In 2021, NFTs became a mainstream topic as volumes soared to the billions, starting with PFPs selling for astronomical amounts of money followed by the play-to-earn boom and the explosion of in-game asset sales. As early investors in the seed rounds of OpenSea and YGG in 2019/2020, as well as in LIT protocol in 2021, we bet on this large wave of NFT adoption coming, but we broadly feel that NFTs are currently lacking a great deal of functionality and this fits into our thesis that there will be substantial value to middleware and added value infrastructure (above the base layer ability to create nonfungibles). We are still in the very early stages of NFTs in which we have a minimally functional object database for the future internet (aka Web3). Where OpenSea provides horizontal discovery and marketplace functionality, YGG provides a new model for use of yield-generating NFTs, and LIT protocol provides horizontal access control services, we feel that Solv addresses the need for NFTs to be more usable as structured financial products.
Fundamentally, we believe a powerful use case for NFTs will be in the financial realm. In TradFi, assets are non-fungible, even if they are fungible in their financial value/liquidity; for example, 100 shares of XYZ held in a brokerage account are held by a custodian for benefit of the account owner (non-fungible characteristic in a registry), but can be traded (even partially) in a highly liquid market (acting like a splittable, fungible asset), with settlement resulting in that non-fungible characteristic being updated in a database.
Today, most on-chain financial products are fungible. For example, if you commit capital to a money market fund (Compound), you get fungible cTokens representing a claim on assets in the pool. To build more advanced financial products, you ideally need the ability to append non-fungible elements onto assets that can trade in a fungible manner.
Solv & vNFTs
Using Solv’s vNFT standard (which is compatible with ERC-721s and acts as a container), users can “upgrade” their NFTs (to “vouchers”) by appending new information/features onto the original tokens, making the financial value a part of the definition of the token. This primitive creates semi-fungibility, allowing NFT assets that have the same financial characteristics to be held and trade in liquidity pools together while still maintaining unique metadata attached to each individual token. This upgrading process offers a key benefit that allows NFTs to be split into multiple derivative instances that all inherit the underlying financial characteristics (proportionally) of the original NFT and be recombined to recreate a larger partial or full NFT. For example, if you had a vesting voucher that could be purchased at a discount and allowed its holder to claim 100 tokens each month for a year, the holder could split this asset into 10 NFTs that allowed the owner of each one to claim 10 tokens each month for a year. A user could buy 3 of these individual assets and combine them into a single NFT that allowed the owner to claim 30 tokens a month.
With this primitive, developers can build many traditional financial products including bonds, deposit receipts, and convertible notes, among others. There are also more crypto-native use cases enabled, like NFT installment purchasing where users could buy an NFT over time in installment payments but receive a portion of the asset with each successful payment.
Solv’s standard can also improve on fractionalization, as their mechanism doesn’t use the popular ERC-20 “loose backing” (that really only works for investment use cases) but rather gives direct partial ownership to the holder (satisfactory for both investment and use), increasing utility for fractional owners. It also allows projects to release a token (and even do a public sale) without having that token go live and into price discovery on DEXs, helping to keep teams that use this as a fundraising mechanism focused on continuing to deliver milestones.
After building conviction on Ryan, Will, Yan and the rest of the team, seeing the progress of what was already built, and factoring the very large addressable market (current and potential) from the use cases we saw (and hypothesized being built), we decided to lead the Series A round alongside our friends at Blockchain Capital and Sfermion.
The ability to gain control over NFTs and generate additional semi-fungible assets is a way of understanding an NFT as a contract, and understanding contracts themselves as assets that can be financialized. We see many future use cases involving this functionality.