What’s Next for Next-Gen NFTs

The Ownership Economy begins when NFTs tokenize their rights, gain a (decentralized) identity of their own, and start to act, just a little, fungible.

By Mike Kriak, Managing Operating Partner, ConsenSys Mesh

What a sight!

Herds of NFT unicorns, fresh off their mainstream media highs, are crashing down the centralized value-sucking platforms that built the internet as we know it. Creators, artists, musicians are FINALLY getting the proper value they deserve. Welcome one and all to the Ownership Economy promise land!

Except, not really. Not quite yet.

The greener pastures of Web3 are to bring a fair and equitable exchange of value between the creators, the platforms through which they distribute, and the consumers; each rewarded for their part in the economy, and truly owning their share for what they contribute.

But if we’re not careful, soon, the only crashing down these NFTs are set to do is in their price at Christie’s. And it’s not just price we are worried about — it’s the trust and confidence that digital assets truly hold value that is freely transferable and fully owned by the holder.

The good news is, as General Leia said to Rey at the end of The Last Jedi, “We already have everything we need” (and if you hated The Last Jedi, please do still keep reading anyway).

Let’s piece together the solution; we have never been closer to a Web3 world and with that, a true Ownership Economy promise land.

I can has solution?

Before we dive in, let’s start with some basic understanding of the current NFT economy and some good old supply and demand.

While there are plenty out there, there are too few premium NFT projects. To brew up success, it’s a very delicate concoction of celebrity or insider crypto-nerd winks, mashed up with a healthy measure of gamification and defi. Scarce supply indeed if you’ve sailed the open seas. And we shouldn’t necessarily change that. Creativity, uniqueness, and raw talent are scarce in humans. No changes needed here.

It’s the other side of the equation that’s the problem: there’s too much ready, liquid demand.

The pods of whales with their countless barnacles of bots have swallowed premium NFT value, generated to date, nearly whole. Just like they did, and still do, when they act as farmers, reaping in the fields of defi. Not that they should be blamed per se, but there’s too much large demand for too few projects for the minnows to get in.

Sure, this bodes well for the select few creators who strike the right crypto native nerve, for now. But we are still left empty-handed on consumer mass participation around the prospect of NFTs.

A slice of the action

Fractional ownership of NFTs starts to make this all equitable and finally affordable to the masses.

This can happen 2 ways: you either slice up the asset for single owners to each have a piece, or you bundle a group of owners, each with a percentage of a single high-value asset or group of assets.

At present, the bundle of owners is leading the charge. Collector DAOs are an elegant way to manage governance and economic flow. DAOs determine which, how, and when to bid, buy, or resell an NFT. Or eventually, cash out. Self-organization of like-minded members will continue to grow and evolve the creator x collector dynamic.

But more importantly, some DAOs enable NFTs as pooled collateral, providing a new source of liquidity in defi. Rocket lets you take a loan out on your staked NFT. The theory goes that when you combine this functionality your even “small” fraction of an NFT can be used as collateral to get the loan you need, even if you don’t own an early CryptoPunk.

We are forever in the year of the DAO, and with fractional ownership and collateral staking, I’m sure 2022 will be no different.

Non Fungible Tokens must deploy unique token models just like fungible siblings

However, creators are looking for broader premium platform models with a full-stack solution at scale that can promise a lot to consumers. This is why OpenSea and Rarible have been successful early entry points for any and all creators. They were the fastest, most simple way to mint and present your NFTs. But while there have been early gateways, they lack the polished experience, interoperability, low transaction fees, and right and royalty management that creators rightly crave and expect as part of the Ownership Economy promise land.

New platforms are emerging to address these concerns, especially around faster transactions and lower fees via L2 solutions. These platforms will also offset any potential environmental impact, further validating the transactions. Look to ConsenSys-backed project Palm later this summer to enable these next-generation premium platforms as well as Immutable.

But aside from looking forward, we should look back as well. Prior generation platforms hold the true key to our future, they were just before their time. So let’s kick it all the way back to epochs ago: 2016.

Early pioneers like Ujo, Breaker and Cellarius created decentralized, token platform models for entertainers to engage directly with consumers. Ujo issued some of the first NFTs as album covers. They also allowed musicians to determine who got paid what % based on total listens. Breaker enabled direct distribution by moviemakers on a streaming platform. Payments for those streams followed directly back to the fractional token holders who owned the movie’s rights. Cellarius was truly 100 years into the future. Imagine a media x entertainment company that tokenized each contribution x IP into their storytelling process — where all who contribute to the final project partake in any future revenue stream — streaming, merchandising, etc. Imagine if you created the design of stormtroopers in StarWars. Mind blow.

Thanks to the onslaught of media coverage of NFTs, people are finally paying attention and it’s time to try again.

Today’s NFTs plus tokenized rights management solutions will enable true ownership and profit distribution. And the platform that does this successfully will lead to mass consumer adoption.

Here’s why.

Creators must make their work accessible, transferable and affordable to the everyday consumer for mass appeal and mass financial opportunity, BUT they also want to determine the rights of their work as the work moves through the digital world. Likewise, collectors and original owners of NFTs (or NFT fractions) are going to want some type of assurance they are properly paid for the realized gains when and if those NFTs change hands. This is one of the many brilliant use cases for tokens: units of ownership with economic rights that follow where they go, freely tradeable and freely divisible.

While this presents legal challenges around whether or not these tokenized rights represent securities, it doesn’t change the consumer expectation/creator fulfillment dynamic. In fact, it’s been widely reported on the pitfalls and uncertainty of what you actually own when you buy an NFT at present. In most instances, you own exactly that, the token. Not the underlying IP or rights. A tokenized right management platform solves this.

Breaker has created such a back-end tokenized rights mgmt system that enables a creator to fractionalize any media asset (NFT, jpeg, video, movie, you name it). This system tokenizes the IP rights and thereby the underlying economic rights, enabling distribution of those attributes via tokens that can be dropped, transferred, or sold to consumers. As payments (purchased, streamed, ad attention) flow through the platform they automatically get distributed according to the token allocation.

Fractional ownership and fractional rights are absolutely required if a mass secondary, liquid market is to form. DAOfi’s Fraction is seeking to solve NFT’s liquidity problem by fractionalizing an ERC-721 (non-fungible token) into an ERC-20 (fungible token) via an ERC-1155 (multi-token) standard via a bonding curve. One can begin to see how NFTs need to become like their fellow fungible friends.

Perhaps these tokenized platforms become a DAO themselves, connecting with the fractional ownership discussed above.

So while there has been tremendous NFT creation from leading artists, entertainers, and brands to date, there is not a platform like Breaker to independently manage the economic flow and rights of what they create. NFTs need a model that freely transfers ownership and rights of the underlying digital assets. That model is a tokenized rights management solution that sits underneath a premium media platform that views, plays, and trades all forms of NFT entertainment.

It’s alive, my creation, it’s alive! (and can verify its own credentials)

Once an NFT’s value is unlocked via a tokenized rights management system, it will take on a life of its own. One where its identity is independent of its owner.

Identity, verified credentials, and unified standards are needed so an NFT is freely tradeable cross-platform, where more than just the meta-data can be tracked and traced. Provenance data needs to move with the image, JPEG, or movie. Lack of interoperability and verification in the coming years is what (rightfully) scares some NFT naysayers.

Identity standards and protocols that will enable cross-platform and cross-chain transferability, are needed. Ceramic, IDX, Serto and Veramo are all playing an interconnected role in realizing the independent identity of NFTs.

Imbuing an NFT with a distinct identity, with its own ability to verify its traits, attributes, or provenance, AND that is in full custody of its rights and able to determine who gets paid what for its success — this sounds like the promise land.

So what General Leia really meant was “We got all the composable decentralized legos we need for next-gen NFTS, we just need to put them together.” Okay maybe that’s a stretch, but you get the point.

Come on unicorn creators, saddle up! Demand that NFTs reach their full potential and ride freely into the Web3 Ownership Economy promise land!

Originally published at mesh.xyz.

ConsenSys Mesh a.k.a. Mesh is an accelerator, incubator, investor, and innovator of blockchain technology solutions since 2015.