Interpretation of the Standard for Encrypted Digital Assets vNFT: Three Major Design Goals and Three Design Details

NFT, as a digital ownership certificate with multi-attribute descriptive capabilities, can serve as an excellent tokenization carrier for collectibles, real assets, game items, etc. This has been confirmed by the frenzy in the crypto collectibles market over the past year. NFT has brought new forms of creation and monetization channels, benefiting creators greatly, but the potential of NFT goes far beyond this.

In the DeFi space, an increasing number of project teams are upgrading their businesses with financial NFTs, and the launch of Uniswap V3 is a typical representative of this trend. Uniswap V3 has designed LP Tokens as NFTs, allowing users to customize their market-making ranges, significantly improving capital utilization, showcasing the potential of NFTs.

Currently, NFTs have the potential to become the new infrastructure for almost all financial sectors such as lending, insurance, bonds, and options, providing users with diverse customization capabilities (similar to Uniswap's custom market-making), ultimately leading to improved capital utilization and enhanced financial product experiences.

As the next directional marker for the development of DeFi, financial NFTs will inevitably lead to a series of innovations in infrastructure, protocol layers, and application layers in the market. In terms of the underlying protocol standards for NFTs, the widely accepted ones are ERC-721 and ERC-1155. Recently, a new token standard proposal has appeared in the Ethereum official code repository, which claims to be specifically designed for financial NFTs proposal.

Financial NFTs? It seems that no one in the market has specifically defined this concept. Currently, the NFT token standards most commonly used in financial scenarios are ERC-1155 and ERC-721, with Uniswap V3 adopting ERC-721. What distinguishes the financial NFTs targeted by this proposal from the NFT assets already implemented in financial scenarios?

According to the proposal, vNFT assets are NFT assets compatible with ERC721, capable of various flexible operations such as splitting, merging, and partial transfers. From this description, it can be inferred that the designer is improving upon the issue of the lack of quantity attributes in ERC-721. The ERC-1155 standard, originally designed for game items, also addresses similar issues and achieves the expression of multiple categories of assets and batch transfers by adding "ID" and "unit".

So, what is the difference between vNFT and ERC-1155? This article will explore and interpret the design goals and key designs of vNFT.

### 1. Design Goals of vNFT

1) Improve the liquidity of NFT assets

Every NFT asset implemented under the ERC-721 standard, whether it is an art collectible or a financial product, is considered unique, which leads to difficulties in share division, pricing, and valuation, resulting in a lack of liquidity for NFT assets. The addition of the "units" attribute in vNFT adds a quantity feature to NFT assets, similar to ERC-1155. The uniqueness of vNFT lies in the addition of the "SLOT" attribute, which not only allows for the splitting of vNFT assets but also enables merging, whereas ERC-1155 can only split and not merge.

2) Provide batch management capabilities for NFT assets

The ERC-721 standard considers different NFT assets to be completely unrelated, denying the commonality that exists between assets. From the perspective of asset holders, this means that each asset they hold can only be stored and managed individually. It's like a shelf filled with a variety of products, where each product is unique and cannot be categorized or organized, and transactions can only be negotiated and conducted on a single asset, which undoubtedly creates significant difficulties in asset management and trading.

vNFT utilizes the "SLOT" to define common attributes between assets, abstractly summarizing and categorizing NFT assets, thereby enabling the splitting and merging of vNFT tokens, allowing users to add new assets to existing vNFTs as needed.

3) Reduce the issuance costs of NFT assets

When minting NFT assets using the ERC-721 standard, a separate contract needs to be deployed for each asset. If we compare token contracts to factories, ERC-721 is like a special type of factory where each factory can only produce one type of product and only one item. Developers need to deploy a new contract for each new NFT asset they create, just like needing to set up a new factory for each new product, which creates unnecessary development burdens and increases issuance costs.

In the design of vNFT, "ID" distinguishes different vNFT tokens, allowing a single vNFT contract to represent multiple vNFT tokens. Developers can issue various types of NFT assets within the same contract while setting any quantity for a specific asset. In this regard, ERC-1155 achieves the same capability, also reducing the burden on developers and saving issuance costs.

### 2. Key Designs of vNFT

1) Add quantity attribute "units" as a core attribute of NFT

vNFT adds the quantity attribute "units" as one of the core attributes of NFT assets. NFT assets expressed with ERC721 are all unique, meaning that the quantity of each NFT is 1. The difference with vNFT is that you can set the quantity of entities contained within the token to any number. For example, if digital collectible cards are issued based on vNFT, the cards are the entities contained within this vNFT token. If the quantity "units" is set to 100, then this vNFT token represents a collection of 100 collectible cards.

vNFT uses the quantity attribute "units" as a "pocket" to "store" these 100 cards within a single vNFT. It is also easy to take out one or several cards from the "pocket." When you take out 40 cards, the original vNFT is split into two vNFTs: one representing 40 cards and the other representing 60 cards. By adding the quantity attribute "units," vNFT makes the fractionalization and splitting of NFT assets very easy, greatly facilitating the liquidity of NFT assets.

It is worth mentioning that the quantity attribute in vNFT is very flexible in practice, capable of expressing share quantities as well as various measurements such as area, length, weight, and price. It also allows developers to impose various constraints on these quantities, such as maximum and minimum amounts, whether they can be split, and the minimum unit for splitting, thus meeting the needs of various application scenarios.

This capability, compared to the simple quantity description ability of ERC-1155, makes the application scenarios of vNFT more extensive and capable of realizing more complex business scenarios.

2) Utilize the "SLOT" mechanism to abstractly categorize NFT assets

"SLOT" is a unique attribute of vNFT, which uses "SLOT" to abstract and categorize NFT assets. ERC721 treats each NFT asset as unique, while in practical applications, users often focus only on a few core features of the assets. For example, when selecting fixed-term deposit products, consumers only need to pay attention to asset type, term, and interest rate. Considering the practical value of vNFT with fixed-term deposit products, we can use SLOT1 to represent "asset type," SLOT2 to represent "maturity date," and SLOT3 to represent "interest rate," allowing us to merge deposits with the same "SLOT" into one token.

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In this use case, vNFT aggregates two fixed-term deposits, concentrating liquidity in one vNFT. In practical applications, this means that when adding deposits, users can directly inject funds into the existing vNFT without needing to mint a new NFT. The flexibility of operations not only saves gas fees but also optimizes the liquidity of complex financial assets.

3) Compatible with ERC721

vNFT is compatible with ERC721, meaning that applications currently supporting ERC721 can directly support vNFT. This is a significant advantage of vNFT compared to ERC-1155, as ERC-1155 cannot be compatible with ERC-721, hindering its interoperability with many existing protocols. vNFT can directly utilize all existing infrastructures that support ERC721 assets, making the application threshold relatively lower.

### 3. Conclusion

The mainstream NFT implementation standard, ERC-721, has exposed performance shortcomings in the wave of advancing financial NFTs, primarily in its splitting capabilities, which is also a direction recently discussed by Uniswap regarding how to split LP Tokens to support users' flexible adjustments of market-making positions.

ERC-1155 can support splitting functions, but two drawbacks have led the Uniswap team to choose the clearly limited ERC-721. One is that 1155 cannot be compatible with 721, making it difficult to be supported by all NFT protocols. The second is that the splitting of 1155 needs to be predefined, and each fragment must be completely homogeneous, which does not align with Uniswap's goal of supporting users in adjusting their market-making positions.

From this perspective, the crypto market indeed needs a more flexible token standard for support. Through the analysis above, the vNFT standard, with its abstract design concept, realizes the quantification of NFT assets, which may indeed be a way for NFT assets to better integrate into the DeFi world characterized by "computability." Currently, the market size of ERC-721 assets has reached 17.2 billion USD, primarily concentrated in collectibles, while the financial NFT market targeted by vNFT has considerable imaginative potential. The specific progress is worth our continued attention.