The Non-Fungible Fungible Token (NFFT)
ERC741, a new smart contract for the Ethereum Blockchain
Summary:
ERC741 is a new token type that combines the qualities of fungible and non-fungible tokens. The name comes from combining ERC20 (the standard for fungible tokens on ethereum) with ERC721 (the most common non-fungible tokens). ERC741s energize fungible token economies, ushering in a new era of gamified decentralized finance.
The following is not a token white paper. It’s a description of a new token standard being proposed, with a discussion of the rationale behind it and examples of how it might be used. In separate documents, white papers will be regularly released from the community which describe specific tokens launching with this standard. These white papers will likely first appear on the community website, erc741.com, but will also come from all directions as the concept matures and takes root. In addition, technical white papers will be published detailing the architecture and enabling technology.
The philosophy of an ERC741 is simple: NFTs are best utilized for human and community engagement, not for get-rich-quick flips; while fungible tokens generally reflect investor sentiment. Therefore, to achieve optimal results, both token types need to work together and do what they do best. ERC741 is the first non-fungible fungible token.
Here’s how it works: at the time of mint, each new ERC741 token is created with both a standards-based fungible and non-fungible token. The ERC721 and ERC20 are “entangled” and cannot be separated. The two tokens operate as a single entity–where one goes, so goes the other— forever.
When an owner of an ERC741s looks in their wallet (all standard crypto wallets are compatible, including Metamask) they will see how many fungible tokens they own. If they send out any of their ERC20s, the associated NFTs transfer ownership as well. ERC20s move in bulk as fungible tokens, but any individual ERC20 can also be viewed–meaning, its specific NFT can be singled out and its unique characteristics observed.
When you transfer 741 tokens to a peer or exchange, they move as standard fungible tokens, transferring with them ownership of the associated NFTs. In the roadmap for ERC741, the system will allow for "locking" to protect particular NFTs from being swept away. However, initially, to retain or protect an NFT from being lost on transfer of fungible tokens, desired keepers are taken out of the main pool— to be collected, traded or sold individually.
ERC741s offer infinite gamification potential, including surprise & delight rewards, exclusive access, puzzles, unique staking mechanisms, and head to head competition. The nature of ERC741s allow them to fully participate in the DeFi economy, while incentivizing the community in new dynamic ways.
It is important to note that the market prices of these NFTs are irrelevant– they should be understood as objects of engagement, not speculation. The success of an ERC741 is measured against fungible token metrics of success (price and volume on a DEX or CEX, for instance), as opposed to anything related to the non-fungible economy (such as OpenSea, etc).
In this context, the 741’s NFT is focused on one thing alone—driving communal behavior and goals. If any individual item does “well”, it’s a byproduct not a goal. By applying the gamification characteristics of non-fungible tokens to community behaviors, ERC741s represent a better model for building and growing fungible token-based communities.
Introduction:
Ethereum-based fungible tokens are the central element of the DeFi movement, with some achieving high market caps and daily trading volume. Non-fungible tokens (NFTs) trade differently, usually at lower volumes with the psychology of individual sales, but can deliver media and powerful collector and game mechanics. ERC741s unite the power of both, in full compatibility with the existing ecosystem. The result: a superior mechanism to gamify behaviors that drive success.
Consider the meme stock phenomenon, GameStop. The Gamestop story was heavily driven by speculative trading based on market sentiment rather than GameStop's fundamental value, showcasing the powerful role that perception and psychology can play in the stock market. A large number of individual investors, coordinated through social media platforms like Reddit (particularly the subreddit r/wallstreetbets), mobilized to buy shares and call options in GameStop. The more people bought and held (vs. dumped), the higher the stock went, and the higher it went the more news spread, the more FOMO kicked in, and the more new buyers found their way into the game. In such speculative markets, typically, the bottom falls out eventually for two reasons: first, the fundamentals of the underlying asset cannot support the price; and secondly, the interest of the community to continue to engage in the behaviors driving the momentum wane. A review of such behaviors should not be confused with a judgement as to whether this is “good” or “bad”— but simply an observation that it’s how market dynamics often work.
Similarly, we see the same dynamics in crypto currencies, The success of a token tends to be driven by several primary factors, notably:
Number of new token buyers
Number of tokens per buyer
Percentage of tokens retained rather than sold
Public awareness with positive sentiment
Rate of new members joining and participating in the community
One could argue against this— but the counter arguments to date are deeply flawed. Arguments that cryptocurrencies trade in a rational correlation to underlying asset value, rather than collective sentiment and speculation, is incorrect. In the future, tokens will increasingly reflect the intrinsic value of the assets they represent. In fact, just about everything that can be tokenized will. I would argue, however, that even as this more substantive correlation emerges over time, the behavioral and gamification dynamics enabled by 741s will be no less, and likely even more, relevant.
Imagine two scenarios, one has the token built in the standard fashion and another as a new ERC741. In the first case, the following community activities might be encouraged:
Liquidity Mining: Offering rewards to users who provide liquidity to the token's trading pairs on decentralized exchanges (DEXs) can increase trading volume and liquidity, potentially driving up the token price.
Staking Rewards: Encouraging holders to stake their tokens in return for rewards can reduce the circulating supply, potentially increasing the token's price while also fostering a sense of community and long-term holding.
Airdrops: Distributing free tokens to existing cryptocurrency holders, especially to those holding related or complementary assets, can increase token distribution and awareness, often leading to an increase in trading activity.
Yield Farming: Providing opportunities for token holders to earn high returns by participating in DeFi protocols can attract more investors looking for high yields, increasing demand and trading volume.
Burning Mechanisms: Implementing token burn mechanisms, where a portion of the tokens from transactions or profits is destroyed, can decrease the total supply over time, potentially increasing the token's value.
Partnerships and Collaborations: Announcing partnerships with other reputable projects or companies can create positive sentiment, driving investor interest and increasing token volume and price.
Social Media and Influencer Marketing: Utilizing social media platforms and influencers to promote the token can reach a wide audience quickly, generating buzz and attracting new buyers.
Limited Time Offers and Bonuses: Providing bonuses or special offers for early adopters or during specific campaigns can incentivize quick action from buyers, boosting volume and potentially the price.
Transparency and Communication: Regularly updating the community on developments, future plans, and financial health can build trust and confidence, leading to greater investor engagement and support for the token.
Token Utility Expansion: Developing and communicating clear use cases for the token within its ecosystem, such as governance rights, access to exclusive services, or payment methods, can increase demand and usage, supporting the token's value.
Each of these initiatives, done with traditional ERC20s, can be effective to some degree. However, you can’t see fungible tokens—they aren’t funny; they aren’t intriguing or playful. There’s generally not much driving most token communities after the launch. The mechanisms to engage are complicated to understand, are niche in nature, and are–in essence– just not fun.
Conversely, if the token is issued as an ERC741, a wide range of opportunities open up for an entirely new sentiment and engagement model. Let’s look at how each of these categories changes with an ERC741:
Liquidity Mining: Unlike traditional tokens, mining with ERC741s is far more entertaining. Rather than simply get more tokens that are worth market price, each token awarded to ERC741 miners has the potential to be worth far more– from instant bounties to prizes, tickets and access passes, groceries, discounts or other value from real world brands. The introduction of “storytelling” and fun, along with the prospect of upside makes for a far more enticing proposition.
Staking Rewards: Similarly, ERC741 staking rewards are more interesting as well. ERC741s offer a novel concept called “Strategic Staking”. Unlike traditional staking (you stake or you don’t), ERC741 staking allows creators to provide numerous gamified options, complete with back stories that fit their theme. The first is Yield Staking, where tokens are locked up for periods in exchange for rewards– again, in this model, each rewarded token (the “yield”) is like a Cracker Jack’s Box, with the opportunity to look inside and discover the prize. New tokens generated from Yield Staking can be worth far more than the market price at any time, from new tokens to coupons, tickets, treasure hunts, puzzles and collectibles that produce prizes when completed, and more. In addition, the tokens themselves– during the staking period– can “change state” and grow in value. So not only do you get new tokens –any one of which could be a windfall–but the locked tokens will change over time– getting “better” the longer they are staked. Lastly, the nature of strategic staking in ERC741 also allows holders to look through their collections and stake specific tokens, an impossible concept in the standard ERC20 world. These staked pools of specific tokens can then be put forward into numerous game scenarios, such as battle teams against other staked armies.
Airdrops: In 741s airdrops take on new meaning. Rather than drop fungible tokens worth market price (or another project’s tokens usually worth nothing) 741 airdrops have both the liquidity of the fungible token and– at the same time–an air of excitement and mystery. In the past, one could always airdrop NFTs to tangible token holders, but the psychology is different in DeFi vs. NFTs. Airdrops of NFTs are “one offs”, which can try but often struggle to connect back to fungible token economics. And vice versa, airdrops of fungible tokens have instant value and likely liquidity but lack inherent enticing, entertaining qualities. It’s quite different if the airdrop itself is the very same token that the community is there to bolster, i.e. a fungible token. Suddenly you now have “more” of something that has daily volume and resulting liquidity, and– at the same time– has intriguing qualities and incentives built in. Suddenly, fungible airdrops can take the shape of 3D animated crates that only open on certain days or based on conditions– such as finding the NFT “keys”, or when sports teams achieve goals, or when a new movie comes out (ticket inside!). In addition, collective behaviors can be set out that, when achieved, trigger additional airdrops for all holders of that token– creating sub groups that work together to unlock the prizes. For instance, a token could invite owners to post on Instagram, and if more than 10,000 new wallets are created, everyone in the group splits the bounty. Such sub-group “social accountability” challenges can run their own sub communities and work together to achieve goals. While such concepts are often experimented with individually in fungible and non-fungible token communities, it is traditionally awkward to link the two concepts together. Again– to emphasize the difference– in traditional NFT airdrops, your token may or may not be worth anything and may or may not have liquidity potential. In dropping fungible tokens with non-fungible properties, the liquidity is more certain, as trading dynamics in DeFi are distinct from NFTs. In this way, the fun of an airdrop and perceived value is increased. A hybrid token seamlessly merges the ideas, turning each fungible toke into a game piece, ready to be discovered and enjoyed.
Yield Farming: Yield Farming takes on new meaning in 741s as well. In addition to traditional DeFi yield farming systems, all of which will work with perfect compatibility, 741 yield options become highly fun and engaging. For instance, you can have certain tokens that are “seeds” that you can “plant”. Over time, the plants will grow and yield more tokens on their branches to be plucked. Actual “farming” behaviors gamified. Other tokens might be crossword puzzles, scratch-to-wins, or trivia contests that trigger big bounties of new tokens bounties. Still others might live in Augmented Reality around your city, or within Virtual Spaces and games, that trigger new drops as you discover and catch them.
Burning Mechanisms: While optional for any token series, there are infinite game mechanics that would encourage burning. As an example, if a pre-specified quantity of tokens are staked into a “Burn Pool”, a metaphorical fire will ignite and destroy them all, lowering the overall supply and putting upward pressure on the price. Burners can be rewarded for their contribution to the community with special new tokens with higher rarity. This will incentivize people with tokens they don’t like to burn them rather than sell them.
Partnerships and Collaborations: ERC741s are ideal for 3rd parties to participate in a community. Because the statistics of scarcity of various tokens in a series will be published, brands or others can independently offer rewards to people who possess certain rare tokens or combinations. By providing such rewards, brands can ethically and legally gather 1st party data and develop ongoing relationships with users. For instance, a ticketing company can offer free tickets to anyone with the Gold Star tokens in exchange for data; a packaged good company can offer product discounts to anyone with certain tokens in their wallet, who also wishes to have a relationship with a specific brand; groups can reward proof of community commitment– i.e. those who stake term– with higher level access to brand giveaways. All of this activity is strictly opt-in, and has no bearing on the tokens themselves or the technology. The nature of blockchain based reward systems is such that any partner can join after-the-fact and instantly make a rare token valuable by offering something special.
Social Media and Influencer Marketing: With ERC741s influencers can participate in unusual ways. Importantly, social influencers should never “promote” a token, or imply that it may go up or one should buy it. This is dangerous and unethical because it could imply that there’s a valid “investment thesis” for putting money into a token. Tokens of this type have only one thesis– that it might be fun to play and engage in the games, and work together as a community to see if you can collectively make the game (after all, that’s the point– it’s really one big game) grow and thrive. Instead, with 741s influencers can benefit from simply giving tokens away and having fun with the games that grow and galvanize the community. No indication or promise of upside is necessary or advisable. In this model Influencers can be given “dispensers” that: 1. Produce one token to their own wallet for every new wallet that engages in the community; 2. Insert “id watermarking” into every token they distribute that gives them a permanent dividend back for the life of the token or wallets they bring in, depending on various metrics of how it moves, is staked, or otherwise helps the community (i.e. is not dumped). In this way, consumers pay nothing– there is no call to buy– there is simply an opportunity to play for free, and incentive to add new members to the game. Like in traditional “free-to-play casual games”, if players wish to buy more tokens to top up and advance their play, so be it. This is the essence of common mobile games already, and the way blockchain games already work today, and now– with ERC741–how token communities can be built as well.
Limited Time Offers and Bonuses: ERC741s are gamified, so offers and bonuses can be built into the object itself. Unlike fungible tokens, the 741s show up as limited offers or potential bonus pots in exchange for action. For instance, one token may look like a stick of dynamite with a fuse burning down…. If you activate it before it burns you get its contents, but if the fuse burns it explodes into ashes. Another may show up as a snowball that gets bigger each time you share it with someone, and bigger still when they share it with someone else and so on. If it gets to a certain size it will alert everyone in the chain, and will then display melting behavior that reveals its hidden bounty, with the lion’s share to the first and last link. There is no limit to the games that will be devised to encourage sharing, holding, and bringing new members to the fold.
Transparency and Communication: The nature of 741s creates the mandate for usually high communication and participation. The game mechanics must be published and expanded upon; the barter or trading marketplaces (“Craig’s List” for tokens) to enable people to swap to compete puzzles and sets; the communication of new sets and offers and partners, the list is endless. Unlike traditional communications, however, these are not only more prevalent but more relevant as they relate to rewards, games and even secret rumors and chatter about ways to unlock more value and trigger rewards. For instance, a rumor might be going around that certain tokens with stars on them are actually holding a million tokens if you sing to it, or drop into your wallet a coupon for a trip to Disneyland, but to unlock them you need to enter a code that can only be found in the supermarkets on bottles of cola, or on printed notices posted in the aisles.
Token Utility Expansion: Meme coins, by definition, claim no inherent utility. ERC741s, however, are in constant expansion of “what you can do with them” because the game is always expanding, new partners are always being added, and novel or even deliberately secret (like the secret menu of IN n’ Out) mechanics inserted and discovered.
Let’s review the core objectives of ERC20 communities and howERC741 would accelerate each:
Number of token buyers: increasing constantly with people seeking the surprise & delight moments
Number of tokens per buyer: users amass more tokens per person because of a combination of strategic staking, engaging games, and motivations to complete puzzles and sets that have prizes associated..
Percentage of acquired tokens retained rather than sold: novel staking that not only creates rewards, but also transforms the core tokens over time to be increasingly valuable the longer you stake. In other words, the tokens actually change state during lock up periods to achieve different looks and rarity– a novel concept for how staking traditionally works.
Public awareness: 741’s turn normal crypto currency buying into a mass scale gift “unboxing” or pack “cracking” phenomenon, with every purchase an opportunity for drama and suspense. YouTubers unboxing their bags, revealing what they have won, brings the excitement of the unboxing trend to DeFi and drives both public awareness and FOMO.
Rate of new members participating in the community: 741s trigger rewards not only for sharing but for successfully bringing in new members, and for the behavior of those members over time (i.e. are they buyers, sharers, posters, stakers, whales, etc). Prosocial behaviors, as determined by creators and the community, pay dividends directly into wallets in perpetuity.
If ERC 741s consistently drive higher prices and volume of fungible tokens, and are fully compatible with existing DeFi systems– new tokens, and many existing ones, are likely to adopt these concepts. Except for occasions where token price and liquidity is not important, the ERC741 could become a preferred method of driving successful token economies. It’s the gamification of Defi, turning the decentralized economy into a collective, fun and rewarding community experience.
Background: The Vatom
In early 2015, I proposed a concept for programmable non-fungible tokens on blockchains called “Vatoms”– short for virtual atoms. In the months that followed, I started making presentations on scenarios that “smart” digital objects might enable. At the time, as far as I knew, there were only fungible tokens on blockchains. As we got underway with building, it was clear that it was an idea whose time had come and some good thinking on related topics had long been underway.
The concept of “colored coins”, for instance, dates back to 2012. Meni Rosenfeld, president of the Israeli Bitcoin foundation, was the first to publish a white paper about it. He released the "Overview of Colored Coins" on Dec. 4, 2012. Another white paper about colored coins was published in 2013 by Rosenfeld, Yoni Assia, Vitalik Buterin, Lior Hakim, and Rotem Lev. Colored coins proposed the idea of “coloring” satoshi’s (fractions of bitcoin) that could be used to distinguish them. Also, my favorite project in this period was called “Mastercoin”, later Omni, led by my personal “giant”, Craig Sellars. Craig would eventually join Vatom in its infancy, and to this day has worked tirelessly to advance the underlying principles of self-sovereign ID and true digital ownership.
Though it was clear that this kind of thinking could help distinguish one token from another, it was not clear how to do what I wanted-– dynamic visualizations, interactivity and state changes, network-awareness, and programmability. My goal for “Vatoms” was to create the first “Smart NFTs”, focused less on speculation and more on engagement, utility, and most of all– fun. The theory was, and still is, that the less boring a token is, the more effective it will be at engaging people, gathering data, and maintaining the relationship (“the new cookie”). The theory is that combining “ownership” with “gamification” can drive individual and communal action, and create valuable direct relationships via the wallet and tokens. And so it was in 2015 that we set out to build this vision on the proverbial “shoulders of giants.”
Today we can see an unmistakable trend toward many Fortune 500 organizations adopting Smart NFTs as part of their audience communication and loyalty systems. While the original vision of NFTs as instruments of engagement and utility is on track for brands, when it comes to DeFi dynamics and users, NFTs pale in comparison to their fungible counterparts. In other words, the immense engagement potential of NFTs is being wasted on NFTs, and only poorly applied to where the liquidity and economy is strong and growing.
To try to bridge the gap between fungible and non-fungible benefits, one recent trend has been to inscribe images on “Satoshi’s”, i.e. the fractional unit of Bitcoin. These NFTs, called Ordinals, to some degree advance the NFT field, given the higher trust level of the Bitcoin blockchain. Today, however, Bitcoin does not have smart contracts, which are essential for the gamification concepts of 741s. In addition, Ordinals do not have compatibility with the vast existing DeFi economy, which is currently built on Ethereum. Lastly, Ordinals are not cheap to mint— the price to mint an Ordinal depends on the size of the content. Unless you mint with text only, and use that text to generate images, you cannot mint at scale in a cost effective manner. To mint a billion Ordinals, even small images will incur a bill so large as to inhibit the practice. While Ordinals will solve these problems some day, it is not there yet. The solution to what I’ve been envisioning must, by definition, have three qualities to succeed that Bitcoin does not yet offer:
Full participation in the existing DeFi economy, and all associated mechanisms such as staking, derivatives, futures, and more.
Smart contracts on-chain with programmability that enables dynamic state changes and gamification of the tokens.
Ease of Use and Cost. The system must be no more difficult to use (and ideally even easier and cheaper) than today– no new wallets or new applications, exchanges, or marketplaces required.
As a result of needing to satisfy the requirements above, the solution must start on the Ethereum blockchain. In the future, the system we envision here will be ported to Bitcoin as well, offering creators an option. In addition, we’ll need time to catch up to the Ethereum DeFi world, and some time to overcome the current complexity of the Ordinal user experience. For the moment, this should begin where the starting criteria can be best met– the Ethereum-compatible ecosystem.
Fungible tokens on Ethereum have a vast, global population of creators, market marketers, exchanges, and traders. The most common of these tokens are known as ERC20, a standard that enables the creation of a fungible token within a smart contract. When you transfer ERC-20s, there is no concept of one vs. another. After a transfer, the blockchain reflects the quantity remaining and the corresponding increase in a receiving wallet. Depending on a range of factors, including popularity and sentiment, ERC20s can command significant market capitalizations, liquidity, and daily trading volumes. At the time of writing, the combined market capitalization of all ERC20 tokens is approximately US$9.41 trillion, with over 14 billion dollars in trading volume per day.
Non-fungible tokens (NFTs) are different. Unlike fungible tokens, each NFT is unique and may contain media or code. The unique nature of each token means that users tend to interact with them on an individual rather than volume basis. Generally NFTs are bought, sold and traded individually. Though an NFT can be listed on multiple markets simultaneously, managing a listing for the same asset across several platforms at once can be complex and time-consuming, as one must keep track of bids and offers and ensure information is consistent.
Defi mechanics such as staking, futures, and derivatives are largely relegated to the fungible token world. NFTs lack uniformity and are not well suited for traditional DeFi mechanisms like staking or liquidity pools, as the value and properties differ for each. The market for an ERC721 token tends to be smaller (though there are anecdotal examples otherwise) as it appeals to a niche set of buyers interested in the speculative value of a particular asset. The result is it's just plain harder to find and engage buyers of NFTs vs. fungible tokens–there are less options for liquidity. With fewer standardized financial products and mechanisms, NFT trading volumes are generally much lower.
What if you could combine the best of both worlds? What if fungible tokens could have the advantages of NFTs, and vice versa? What if there was a new token type that could act as both an ERC20 and an ERC721 at once, while maintaining full compatibility with all existing applications and use cases?
ERC741 is the world’s first non-fungible fungible token (NFFT). In quantum theory, light behaves as a wave or particle depending on whether it’s being observed. Similarly, an NFFT holds two antithetical properties at the same time, fungibility and non-fungibility. Depending on how you observe it, the token assumes one state or the other. If you act upon them in bulk as a quantity, they act as standard fungible tokens. If you observe them individually, they become unique particles, each with its own characteristics.
Each NFFT is composed of a fused ERC20 and ERC721. This is an important point– the components are not “like” ERC20s and ERC721s, they are in fact the real article. When a new token is minted, its component ERC20 and ERC721 are minted at the same time and permanently fused. Typically, the 721 portion will contain a distinct image, created by generative AI or any other automated mechanism. This allows each unit to have unique media and programmable properties at scale. If you do not individually observe your tokens as a unit, the group acts as a quantity of ERC20s. If you single one out, you will see the token’s inextricably bound ERC721.
Once minted, an NFFT’s fungible token works perfectly on any ERC20 compatible exchange, crypto wallet, blockchain-based game, or DeFi system such as staking, derivatives, or futures. In addition, the token’s NFT component works perfectly across all existing NFT exchanges, marketplaces, apps, sites, etc. The reason is that each token has two parts–an actual ERC20 without any variation from the standard, and an actual EC721 without any variation from the standard. I emphasize this point several times, because I can see the potential for a disconnect here. If this were not the case, one could start to wonder: why not do this as a bunch of NFTs, etc. As the linked NFT conforms to existing standards, it can be listed on any NFT exchange such as OpenSea, Rarible, and more. The result is a step change in the psychology of the existing crypto ecosystem-- a token that works seamlessly across all aspects of modern DeFi, yet can delight the owner with surprises within.
To illustrate how this works, imagine you wanted to create a new NFFT called “DogePunk”. First, decide on a supply of, say, 150 billion. Then decide on game mechanics– i.e. one out of every thousand DogePunks is a piñata holding additional DogePunks inside, and 1,000 DogePunks total contain tickets to a Taylor Swift concert. Next, create the AI algorithm to generate 150 billion visually different “DogePunks” and attach it to the smart contract. Lastly, mint your NFFTs in advance, or on demand (pros and cons for both), and open your project to the public. Once launched, the game mechanics of your token will drive the community to engage like never before. In this way, every aspect of what makes a token successful can be gamified and incentivized to an exponentially greater degree than previous methods.
Why not, one might ask, simply create 150 billion standard NFTs and put them on a market like Open Sea, with varying degrees of rarity, and prizes associated with a select few? The answer is simple: you can, but you would not want to because:
Liquidity: The NFT owner & community mentality is inherently about one-off value, not overall token success across marketplaces. Therefore, the liquidity of any one token will average far lower with NFTs minted at scale.
Gamification: while traditional NFTs can live alongside fungible tokens within the same branded project, it’s an awkward link for gamification. NFT holders are thinking about the value of their individual NFT, not the communal value of the overall token. In addition, the same holds true for the traditional fungible token, which can be linked to prizes in the NFT games, but the link, once removed, is tenuous and, as such, fails to drive behavior.
DeFi mechanics: If you own a large volume of NFTs, thousands or tens of thousands, it is extremely cumbersome to handle buying and selling and trading them at scale. NFTs, and NFT systems and applications, are simply not well suited for managing such transactions at scale. The DeFI economy is mostly based on fungible tokens, so NFT projects are at a significant disadvantage.
To be clear, the world of creators and inventors is vast. It’s quite possible that people will come up with equivalent or even better gamification mechanics without ERC741s. However, to date they have not, and the reasons above are partly why. This new smart contract, being proposed to the Ethereum Foundation for consideration, is a method of energizing token communities in a more effective manner.
To fully realize the advantages of an ERC741s, creators will enhance the basic concepts in many ways. For example:
SCENARIO ONE: NEWLY MINTED SERIES
A creator launches a new NFFT series, called “DogeCat”, with a fixed supply of 150 billion tokens.
A generative AI algorithm is created to create a unique picture of a DogeCat every time it is invoked. In addition, each NFT is also automatically overlaid with a unique set of symbols, further differentiating the tokens from one another.
The various characteristics of the cats, colors, and shape overlays are calculated to conform to certain rarity percentages. For instance, only 10% may have red hats, or only 1% may have Red hats and blue triangles, etc.
When each DogeCat is minted, it is minted as a fungible ERC20, along with its entangled non-fungible ERC721 containing its unique image.
Now the token is listed as ERC20s on centralized exchanges like Binance, and Coinbase, and decentralized exchanges like Uniswap, Pancake Swap, and Sushi Swap.
You, a user, buys 10,000 of the tokens for market price from Uniswap. For the sake of argument, let’s call it 10 cents and you paid $1,000.
The price goes up to 20 cents, so perhaps you decide to take some profits off the table.
However, here’s where things change–selling any portion of your DogeCat without looking at them would be madness.
Any one of your DogeCats could be worth dramatically more than the market price, so you need to find out what you have before you sell.
You decide to observe your coins, using the search engine at erc741.com:
You see that one of your cats is wearing a red hat. That sounds familiar.
You go to the community bulletin board and see that rare red hatted cats can be cashed in for a million new DogeCat tokens. You remove that one from your wallet, cash it in and suddenly your wallet fills with 1,000,000 new tokens you never had before, each one potentially with a new prize or opportunity.
You observe the rest of your cats…nothing special. What do you do? Throw them back into the pool perhaps and buy new ones, hoping to find another red hatted cat or something even more valuable?
No– in fact, you may not see distinct super-value in your trove at the moment, but the best bet is not to throw them back, but instead to:
Either wait to see what value and rewards may arise (3rd party ecosystem is constantly coming up with new games and reward systems for specific cats, so you’d never forgive yourself if you gave up the wrong one too soon).
Or “stake” them. Staking NFFTs works just like staking standard ERC20s, with a critical twist. The first is “yield”. Like typical ERC20s, staking coins generate a certain amount of additional tokens, paid over time based on how much you stake and how long you stake it. In addition, however, there is something even more interesting than yield that happens when you stake. Staked ERC741s go into a metamorphosis mode, and begin to change gradually into something entirely new. Importantly, as staked DogeCats change over time, they change color, size and utility– they gain, over time, value that dwarfs unstaked tokens. For instance:
Certain kinds of staked coins give birth every week to 10,000 new DogeCat tokens (“Super Yields”)
If you stake more than a certain amount of tokens for more than a month, they become double the size and spout new coins daily for a year. These “mature” tokens have higher rarity as they could only be made by prolonged staking, and therefore become more coveted.
Certain staked coins grow mustaches. There is an entire marketplace for mustached cats where you can exchange them for trips and cruises, etc. like a Girl Scout’s cookie catalog.
Fun idea: Some staked coins eat your other coins, so you need to feed them stable coins (like USDT) to prevent them from eating up your stake pools. These are annoying, but it’s best not to throw them away because they are also soothing to the other cats and they make them grow to maturity 2x faster. Game mechanics are whatever you make them.
SCENARIO TWO: WRAPPED SERIES FOR EXISTING SUPER COMMUNITY
For Shibu Inu community, suddenly every Shib is a game piece or Tamagotchi that can be raised to compete or play with others, etc.
For Dogecoin community, now you can “see” your Doge and train them to compete with one another in games of skill. Doge coins can continue to move in bulk, fungible form as today, but each one now holds the promise of surprise and delight.
For USDT, or other stable coins: creators can embed user attribution into the mint. Every decentralized “minter” of a stable coin can now get credit for printing that coin, receiving a portion of the value that coin brings to the community. Today, most of the value of stablecoins goes to the “decentralized” (lol) groups controlling the token, rather than the market participants. For instance, Circle has an agreement with Coinbase to share the yield of USDC. Coinbase receives a billion dollars a year from this activity. What if the yield went instead to the minters and users of the stablecoin? Problem is… how do you know who they are? Why wouldn’t we award pro-rata upside to whoever adds value in the ecosystem? The answer is, even if you wanted to be fair about this, in a fungible world where every coin looks the same once in the wild, it’s been hard to know who did what and how to automate distributions. With ERC741, you can reward– in an automated manner, on-chain– community participants for any action that helps the community.
SCENARIO THREE: REVIVING “SLEEPY” COMMUNITIES
There are many vibrant communities that aren’t living up to their amazing roots and ideas, some of which have great IP and strong communities. They just need a boost. I think Madworld is one of these. Imagine swapping $UMAD with an ERC741 equivalent, and suddenly firing up the community with renewed vigor, challenges, rewards, and calls for communal action that benefit the collective. We can see thousands of such groups with enormous dormant value that could reset, revive, and thrive.
SCENARIO FOUR: PUZZLE SERIES FORMATS
The idea of puzzle-format NFFTs is to try and find tokens that fit together to produce a completed puzzle objective. There are few coming in 2024 that you’ll see on the community’s roadmap at erc741.com. Note that erc741.com will work with multiple exchanges, as well as discord and other community apps, to enable barter and trading.
MUSICAL NOTES: every token has a unique instrument and note; the goal is to get the right instruments and notes to recreate famous songs. If you can play 5 seconds worth it spits out 10,000 tokens; 30 seconds, 100,000; 1 minute: 1,000,000; full song: 10,0000 newly minted tokens fall into your wallet. I addition you can compose new songs, using only the notes in your collection, and the top voted songs get rewards
LETTERS: recreate famous phrases, poems, books, etc. and get rewards for different works of art; etc. Some letters have extreme rarity, and some are capitals, bolds or italics. Etc. Successfully completing sentences, passages, or complete works unlock prizes of increasing value against the difficulty of the achievements.
STARS: Each star corresponds to an actual star in the sky. If you map them against real stars, you can form patterns. The most valuable are the Zodiac signs, which produce massive bounties if you complete a set, and new drops per month for years if you stake them over time, i.e. if you stake a group of tokens with a complete zodiac within, the results are 100x. The patterns people trade and seek out most will be Aries, Taurus, Gemini, Cancer, Leo, Virgo, Libra, Scorpius, Ophiuchus, Sagittarius, Capricornus, Aquarius, and Pisces.
MOVIE FRAMES: Each token contains one frame from the movie “Citizen Kane”, or one 5 second audio clip. If you create a 5 second movie clip, including its audio, that matches the real movie, it produces 100,000,000 bonus tokens into your wallet. This is done with generative AI that slices and dices the movie into frames and snippets, and mints them into the hybrid tokens. This was not possible only months ago, but the exponential rise in AI capabilities, coupled with the exponential drop in costs of compute and storage are coming together to enable opportunities never before imaginable.
COUNTRIES: Random coins have flags of the 195 recognized countries around the world. If you collect all 195 countries, you can combine them and trigger bounties of new tokens; the flags are regularly burned making it harder to collect. Collecting smaller sets also result in smaller prizes, but combining the flags in historically interesting ways triggers surprising results. Rumors, hints, and clues about what flags go together will delight players as they seek to become the first to set of players to solve the puzzles, unlocking the most value as the rise on the leaderboards.
In many of these scenarios, rather than pre-mint, the creation of the token is done at the moment of purchase from the initial treasury. There are two reasons for this, one: to defray costs of compute and storage by having the user defray cost for each mint; and secondly, to enable personalization of the token to the original minter. For instance, when a player comes to buy, they might be asked to input something personal– such as a selfie, or even just their name– anything that creates a personal bond with that token. That “input” from the player goes into the AI algorithm and is used to generate the image, as well as metadata in the token. The token’s “birth” is now forever associated with the particular wallet that it is born into. The result: as the token goes out into the world and “does well'', all revenue it generates will result in a commission back to its birth wallet in perpetuity.
For example if one of my tokens ends up being staked in the future and generating yield, I may get 10% of that forever. If that token ends up accomplishing one of the challenges in the particular series– such as winning a battle against other tokens, or traveling to 100 wallets and generating a massive bonus – whatever it is, the birth wallet gets a cut forever. In the case of a stable coin, this completely changes the game– rewarding the participants, not just the centralized entities involved.
SCENARIO SIX: “Sweepstakes”
Sweepstakes rules vary across geographies, but have been tried and tested in the U.S. and entire industries have grown around them. McDonald’s, Pepsi, P&G, the list goes on– the use of sweepstakes to drive consumer behavior is ubiquitous in the United States and around the world. For instance, with McDonald’s Monopoly Game.
With ERC741s, rather than simply get a game piece and wait to see if it wins or not, issuers can provide a wide set of game mechanics that take full advantage of the DeFi economy:
Sweepstakes offer is made: “Free Sweepstakes Tickets with any purchase of a six pack of Coke.”
Consumers buy Coke, get 1,000 SweepCoins (numerous proof-of-purchase mechanisms including integration with POS).
Consumer looks at coins, and sees 3 are winners (claiming causes coupons to drop into wallet)
Consumers stake the rest, and they start generating new ones and changing into “better ones” with higher chances to win.
Consumers can always get more free by: buying more six packs, or sending in a self-addressed stamped envelope and we’ll drop one to you.
Or – Consumers can buy more directly from DeFi Swaps or Exchanges.
Every Six months the Jackpot Winner is announced and the holder of that token gets 1 million dollars.
Result: mass increase in product sales, mass audience participation, mass increase in token price (chances to win goods, merchandise and 1 million dollars drives token price from 1 penny to 10 dollars or more)...
Why ERC20
It’s important to remember that the concept of ERC741 is not focused on increasing speculative prices of NFTs. In fact, it’s the opposite. ERC741’s leverage the engagement potential of NFTs to make for more vibrant communities and therefore more successful social, fungible tokens that power the communities. In other words, the goal is to maximize the success of the community and their economy in a sustainable fashion. For this reason, it’s the ERC20s as a group— not the NFTs— that we must measure as the arbiter of success.
The current ERC20 token standard offers several advantages that have made it a popular choice for new token creation within the Ethereum ecosystem, as well as a foundational element in the burgeoning DeFi (Decentralized Finance) space. Here are some of the key advantages and their relation to DeFi:
Interoperability
Standardization: ERC20 provides a standardized set of rules that all tokens must follow, which means that any token that adheres to the ERC20 standard can interact with other ERC20 tokens, smart contracts, and decentralized applications (DApps) on the Ethereum blockchain. This interoperability facilitates seamless exchange and transactions between different tokens within the Ethereum ecosystem, a core requirement for the fluidity and composability in DeFi.
Wide Adoption and Support
Ecosystem Support: Due to its early introduction and standardization, ERC20 tokens are widely supported by wallets, exchanges, and other infrastructure providers. This widespread support makes ERC20 tokens easily accessible to users and readily integrable into various platforms, including DeFi protocols, without the need for specialized software or changes to existing systems.
Ease of Creation and Deployment
Simplified Development: Creating an ERC20 token is relatively straightforward, with many available resources, tools, and frameworks designed to simplify the development and deployment process. This ease of creation has led to a proliferation of tokens and projects, including numerous DeFi applications that leverage ERC20 tokens for functions such as lending, borrowing, yield farming, and liquidity provision.
Liquidity and Exchangeability
DeFi Integration: ERC20 tokens are integral to the DeFi ecosystem, serving as the primary format for assets used in DeFi protocols. They facilitate a variety of financial services on the blockchain, such as decentralized exchanges (DEXs), automated market makers (AMMs), and lending platforms, by providing a common, exchangeable asset type that can be easily traded, staked, or used as collateral.
Programmability
Smart Contracts and Financial Innovation: The ERC20 standard's compatibility with Ethereum smart contracts enables developers to embed complex logic and create decentralized financial instruments. This programmability allows for the creation of innovative DeFi products and services, such as synthetic assets, stablecoins, and automated investment strategies, further expanding the scope and capabilities of the DeFi ecosystem.
Relation to DeFi
ERC20 tokens are foundational to the DeFi ecosystem, enabling the creation of a decentralized financial system where users can lend, borrow, trade, and invest without the need for traditional financial intermediaries. The standard's emphasis on interoperability, liquidity, and programmability has allowed for the rapid growth of DeFi, offering financial services that are more open, accessible, and versatile. Through ERC20 tokens, DeFi protocols can create complex financial mechanisms that operate transparently on the blockchain, offering users unprecedented control over their financial assets.
Applicability of the Vatom Smart NFT:
ERC741 is meant to be an open standard, meaning– like ERC20 or ERC721–anyone can adopt it or modify it as they see fit. For that reason, I do not recommend any specific company or technology to implement ideas. ERC741 is meant to be an open source smart contract, distributed freely, and anyone can use anything to bring an ERC741 project to life.
That said, the original “Smart NFT” is the Vatom, which pioneered the concept of using NFTs as instruments of engagement vs. speculation since 2015. In 2017, we licensed code to start an ecosystem of companies leveraging the concepts and technology, and this journey continues today. Vatom has a proven, easy to use platform that can be applied to building ERC741 projects.
For instance:
No-code, drag-n Drop Studio with SmartNFT game templates such as Scratch-to-Win, Crate & Key, Polls and Quizzes for Rewards, Watch to Earn, AR Treasure hunts, and more.
Automatic manifestation of SmartNFTs in AR, across HTML-based, IOS and Android apps.
Seamless use of the SmartNFTs in Virtual Spaces, i.e. branded web-based metaverses, where the objects can become token-gates to fabulous experiences.
Easy to use Universal Wallet, across HTML, IOS and Android, to allow consumer-level access to your communities.
Integration with POS systems and other redemption mechanisms for full round-trip rewards of SmartNFTs in retail environments.
In the future, I anticipate that Vatom will become useful to the ERC741 ecosystem as it grows (as it has for the NFT world), but it is not a requirement.
Legal Considerations
ERC741 is not a commercial venture, and the smart contract will be available as open source under the MIT License. Projects using the smart contract must each ensure they are compliant with all local rules and regulations where they operate. In addition, there are certain enabling technologies that will be announced soon.
ERC741 community leaders engaging in building the standard, or running the ERC741.com community website, make no representations as to the potential value of any ERC741 token, any initiative related, or any using its ideas, publications or technology.
Conclusion
ERC741 is a proposal for the first non-fungible fungible token (NFFT). This new hybrid token pairs the powerful engagement potential of NFTs with the market dynamics and liquidity of DeFi, energizing token communities at scale like never before.