NFT derivatives: the new frontier? Interview with Smart Token Labs

Talk to someone who isn’t familiar with NFTs and one of the first things they’ll suggest is that they’re not actually doing anything. Even among enthusiasts, the focus is increasingly on utility, as NFTs across the market have seen prices and volume drop of late.

NFTs are art, yes, but that’s just the beginning. The most successful projects stand out because they build a community, with NFTs essentially being membership cards to access these exclusive clubs. Think Bored Ape Yacht Clubs, where an Ape gives you exclusive access to merchandise, gatherings, and even Miami boat parties.

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Smart Token Labs strives to create a way to generate more utility from NFTs. Their method is quite ingenious: creating verifiable on-chain NFT derivatives for NFT holders who retain the intellectual property rights of the original project. They even gave us an exclusive look at their new derivatives website, which you can check out here.

It’s a pretty nifty mechanism and opens avenues for partnerships with other brands, higher royalty refunds, and a host of other revenue and profits for NFT owners. Of course, we had some questions, so we spoke with Victor Zhang, co-founder and CEO of Smart Token Labs.

Invezz (IZ): Can you give an example of some of the NFT derivatives that could be created?

Victor Zhang (VZ): NFTs are a way to digitally record ownership of certain non-expendable rights. NFT derivatives are a way of making non-fungible rights derivatives.

An example of NFT derivatives that can be created are profile picture NFTs (NFTs that represent IP ownership). IP owners (NFT holders) may issue derivative NFTs to represent the license to use this IP in certain ways. Nifty Tailor allows BAYC holders to use their BAYC to create derivative NFTs (apes in different outfits) based on their jumpsuit. They can create derivative NFTs to represent the right to use the IP address on a t-shirt, use a coffee bar, etc. to represent the right to make an “official” recreation.

Another example is DeFi NFTs (NFTs that represent ownership of an asset). Owners of financial assets (NFT holders) can issue NFC derivatives to represent a portion of the current or future value of the financial asset. Uniswap V3 Position NFTs represent ownership of the rights to change and redeem the position. They may issue a derivative NFT to represent ownership of the repurchase right, another to represent ownership of the exchange right, another to repay the right in half, or another to represent certain adjustments for better liquidity and control.

There are also examples that extend to more real-world related NFTs (NFTs that represent ownership of rights in the real world). For example, a car ownership token, which uses an NFT to represent ownership of a physical car. The car owner (NFT holder) can issue derivative NFTs to represent title and use of the physical car for a specified period of time, and can issue derivative NFTs to represent ownership of the right to receive rental income.

IT IS: These derivatives are only possible for collections that retain the intellectual property rights of the original project. What do you think of projects that do not grant full IP rights to buyers?

VS: For IP-related NFTs, if a token holder wants to issue IP-related derivatives, they must own the IP or have the license. But they can still produce derivatives based on the rights they own, such as collectible rights. Collection rights can issue derivatives to represent the proprietary right to use the NFT as a profile picture and sell the derivatives to others. In addition to collectible rights, it also represents ownership of the right to redeem a jersey, after which the NFT holder can issue derivatives to represent this right and sell it separately. Projects can issue derivatives in lieu of NFT holders. As long as shoppers fully understand what they are buying, all is well. The buyer must understand what type of property they are buying; ownership of what rights.

IT IS: Many projects, including the latest highly publicized project, Moonbirds, look to strike initiatives (“nesting” in the case of Moonbirds) to generate revenue for incumbents. What do you think of this initiative?

VS: The important thing is where the income comes from. If only token buyers’ money is redistributed to NFT holders, this is totally fine in a positive cycle where more people buy the token and the price rises in value, leading to more buyers. However, in a negative cycle it will not work. An easier way to think of it is that NFTs have another right, which is to earn income from another source. Additionally, you can spend fungible tokens such as NFT derivatives as tokens, to represent strike revenue.

IT IS: Are you interested in initiatives other than staking (and of course launching derivatives) that generate income for NFT holders?

VS: It is about using the ownership of rights that NFTs represent. If it is an IP, then the question is how to use the IP to generate revenue. If it is a financial asset, the question is how it can be used to generate income. If it is a car, then the question is how the car can be used to generate income.

IT IS: Do you think on-chain derivatives could extend the average holding period for blue chip NFTs? Do you foresee other consequences?

VS: Yes, especially if the derivatives require the holder to lock/wrap the original NFT to prevent double spending of the rights. An example of this would be if I release a spin-off to represent the exclusive rights to use my BAYC on a t-shirt. Once issued, that right must be removed from the original NFT and the original NFT must be blocked or wrapped. In addition, two new NFTs will be minted: one for exclusive jersey rights and one for balance rights. NFT derivatives are like DeFi nesting dolls.

IT IS: There is likely to be just enough liquidity and demand to launch NFT derivatives for major projects. Do you think this will increase the concentration of wealth at the top of the NFT market?

VS: No, the current NFT market is very much an IP type of NFT, bringing success only to the largest or most notable projects. It’s not a problem, it’s just how it works. Later on there will be all kinds of NFTs, so that’s not a problem at all.

IT IS: What do you think about the concentration of wealth within NFTs as a whole and the cryptocurrency industry in general?

VS: Current use cases are small compared to what crypto technology can actually enable. There is nothing to worry about.

IT IS: Does Smart Token Labs have any competitors regarding the launch of NFT derivatives?

VS: We have not seen competitors specifically building a new internet standard for tokenization.

IT IS: Do you foresee a launch only for blue chip Ethereum projects, or are you looking at Solana as well?

VS: We are currently focused on EVM-based networks, so there are no plans for Solana at this time.

IT IS: How do you see the integration of OpenSea with Solana for the NFT market? Do you think this will have any impact on the dominance of Ethereum within the NFT space, and do you foresee a multi-chain future for NFT or will ETH always rule?

VS: In the medium term, I see a multi-chain future for NFTs, just like DeFi. In the long term, I think the future of multi-chain NFTs will depend on sharing security with the Ethereum mainnet and interoperability with each other. (Ethereum mainnet + stacks, sidechains, shards, etc.). Without shared security, cross-chain is “useless”.

IT IS: How do you think NFTs will fare in a prolonged bear market and do you think NFT derivatives will have any impact on this?

VZ It will outperform DeFi tokens as they are more than just finance. The stock price may fall, but Marvel’s intellectual property should not be compromised.

IT IS: You work on other intriguing projects, like symbolizing car ownership. What does the future hold for Smart Token Labs as a whole and how important are NFTs?

VS: We have two open source projects, TokenScript and AlphaWallet. TokenScript wants to become a new internet standard and the standard for a token-oriented framework. In this Web3 future, tokens will be as ubiquitous as web pages, and tokens will become primary objects of ownership, identity, and interaction. AlphaWallet is the largest open source EVM mobile wallet and the only non-custodial wallet that is 100% open source.

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