Adding Value to NFTs on Stellar

It was January 2020 when I first heard that NFTs might soon become possible on the Stellar network.

Most people understood that NFTs, or non-fungible tokens, were going to be important for personal identification, medical records, and ownership of real-world items. Personally, I had hoped to issue Kindle-like digital books as NFTs and found Ethereum’s ERC-1155 and ERC-721 standards both confusing and expensive. Stellar was my network of choice, so to say that I was excited about NFTs on Stellar would have been an understatement.

What we got for NFTs was a sort of workaround. Single stroop, non-fractionable units of an asset with the IPFS hash for its metadata stored as a Data Entry on the issuing account. Where a “stroop” is the smallest unit of a token possible on Stellar, representing one ten-millionth, or 0.0000001, of a full token.

While everyone else got excited about uploading and selling jpg’s, I completely lost interest.

First of all, I couldn’t figure out the value proposition. Sure, you had a token nobody else could own, but a token of what? A bookmark to an IPFS hash or CID? You wouldn’t own the data on IPFS. Anyone could easily find and copy the original file. Anyone could add that exact same IPFS hash to another token. And if someone issued multiple copies of an NFT, that meant that it was a token with a supply, no matter how limited, and therefore was “fungible.”

What were you really buying?

I stayed away from NFTs on Stellar because I didn’t understand how a single stroop token that bookmarked free content added any value to the network.

And then Automated Market Maker functionality was added to Stellar via Protocol 18.

An NFT as a single stroop, non-fractionable unit of an asset that bookmarked free content still held limited* value in my mind, but a single unit made up of 10 million stroops could function in an AMM ecosystem in a way that added significant value.

Art should be fungible.

But more than that, AMM functionality allowed anyone to create a perpetual market for their art by creating a simple, constant product liquidity pool. One that could not be duplicated, one that could remain active for as long as the Stellar network existed.

To me, that was a value proposition.

If the total supply of an NFT** is placed in a liquidity pool against XLM, and the wallet that holds those pool shares is then locked, no human could ever remove that liquidity. The initial liquidity that the NFT total supply is paired against provides a baseline value equal to the liquidity divided by the total supply.

Anyone could buy some of the NFT by adding XLM, and anyone could remove XLM if they sold some of the NFT.

But why would anyone permanently lock liquidity on Stellar?

There are two possible benefits to an NFT with a permanently locked liquidity pool.

First, there is no way for outside actors, even the NFT artist, to push the price to zero.

That may sound like an outlandish claim, so it would be a good time to remind you that this is in no way financial advice and should not be construed as such. Constant product liquidity pools balance the supply by multiplying one asset against another to maintain a constant product. Anything multiplied by zero is zero, therefore, once properly set up, an NFT market with a permanently locked liquidity pool cannot go to zero.

The worst-case scenario is that the NFT creator withheld a portion of the NFT supply prior to locking the liquidity pool or kept the issuing account unlocked, both of which would be obvious in the NFT issuing history. Done properly, they themselves would have to purchase their own token if they wanted to hold any of the supply.

Second, that liquidity would remain functional for as long as the Stellar network existed, without having to trust the artist or future collectors to create demand. It becomes a utility NFT that would repurchase itself, potentially making NFT flipping and long-term holding much less risky.

It becomes a Buyer of Last Resort.

But then again, NFT would be the wrong acronym. Art should be fungible, especially if it adds value.

In the pursuit of adding value to XH5, I will be building and testing several of these permanently locked liquidity tokens or utility NFTs. Each one will be backed by XH5, permanently locking a portion of the total supply in liquidity vaults where it should ensure liquidity for as long as the Stellar network exists.

Art should not only be fungible, it should be able to withstand the test of time.

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*Other than as a key or identification
**Not a single stroop, but a single unit of ten million stroops