Waterdrip Capital: Explore NFTFi leasing, a new breakthrough in NFT liquidity

Original Author: Ryan, gt, coucou

Mentors: Jademont, Elaine, Bill @Waterdrip Capital

1. Introduction

1.1 NFTFi

Before explaining NFTFi, you need to understand two basic concepts about NFTFi

NFT (Non-Fungible Token): A digital asset based on blockchain technology, each NFT has a unique identity and value. Unlike interchangeable tokens in cryptocurrencies, NFT; represents unique assets such as digital artwork, virtual real estate, virtual items, game props, etc. The uniqueness and indivisibility of NFTs make them very popular in the field of digital collectibles and culture.

DeFi (Decentralized Finance): A financial system built using blockchain and cryptocurrency technology, designed to achieve decentralized, transparent, and trustless financial transactions. DeFi; applications provide various financial services through smart contracts, such as lending, debt collateral, trading, asset management, etc., without the intermediary of traditional financial institutions.

NFTFi, or “NFT; Finance”, is actually NFT + DeFi, which refers to the emerging ecosystem of decentralized protocols and applications, mainly to provide financial utility for NFTs. In practice, the NFTFi protocol provides DeFi functionality to NFTs, unlocking the ability of NFTs to lease, borrow, and fractionate, create derivatives and prediction markets around them, and more.

1.2 NFT Leasing

NFT leasing refers to the process of trading NFTs as leased assets. In the traditional leasing model, people can rent various items, such as cars, houses or equipment, while in NFT leasing, people can rent digital artwork, game props, virtual real estate or other types; NFT. NFT; The rental track can currently be divided into two categories: protocol and platform. In terms of protocols, Double Protocol; and; IO Protocol; are well-known; NFT; leasing protocols. In terms of platforms, platforms such as Rarible; and; reNFT; are high profile.

Common NFT leasing methods:

• Fixed lease period: Users lease NFT and choose a fixed lease period, such as one week, one month or longer. Users pay the corresponding rent, during which they can enjoy the use rights of “NFT”. Once the lease period ends, the user will lose the right to use the NFT.
• On-demand lease: Choose the time to lease NFT according to your own needs, without being limited by a fixed lease period. Users may be required to pay rent by the hour, by the day, or by other units of time. This approach provides greater flexibility, allowing users to determine the length of the lease based on actual needs.
• Shared leasing: Multiple users can jointly lease the same NFT, and share the use rights and rental fees in accordance with the agreed method. This method can distribute the rental cost to multiple users, reduce the burden on a single user, and enable more people to enjoy the value of NFT.
• Lease repurchase: Some NFT rental platforms provide lease repurchase options, allowing users to choose to convert the rent paid into an “NFT” purchase fee after the lease period ends. This method gives users the opportunity to decide whether to purchase after understanding and experiencing “NFT” during the lease period.

At the same time, according to whether the assets are mortgaged, they can be divided into:

• mortgage lease NFT

Mortgage leasing is a collateral-based NFT leasing method, which usually requires the lessor to provide a certain amount of cryptocurrency as collateral to ensure the payment ability and responsibility during the lease period. The collateral can be digital assets such as ETH, BTC, or other NFTs. In this leasing method, NFT owners mortgage their NFT in the smart contract to obtain a certain amount of collateral tokens. Renters can use these tokens to lease NFT. When the lease expires or the rent is not paid on time, the collateral will be deducted a certain penalty or confiscated.

Projects that adopt mortgage leasing can better guarantee the payment ability and responsibility of the lessee, and also provide certain risk protection for NFT owners. There are already some NFT projects that mortgage leases, such as reNFT, NFTfi, etc.

• Unsecured Lease NFT

Collateral-free; NFT; leasing allows users to rent; NFT without providing collateral, and return it after the lease period ends. This model is very attractive for users who do not have enough collateral or do not want to take the risk of collateral.

Double Protocol; proposed a standard called ERC-4907, which designed a new; NFT; type, namely doNFT. This NFT has an expiry date and a guaranteed expiration time. This means that users can rent NFT for a certain period of time, and after the lease period ends, NFT; will be automatically returned to the original holder. This model is different from the traditional; NFT; ownership model, it is more like a rental agreement, which can help users save costs and risks. In addition, Double Protocol also provides an NFT wrapping method called wNFT. Instead of receiving the original NFT directly, the user receives a wrapped NFT with the same characteristics and backed by the original NFT. When the lease time expires, the wrapped;NFT; will be destroyed to ensure the security of the original;NFT;.

The difference between the IQ Protocol that appeared later and the Double Protocol is that it does not use ;doNFT, but realizes unsecured lease through packaging. Users can use; ETH; or other cryptocurrencies to pay rent without providing collateral. At the end of the rental period, users will receive the corresponding rent and what they rented; NFT. In general, this model can provide NFT holders with an additional source of income while ensuring safety.

1.3 Comparison between NFT leasing mode and traditional leasing mode

When comparing the “NFT” leasing model to traditional leasing models, there are some notable differences and distinctions:

2. The operation mechanism of NFT; leasing

This section will analyze the leasing; NFT; protocol standard. References herein to; ERC-4907; and; ERC-5006; are in contrast to; ERC;721; and; ERC;1155;.

2.1 Fundamentals of Rentable;NFT;

ERC-4907;

In an ;NFT; lease, the lessor usually transfers the ;NFT; to a designated smart contract, and sets conditions such as lease term and lease fee. The lessor can obtain the right to use the “NFT” by paying a certain lease fee, during the period of use, he can enjoy the rights and interests brought about by the “NFT”, such as income, voting rights, etc., and also needs to bear certain risks, such as; NFT; The price drop causes the lessor to suffer losses. At the end of the lease period, the NFT; will be automatically transferred back to the lessor’s wallet. The figure below shows an example of a leasing function.

Now suppose that;Alice; holds an;NFT, and that;Bob; intends to rent this;NFT. Then there will be; 4; pieces of business logic, namely:

1. Alice; authorizes the lease contract to transfer her holdings; NFT.
2. Alice “lists” her ;NFT, marked as rentable.
3. Bob; selects the rental time according to his own needs, and after selection, he transfers the rent to the lease contract. The rent is calculated based on the unit rental price and the rental time. After the rent is transferred, the rental contract will transfer the “NFT” listed by “Alice” to “Bob”, and set the renter to “Bob” at the same time as “Bob”'s rental time.
4. After the lease expires, Alice; can withdraw her; NFT from the lease contract.

The ERC;721; protocol does not support the separation of the “NFT” between the right to use and the right to own, that is, only the owner of the “NFT” has the right to use. The “ERC; 4907” protocol constructs an additional role that can be granted to the address, and automatically cancels the lease relationship after the role is automatically revoked (expires), realizing the separation of the ownership and use rights of the “NFT”, which is an on-chain “Native lease” provides technical support and is an important infrastructure to solve the problem of “NFT” liquidity shortage.

ERC-5006;

ERC-4907; corresponds to the ;ERC;721; standard, which defines a ;ID; model corresponding to a user. However, in the “ERC-1155” standard, one “ID” can correspond to multiple users. However, from a principle level, there is not much difference between ERC-5006; and; ERC-4907; In terms of specific implementation, ERC-1155; is more complicated and introduces some new variables, which will be described in detail below.

2.2 NFT; function analysis of rentable agreement

ERC-4907;

NFT; The core of successfully realizing leasing is to separate its use right from ownership, ERC-4907; uses dual roles; owner; and; user; Automatically terminate without any further on-chain operations.

The ERC-4907; protocol mainly provides; 3; functional interfaces, namely; setUser, useOf; and; userExpires. The “3” interfaces will be introduced below.

• setUser; Mainly for “on the shelf”;NFT; set a new user and expiration time. Inside the function, it is first necessary to check whether the “NFT” is owned by the initiator, and if so, write the lessor information.
• userOf; can query a certain; NFT; current user. Returns an empty address if the current;NFT; is not leased or the lease has expired.
• userExpires; can query the lease expiration time of a certain;NFT;.

ERC-5006;

ERC-5006; is an extension of ERC-1155; it proposes an additional role - user, which defines two core variables

UserRecord; defines the lease record.

_frozens; defines the token; ID; the balance that is frozen after the corresponding address lease.

_records; defines the mapping table for recording token leasing records, UserRecord; records a token leasing record, here records dual roles; owner; and; user; for authority division.

_userRecordIds; defines each token; ID; and a; Mapping, Mapping; is the relationship between each user address and the token leasing record; ID; of the address.

The ERC-5006; protocol mainly provides; 5; functional interfaces, namely; usableBalanceOf, frozenBalanceOf, userRecrodOf, createUserRecord; and; deleteUserRecord.

• usableBalanceOf; Used to query the available balance of a certain token leased by a lessee.
• frozenBalanceOf; Used to query the frozen balance of a token held by the leasing party.
• userRecrodOf; Used to query a token lease record.
• createUserRecord; used to create a token holding record.
• deleteUserRecord; used to delete a token holding record.

3. ;NFT;Application field of leasing

3.1 NFT; Leasing on the Web; 3; Game Application

Game Player Classification

According to whether they like games and whether they hold encrypted assets as the horizontal and vertical axes, users can be divided into four quadrants:

• Game enthusiasts and hold encrypted assets

Like games, enjoy the fun brought by games, and hold encrypted assets.

• Game enthusiasts but do not hold encrypted assets

I like games and enjoy the fun brought by games, but I do not hold encrypted assets, and there are high threshold restrictions for playing encrypted games.

• Non-game enthusiasts but want to try encrypted games

Not a game lover, but want to try crypto games.

• Non-game enthusiasts but holding encrypted assets

I am not a game lover, but I hope to make money by playing games on behalf of others.

Web;3;Pain points of games

As a traffic portal of "Web;3;, Web;3;games undertake the functions of educating;Web;2;players and guiding more;Web;2;users to enter;Web;3;. However, due to the particularity of;Web;3;games, there are the following problems:

• High barriers to entry continue to dissuade traditional users.
• Most games adopt the stitching;Web;2.5; method, non-encrypted players play games without the blockchain version, Web;3; players play blockchain games, there is a split in the economic system.

Therefore, there is a lack of a way to lower the barrier of entry and allow “non-crypto” users to experience “Web; 3” games in a smooth way. One way of thinking is to directly lower the threshold, such as using abstract accounts. Another way of thinking is to transfer the high threshold, so that;Web;3;players bear the high threshold, similar to helping to open a;ChatGPT;account. NFT; lending is exactly the second way of thinking. It not only allows more non-encrypted players to enter the game, but also allows players with low asset holdings and even zero-dollar parties to enter the game.

Web;2;Rentals of the game marketplace

In fact, leasing also exists in the; Web; 2; game market, and the core lies in resource allocation, that is, to realize the exchange of time and money between groups with “abundant time but insufficient wealth” and “sufficient time but abundant wealth”. Here, leasing can be divided into two types according to the purpose:

• Get rent:

But in;Web;3;, not only rent, but also additional gold.

• Spend money to get achievements and experiences in the game:

In the ;Web;3;, this is almost non-existent.

However, the advantage of the Web;3; is that algorithms built through blockchain and smart contracts ensure a trustless environment. Whereas in most;Web;2;games, rentals are unofficial, off-site, with plenty of scams and distrust. Although the cost of identity fraud on the chain is too low, everyone can easily create anonymous addresses, but in game scenarios, game data has become a hidden cost of fraud.

In the traditional “time-poor but rich” gamer, they either just pay money for a better gaming experience, or earn a fixed amount of money (i.e. entry fee, no ongoing income). But in the ;Web;3;, leasing is more of an investment. Individual investors can invest their assets more reasonably through borrowing and lending, so as to obtain continuous income.

NFT; early exploration of leasing

In the early days, many well-known;GameFi;projects appeared in off-market;NFT;lending figures, such as;Axie Infinity;and;StepN. From this, we can also see that “NFT” leasing has exposed some problems in the “GameFi 2.0” era:

• Bring out a mature gold mining industry chain and disrupt the balance of the game’s economic system, thereby accelerating the game’s death spiral. But in fact, even if the lease is not open, this problem cannot be avoided. In addition, most of the current “GameFi” games focus on playing gold.
• Leasing releases too many uncertain and uncontrollable factors, which can easily lead to difficult control of game values and accelerate collapse.

However, the advantages of leasing are also obvious. As can be seen from the player numbers of ;Axie; and ;StepN;, leasing benefits both parties:

• Lowered the user threshold, opened up the game market, and allowed more players who not only want to make money to enter the game, which is conducive to the game ecology.
• Because leasing to others can make more money, it increases the willingness of large whales to invest funds.

NFT;Lease in;Web;3;Game application status

According to the data from mymetadata.io ranking the games with the highest average daily unique active users in 30 days on June 12, 2022, we can find that the current stage of;Web;3;games

*Games with their own;NFT;rental market/feature account for;7%;.

• Not yet implemented; NFT; leasing, but 18% of games that have publicly expressed interest or committed to doing so in the future.
• Not implemented; NFT; leasing, nor publicly expressed interest or commitment; 75%;

However, while only “7%” of games have their own “NFT” rental market/feature, rental games represent a disproportionately high “20.4%” of the player base.

NFT;rental in;Web;3;special form in game

The characteristics of the game also make “NFT” leasing a new organizational form in "Web;3; games, including guild leasing and project built-in leasing systems.

The most famous example of guild leasing is; YGG (Yield Guild Games), originally known for providing;Axie;rental services for;Axie Infinity;players. This model takes the guild as the main body to purchase a large number of game assets and then rent them out to game users, but at the same time it also brings a lot of pressure to the game side. From the perspective of the game side, the guild is a tool for growth, but it also brings a potential “Sword of Damocles”. Therefore, if gamers can acquire new customers and find healthy and suitable users at a low cost, they will most likely not choose guilds.

However, the form of guild leasing can naturally also be opened by the project party to the leasing system, which is more efficient and convenient to manage, and can directly bypass the guild. From the perspective of the project party, they may not be able to avoid the occurrence of leasing, so it may be a better choice to open the leasing system by themselves.

3.2 NFT; Leasing application in Metaverse

Virtual land leases in the Metaverse are a major part of NFT use cases, helping to bridge the virtual world with the physical world. Just like in the brick-and-mortar real estate business, Decentraland LAND owners can lease out their virtual land to tenants, who can use them to host events or develop them into malls, offices, entertainment centers, and more. In July 2022, Decentraland and Double Protocol launched an on-chain NFT leasing solution, which can be used in conjunction with LAND. In short, Double; provides an infrastructure that simplifies the leasing process while offering a greater variety of leasing services to the benefit of both owners and potential tenants of;LAND;.

Brief Analysis of Leasing Solutions

By utilizing ERC-4907;, the Double NFT leasing protocol runs on two main smart contracts: a “marketplace” contract and a “doNFT factory” contract. The “doNFT Factory” smart contract adds new NFT contracts to the platform, while the “Market” smart contract handles all NFT rentals. Dual NFT leasing protocol allows leasing any ERC;721 based NFT.

When tenants pay rent for an NFT, they will receive a doNFT. A doNFT is minted by a doNFT contract created by a doNFT factory. DoNFT is ERC-721 compatible and has a duration list with a start and end time. The duration specifies that the owner of the doNFT has the right to use a certain NFT for an agreed upon period of time.

The lessee has multiple usage rights throughout the lease period, including subletting and developing the virtual land. The doNFT contract automatically revokes the borrower’s usage rights at the end of the lease period. An example of leasing on “Decentraland” is as follows.

Fashion industry enters metaverse

The metaverse land leasing business will shine as the fashion industry enters the metaverse. The second Metaverse Fashion Week (MVFW) organized by Decentraland officially kicked off in March 2023, with brands such as Adidas, Dolce & Gabbana, Balmain, Coach; and Tommy Hilfiger appearing. Although after entering the “23” years, the popularity of the Metaverse has weakened, but many brands have instead increased their investment in the Metaverse, trying to gain growth on new tracks with new products and marketing methods (whether it is user or profits).

They acquired digital real estate, invested in virtual advertising, and hosted wearable contests and fashion shows. These include Adidas, Burberry, Dior, Dolce Gabbana, Gucci, Nike and many more. Meanwhile, a growing number of digitally native brands have sprung up, like DressX, which sells virtual wearables ranging from basic undershirts to warrior outfits made of digital metal. This, combined with the creator economy and scope of digital ownership that NFTs bring, has the potential to democratize traditionally elite industries.

However, due to the high price of metaverse land, coupled with the continuous downturn in the “nft” market (in fact, the entire encryption market), not all brands are willing to pay a high price to acquire a piece of metaverse land that may depreciate rapidly. Then at this time; nft; leasing business is very important. On the one hand, metaverse land leasing can give non-first-tier brands the opportunity to enter the metaverse track without taking too much risk. The brand owner can choose how much land to lease, the lease time, etc. according to their own needs and affordability. On the other hand, the idle land in the hands of players can also be called up. Many; nft; holders are forced to hold due to the market downturn, and can only wait for the subsequent; The emergence of the leasing business can help these “smashing hands” holders sit on income-generating assets and increase their source of income.

3.3 NFT; the application of leasing in the community

;;Community equity NFT leasing first appeared in ;2019;, when it was mainly tried and explored in the Ethereum community. With the continuous development of blockchain technology and smart contracts, the application scenarios and business models of community equity NFT leasing are also expanding and deepening. Community rights NFT lease refers to the lease of NFT representing the rights and interests of a specific community or organization to users, allowing them to enjoy the relevant rights and interests of the community or organization during the lease period. The lease term, rent and usage rules can all be encoded in the smart contract to ensure the transparency and security of the lease process. Its function is mainly to allow non-community members to obtain relevant rights and interests of community members within a certain period of time, such as voting rights, community resource usage permissions, etc. Equity NFT leasing has a wide range of application scenarios, which can provide various types of communities with new sources of funds and incentive mechanisms, and can also provide renters with more flexible and safer use rights, helping them obtain better experience and income.

business model

;;Community is the basis of community equity NFT leasing. A community can be a virtual community or a physical community. The renter is the core participant of the community equity category; NFT; leasing. The renter can rent community NFT tokens through the leasing platform, and enjoy the right to use specific rights and interests of the community within a certain period of time. During the lease period, the renter can participate in community activities as an NFT holder in the community, or obtain corresponding community rewards. The leaser’s rent will be paid to the leasing platform, part of the rent will be used as the income of the leasing platform, and part of the rent will be distributed to the contributors or holders of the community as a community reward. In addition, the leasing platform is an intermediary platform for community equity NFT leasing. The leasing platform provides NFT leasing services for the community, and collects a certain percentage of handling fees from the rent as its own income. Leasing platforms can also promote their brands and services through NFT leasing activities.

The business model of community equity NFT leasing mainly includes the following aspects:

**1. Platform charges: **The rental platform charges a certain handling fee or rent from the lessee.

**2. Community income: **The rental platform cooperates with the community, and the platform charges a certain percentage of rent as its own income, and the remaining rent is distributed to the contributors or holders of the community.

**3. Brand promotion: **The rental platform brings exposure and attention to its own brand promotion through NFT leasing activities.

4. Advantages and challenges of NFT; leasing

4.1 NFT; Leasing Advantages

Summarizing the advantages of the above three scenarios, the advantages of “NFT” leasing are as follows:

• Lowering the threshold: NFT; leasing can reduce the threshold and cost, allowing more users to enter, whether it is games, metaverses or communities, it is beneficial to the ecology, encourages more users to participate, and enhances interactivity and community cohesion.
• Improve asset liquidity: NFT; leasing can improve asset liquidity. Make it easier for people to buy, sell, lease and invest in virtual assets.
• Provide financial support: NFT; leasing can increase the inflow of funds, provide financial support for the sustainable development of the project ecology, and promote its development and growth.
• Create a new economic model: NFT; Leasing creates a new economic model. It can facilitate the efficient utilization and trading of assets, create value for owners, lessors and developers, and provide them with new revenue streams.

4.2 NFT; Challenges and Risks Facing Leasing

Summarizing the above three scenarios, the challenges and risks faced by NFT; leasing are as follows:

• Market bubble risk: NFT; excessive speculation of market prices may lead to instability and investment risks.
• Legal and regulatory risks: The ownership and leasehold interests of virtual assets may involve complex legal and regulatory issues, and risks in compliance and legal protection need to be carefully considered. *Technical security risks: using; NFT; leasing for transactions may involve technical obstacles, smart contract vulnerabilities and network security risks.
• Market demand and acceptance risk: Successful implementation; NFT; leasing also requires market demand and wide acceptance.
• Uncertainty of rental price: The rental price is affected by market supply and demand and other factors, and the price fluctuates greatly. It is difficult to guarantee the stability and fairness of the rental price.
• Lack of norms: NFT; the leasing market lacks uniform norms and standards, and there may be uncertain factors and unpredictable risks in the leasing process.

Five, NFT; the future development of leasing

Summarizing the above three scenarios, we believe that the future development of “NFT” leasing will present the following three trends

• In the future, NFT; leasing will achieve a higher degree of automation and autonomy with the support of smart contracts and blockchain technology. In addition to technical specifications, market norms and standards will be specified to create a smoother and low-threshold user experience while ensuring that the rights and interests of all parties are protected. The future “NFT” leasing model will be more flexible, intelligent and diversified, and can be personalized according to the needs of participants to meet different usage scenarios and business models.
• With the development of “NFT” in the future, there will be more and more application scenarios of “NFT”, including social, metaverse, games and other fields. With the emergence of more rights and more scenarios, NFT; leasing will also benefit from these new application scenarios, with more gameplay and empowerment. At the same time, the trend of globalization will also bring more opportunities for “NFT” to promote the global development of “NFT” leasing and attract more participants and users. In this context, NFT; leasing will continue to innovate and develop, becoming an indispensable part of the future; Web; 3; ecology.
• NFT; leasing as a way to lower the threshold can bring participation to more users; Web; 3; ecological opportunities, reverse empowerment; NFT; and; Web; 3;, promote; Web; 3; Development and; Mass Adoption. The existence of NFT; leasing can allow more users to own; NFT, and then promote the expansion of the application scenarios of; NFT; and help the prosperity and development of the; NFT; ecology. At the same time, NFT; leasing can also provide empowerment for more; Web; 3; scenarios, and bring more possibilities for different application scenarios in the "Web; 3; Sexuality and Opportunity to Promote;Web;3;Ecological Diversity and Development.

6. Summary

This article first introduces the basic concept of “NFTFi” leasing in detail, and at the same time points out that “NFT” leasing is different from traditional leasing in that people can lease digital artwork, game props, virtual real estate or other types of “NFT”. Secondly, from a technical point of view, this paper analyzes the currently widely used “ERC-4907” protocol and “ERC-5006” protocol, and briefly introduces the functional interfaces of these two protocols. Due to the rapid development of “NFT” leasing, its application fields are becoming more and more abundant. Web;3;Games, Metaverse, and community rights and interests;NFT;are typical application scenarios of;NFT;leasing. This article explains in detail the business logic and representative projects of;NFT;leasing in these three fields. Finally, the article summarizes the advantages, challenges and risks of “NFT” leasing, and looks forward to its future development direction.

References

EIP-4907; Protocol Interpretation_jason

The second Decentraland Metaverse Fashion Week was very good, don’t do it again next time

Decentraland grantee, Double Protocol, has launched a new, custom LAND leasing system.