and the points can be exchanged for reputation tokens. Reputation tokens are illiquid——no transferable or tradable.

    The liquidity token system is used to quantify the potential of capital to become an investor. Since capital is a “double-edged sword”, while increasing capital flow, capital exploitation may also occur . Therefore, in order to ensure the alignment of values between investors and organizations, TEC only accepts investments from a specific organization – The Trust Seed. The Trust Seed’s personnel list will undergo rigorous manual review to kick out profit-seeking speculators, leaving those who really want to create value to build a mission or value-driven community. The token corresponding to this system is called Seed Stack. The more Seed Stack tokens you hold, the more money you can invest.

  • STEP 3: Mission, Vision, Values (MVV)

    It is up to the community to jointly determine the mission, vision and values of DAO. The community will provide space for members to learn and discuss to reach an internal consensus. After that, two rounds of brainstorming about MVV will be organized in the community, and the MVV will be finally determined based on the quality assessment.

  • STEP 4: Determine Economic Model & Visualization

    For instance, TEC and The Commons Stack are in partnership, so they can directly use the economic models in The Commons Stack, such as augmented bonding curve and conviction voting. But for most other DAOs, it is still necessary to vote for the appropriate economic model.

  • STEP 5: Design an Economic System

    The collaborative economic mechanism needs to create fun to attract everyone to participate, instead of assigning homework in the classroom like a teacher, allowing members to claim and complete tasks individually. TEC provides a venue for members to encourage brainstorming parties. Of course, a party with "business boast" can't really solve any problem. Therefore, TEC provides guidance and education internally to help members improve their awareness, so as to form their own thinking and dare to refute and debate at the party.

    A final economic system construction plan still needs to be finalized after all those brainstorming. TEC adopts a two-round voting mechanism to reduce time costs. For example, when the community needs to vote on 80 economic system proposals, the first round will use quadratic voting based on reputation tokens; the second round will use ranked-choice voting, and only There are 3-5 options, and everyone will vote after understanding the content of each proposal. It is equivalent to the first round as a preliminary election, and the second round is the real voting.

  • STEP 6: Form a community culture

    After the above five steps, a DAO finally has a dual-token system, which has determined the MVV of the organization, built an economic model and visualization tools and formulated an economic system. Most importantly, community members learned about and participated in the building of the system in an interesting way during a period of time, creating a cultural resilience against technocracy.

    At this time, if there is a so-called "leader" who wants to stand up and take charge of the overall situation (even if some of them are well-intentioned), the members have the confidence to say no to him, refute the views they disagree with, and give them based on their own knowledge. personal opinion.

    When every member of the community is personally involved and educated, technocracy is self-defeating.

    "We need educated democracy, that's true democracy", and the collaborative economic model will help us achieve that.

    Source: https://mp.weixin.qq.com/s/fKL5vxyz8y0eNsSVvEbpPg

Hot Topics

StepN Cleans Up Mainland China Users

On May 27th, StepN released an announcement to clear its users in mainland China, which stated that it would stop its service to mainland Chinese users on July 15th, 2022. After the announcement, its Token price dropped by more than 50%, then rebounded and is now stable around 1.1 USD.

source: CoinMarketCap

In response to this announcement, user feedback varies, with some users believing that clearing out Chinese users will be beneficial to the long-term development of the project, while others believe that when Chinese users exit, they will sell off GMT, sending StepN into a death spiral. Up to now, GMT price has rebounded and has not fallen further, indicating that users and the market still have relatively high confidence in StepN.

Week's Recap

Indicator Tracking

MVRV

source: Coin Metrics

Crypto Fear & Greed Index

source: Alternative

Data of NFT Market

source: NFTGo

Total Value Locked of DeFi

source: DeFiLlama

Total Value Locked All Chains

source: DeFiLlama

Protocol Total Revenue

source: Token Terminal