NFT Applications Thesis
Oct 13, 2023
There has been a lot of buzz in the community about NFT metadata. How do we leverage it? What properties do we need our metadata to have?
Middleware and infrastructure protocols like POKT(Pocket Network) have emerged to connect users to blockchain data on multiple chains, acting as a decentralized bridge to web2 compatible technologies. Similar to the node infrastructure stack, NFT solutions are attempting to bring complex business logic on chain by enabling dynamic NFT metadata. This allows NFTs to deliver new use cases with real utility to users, and effectively bridge the gap to existing web2 architecture. As the saying goes, you are only as strong as your weakest link; the same can be said for decentralization. This is merely a step forward in the cyberpunk mission of decentralizing the entire web3 stack.
Part 1
Current State of NFT Utility Solutions
A few curious things become apparent when you look closely at how this NFT utility is currently being provided.
Almost all NFT utility vendors implement utility outside the Smart Contract in traditional Web2 systems.
Real Web2 data integration is extremely rare. This integration refers to external dynamic data fed into and used directly by smart contract logic.
Data carried in the NFT on the DLT is tiny. In addition, much effort is made not to change it.
Placing utility logic in the Smart Contract is discouraged. When the smart contract does contain utility logic, frequent execution of that logic is strongly discouraged.
When facing a decision to place logic inside the Smart Contract or place it in the Web2 portion, vendors will invariably choose to place the logic in the web2 component of their stack.
Why? Ethereum’s rigid contract template architecture, low TPS, and high fees make these solutions either impossible or impractical. The infrastructure to support these advanced use cases does not currently exist. As a result, the true power of NFTs is largely untapped. However, there are some interesting solutions, both inside and outside of the Ethereum ecosystem, that may make these enterprise grade, complex use cases viable in the future.
The most common use case right now in dynamic NFT metadata seems to be upgradable NFTs. See here and here.
However, we believe this is just the tip of the iceberg for NFT innovation. Taking it a step further, what if the entire NFT could be executable, like a software application itself?
Metaplex just introduced pNFTs (programmable NFTs) , while Coral introduced xNFTs (executable NFTs) in late 2022.
OK, so if the NFTs are applications themselves, where can I find them? And how can I buy/sell them?
A marketplace for applications
Friction has been removed or massively reduced from various areas in the economy. It’s literally how companies create value. Open marketplaces drive savings for consumers by forcing sellers to compete with one another directly. Software apps will not be immune from this trend.
NFT Application Marketplaces
We see a future where SaaS applications can be traded like NFTs themselves, similar to the way startups can now be sold on MicroAcquire. We expect NFT applications to themselves be tokenized, which unlocks a new secondary market for mini-software based businesses. If this thesis holds water, there may be a winner take all opportunity in building an NFT application marketplace.
The future of NFTs is programmable, useful, tradable, and decentralized.
Part 2
Open Source Monetization Thesis
Moving down the stack, how will these NFT applications be created? The types of tools needed to build these apps are marked in red below. There are various repeatable software functions needed to produce these types of applications.
These repeatable functions(think Wordpress plugins) could be monetized by either “usage” (pay for the function based on how many times your API calls it), or pay once to use forever. This could unlock a massive gig-economy for the technical version of a solo-capitalist, solo open-source developers. Developers will be more directly incentivized to innovate if they know they can get paid instantly via royalties based on how valuable their contributions are, while still retaining upside interest in their work. The current alternative is joining a startup and waiting years on the private markets via unvested and dilutable equity. In this new environment, developers can be compensated for building useful, reusable pieces of code logic that are needed in various different use cases for NFT applications. Better developer tools are needed to make this a reality. In order to properly serve the end users of these NFT tools at scale, we believe it is highly likely that the app enablement layer will converge with the NFT developer tooling layer, as shown below.
Additionally, below is supporting evidence that this convergence is indeed already occurring.
In summary, web3 royalties have the opportunity to create superior and more efficient monetization methods for developers, relative to web2 big tech. We may continue to see more overlapping scenarios across multiple segments of the web3 stack.
Part 3
Vertically Integrated Middleware
Similar to how vertical SaaS solutions gained popularity in the web2 space following horizontal SaaS offerings, we expect web3 vertical middleware to follow a similar path. History doesn’t always repeat itself, but it usually rhymes.
The most exciting unlock of modular design across the web3 infra stack won’t be the general purpose offerings that are popular today (e.g. L2 rollups). Rather, I believe we’ll see the formation of a new layer built on top of general purpose L1/L2s: vertically integrated middleware.
Vertical-Specific Middleware: is defined as: Sufficiently decentralized protocols and networks that act as core services for specific verticals that crypto is uniquely positioned to disrupt (identity, remittances, domains, etc).
Capability-Specific Middleware: Components or products which abstract specific base layer capabilities for developers such as key management, sequencers, or bridges / interoperability solutions.
One-Click Infra: Tools that make it simple for developers to stand-up modular infrastructure (e.g. app-specific rollups, gas optimization).
These protocols empower app developers to build on top of and create compelling experiences for targeted audiences.
The meta-point in all this: instead of waiting for any single ecosystem to enable capabilities like these, builders can create middleware solutions and compete for developer mindshare in an open marketplace.
We see other examples of this thesis playing out. Farcaster, a sufficiently decentralized social network that facilitates user-owned data via off-chain hubs, has sprung up an entire constellation of interesting consumer social applications built on top.
This is just the start. I believe we’ll continue to see this trend of specialized middleware solutions supporting a wide array of verticals from verifiable AI model training & execution to on-chain game execution — and much more.
Conclusion
In summary, developer tools and protocols focused on verticalized middleware that help enable the creation of NFT applications could unlock the next wave of programmable, useful NFTs.
Disclaimer: Part 3 of this thesis was expanded upon the original work of the Lattice Fund team.
Supporting Evidence
1) https://medium.com/pinata/how-to-build-progressive-web-apps-as-nfts-73a3a70a1519
2) https://medium.com/pinata/how-to-build-an-app-nft-7c57b51698e7
3) https://github.com/coral-xyz
4) https://devpost.com/software/meta-blocks-nft-evolution-protocol
5) https://twitter.com/metaplex/status/1624094065133334538