2. Getting Introduced and Prepared

Building context, getting prepared and ideating prior to the design session.

Introduction

Semi Fungible Tokens is a solution to connect sets of custodial assets to decentralised fungible tokens. The price of the fungible token is primarily set by the custodian's ability to arbitrage onchain and off chain simultaneously.

The assets themselves can be arbitrarily non-fungible but need to have some property that is fungible between them. It could be anything from weight, pure chemical/elemental content, revenue, etc. but there must be ONE common measure. This common measurement is used to mint ERC20 fungible tokens in the same transaction as the NFT in the same ERC1155 amount of the NFT.

Importantly the fungible property must have a liquid off chain market. Precious metals are a great example. They can already be valued, bought and sold by their pure weight in established and deep global markets. Numismatic coins on the other hand may have a pure gold/silver weight equivalent price but typically their offchain market price is determined by their collectible value, and a specific coin is not readily bought/sold for a clear spot price.

These requirements exist because the price of the fungible token is primarily set by the custodian's ability to arbitrage onchain and off chain simultaneously. If the offchain assets cannot be readily bought/sold for a clear price that is measured in the same way as the fungible tokens minted by the custodians, then there is no way for the onchain tokens to maintain price stability against the offchain assets. This model does NOT imply or require that end-user token holders have any rights or claim over the underlying assets, or physical delivery, etc. That "direct ownership" model would require users to be doing onchain/offchain arbitrage themselves, which presents logistical, regulatory, and liquidity problems that the custodian can avoid or manage themselves.

There IS a form of physical allocation in that the NFT audits force the custodian to have any/all physical assets they mint fungible tokens against, but the allocation by the custodian doesn't imply ownership for the end-user.

The vault can't complete an audit without either all the gold bars the NFTs they hold say they should have in their vault and they can't burn NFTs without the FTs they minted. Nobody seems to own the gold in that scenario. the game/incentives seem to line up, the vault wants to pass audit or their fees will be accruing in a worthless ERC20. but i don't know if holding the FT constitutes "ownership" or just an implied threat of failed audit if something goes missing decentralised audit accountability, or something…

Within the ecosystem there are issuers, auditors, end-users

• Issuers have the right to mint/burn NFTs that represent something physical
• Auditors have the right to approve the NFTs to extend the system freeze (kind of like the difficulty bomb in Ethereum itself)
• End users are the ppl who have the 20 and are the one's that get frozen if no auditor extends the time
• A DAO might be able to add/remove issuers and auditors over time, for example

Example, Audit failure

So say one issuer couldn't pass audit and there was 1 bar missing, another issuer could buy enough 20 on the open market to buy them out and burn the bad NFT and the issuers would have to work as a team. Even if the system was frozen for end users the issuers themselves could trade against an AMM, but ideally they'd resolve issues before the freeze actually kicks in, if the freeze kicks in and there's no liquidity for issuers to access, they're kinda fucked if they can't convince an auditor to extend… but that's the teeth in the system that lets end users trust it.

Preparation

Read system design

Read user cases

Ideation

• Before the design meeting
• Describe your product or service
• Identify the value of creating a digital currency
• Identify what you think a common property across your assets might be
• Identify how an audit might look - who, how, when, where, what
• Identify the unique assets you want to tokenise

Description Asset Class ERC1155

• ERC1155 generated for each asset class (agri, hotel, residential, commercial)
• ERC1155 can be added for individual assets if required
• 1155 can't hold any info onchain, it passes info through to the subgraph to point to this info on IPFS, essentially 1155 is used to track audits
• 1155 natively supports an amount (721 every NFT is itself); 1155 is a hybrid - ID and amount every 1155 has its own balance
• The 1155 amount minted/burned matches 20 mints/burns (see next page for table).

Description Asset Class ERC20

• ERC20 generated for each $1 income generated by the NFT collection in its entirety
• ERC20 represents fixed income, the ERC20 should have a fairly stable value - whatever people believe; Potentially valued something like bonds but not exactly because they aren't debt interest or time bound, rather they are backed by existing revenue producing assets. (See below).

There are different ways the value of the ERC20 can be expressed. For example these are options put to Sark.

Ideation Option 1 - Fixed income

• Rather than maintaining a price peg on the mint/burn, we impose a legal restriction that the asset cannot be sold as long as tokens are outstanding (simplification), and then somehow the % APY for each asset becomes what makes the tokens fungible.
  • Product: Fixed income product, legally guarantee people get a certain amount with a buffer.
• Innovation: APY becomes a fungible asset, this gets around the issue with property where assets are not fungible on asset price.
• Issuer: So rather than issuing $100M worth of tokens, say the asset will bring in $10M a year of profit, so let’s issue 10M tokens- Purchase price & payback: Like any fixed income product, $1 purchase would generate $0.10 a year (issue ERC20 tokens at 10x value), payback over 10 year period.
• Value: Basically like a bond - value of the bond, tracking how much people value fixed income, bearish product; Track inversely to stock market.
• Asset owner: Asset owner generates addition returns above the fixed income which are its profits, plus it needs funds to maintain fixed income payment in case of asset or income issues.

Option 1A - Fixed income + Collateralisation

Given the fixed income product is government backed and fully insured.

We can partner with onchain collateralisation provider and support users to collateralise this fixed income product.

Assets back the collateralisation given they are providing this revenue.

Option 1B - Fixed income + Borrow & Buy Back

• Participants in the fixed income product can also borrow against the product and have it automatically paid back
• Buy 100K of the ERC20
• Borrow 20% on the ERC20
• Pay off the debt automatically
  • Participants in the fixed income product can also borrow against the product and have it automatically paid back
• Buy 100K of the ERC20
  • Borrow 20% on the ERC20
  • Pay off the debt automatically

Option 1C - Fixed token buyback

• Same issuance structure, but the audited income is used to buy back tokens rather than distribute income
• Buybacks have two issues:

1. They change the price of the thing being bought in an unpredictable way, so how to audit that?
2. They assume liquidity, which assumes fungibility and available pairs

• The challenge with a buyback is it turns the ecosystem into speculation, rather the supporting the regeneration of the assets

Option 1D - Indefinite buybacks and resale algorithmically

• We wouldn't even try to setup LP pairs we would just dump rent into the vending machine
• Basically ppl would expect when they buy a minted token to be able to sell it back for a higher price later as rent comes in
• You sell 1000 tokens for $1000 each and raise a mill
• dump whatever revenue you are getting in the vending machine at $1100 per token
• have the vending machine impose a cap so that it never takes in more $ than tokens are outstanding
• it's still a "fixed ROI" product
• concerned that infrastructure projects turn into ghost towns full of half finished concrete shells if their funding dumps too hard
• this model is better for buying and flipping as a one time thing

Question, how do I make money?

Once the requirements are met for an asset, the custodian can profit simply by arbitraging price divergences. There is no need for additional fees from the custodian to the end user to cover costs. For example, if the price of the offchain asset is higher than the onchain token, the custodian has sole right (enforced by the contract) to buy back the token and burn it, then sell the assets in custody for profit. The reverse is also true. If the off chain price is cheaper than the onchain token, the custodian can purchase additional stock and sell newly minted tokens for a profit until the price normalises.