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Ethereum, NFTs, and the Tokenized Society

With all assets represented on the blockchain, as NFTs, the entire economy will run on a blockchain. Vitalik Buterin proposes migrating NFT to second Ethereum layers.

The Tokenized Society
The Tokenized Society (Photo by Eric Prouzet, @eprouzet on Unsplash)

In Short

  • The current demand for NFT is one of the leading causes of high fees in Ethereum.

  • The proposal seeks to migrate tokens but make them 100% dependent on the main chain.

  • Ethereum rollups allow transactions at much cheaper rates.

NFTs and the tokenized society

The importance of Non-Fungible Tokens (NFTs) is related to the birth of the tokenized society.

"NFTs are the basis of a world where instead of having paper records that say you own an apartment, car, or TV, people will tokenize everything. That has great advantages. For example, I can pawn it and get a credit that I put as collateral for something else if I have my TV. Or everything that has to do with insurance or property," Jordi Baylina.

Jordi Baylina, a telecommunications engineer and Ethereum software developer, says it is not easy to explain what is going on. He says he has told his father about it several times, but he never quite understands it. All in their twenties, his children's friends have asked him to call a meetup because they don't understand it either.

On the phenomenon of NFTs, its secret does not lie in whether or not an NFT has value. "It resides in the social contract. If a group of people believes it is money, then that token already has value. Dollars or euros have value because I can buy anything with them, and I can do that because everyone believes they have value. The same thing happens with NFTs. When people believe that whoever owns an NFT of an apartment is the owner of the property, they will start to work in the real estate sector".

He indicates that the revolution has not yet started because people have to realize what is happening.

"In Paris, Vitalik recalled the domain names on the Internet, which are NFTs. Whoever owns the NFT owns the domain. NFTs are good for any physical or virtual good. Being able to do all these things from your home, with transparent rules and leveraging all the ideas behind decentralized finance is awesome. Leveraging Decentralized Finance (DeFi) for real cases like the ones I'm citing means that DeFi is one more piece of the whole gear needed to value things. At that point, DeFi will stop being a casino and become the financial system that accelerates the economy."

Everything is susceptible to becoming NFT

Everything can be susceptible to becoming an NFT. From consulting hours to potatoes grown by a farmer. This democratization of markets and finance, with transparent rules for everyone, is the dream of many people. Smart Contracts eliminate intermediaries from the markets and make a much fairer society possible, he says.

Regarding the interoperability of blockchains, Baylina points out that this is a complicated debate and that it is not yet clear if there will be one blockchain or many. "The implementation of this technology is not linear. Also, when the Internet emerged, there were different ways to make a search engine. Google proved to be the good one. If not, there would have been more search engines. We are at the stage where we don't know. There must be many projects and a lot of gray matter".

Buterin proposes migrating NFT to second Ethereum layers

Vitalik Buterin recently published the proposal within the Ethereum Research Forum, dedicated to researching improvements in this general-purpose blockchain. The Russian-Canadian developer suggests the creation of "rolled-up NFTs" or wrapped-NFTs. These could be mobilized and traded between the different Ethereum rollups.

Based on the above, the main point of Buterin's proposal settles in the non-reliance on a single rollup. While these offer to reduce commissions, using one can be counterproductive since, in the event of a failure, NFTs would get trapped.

Using multiple rollups avoids this dependency model. In case of failure, the trapped NFTs can migrate to another rollup or the mainnet through the proposed system.

Exchanging "rolled-up" NFTs

As mentioned, the Ethereum creator's proposal rests on the creation of wrapped-NFTs (WNFTs). These, in a practical sense, would be tokens that represent other tokens within the rollup. The original WNFT would be stored directly on the Ethereum blockchain via a Smart Contract that would serve as a security vault.

What's interesting about this concept is the mobility of WNFTs when users begin transferring them. For example, Adam "rolls up" a WNFT and sends it to the Arbitrum rollup. In this, Bea decides to buy it. Bea would be purchasing the WNFT and not the original NFT. However, according to Vitalik's proposal, an exchange voucher would be generated since there is a transfer.

When Bea wants to claim it within the main chain, he would only have to present the voucher so that the vault can change the address holding this WNFT from Adam to Bea.

exchange of an NFT between 3 different rollups
Schematic of how the exchange of an NFT between 3 different rollups would work. Source: Ethereum Research.

If a chain of exchanges happens within a rollup, the last WNFT holder who decides to claim it will possess this chain of exchanged tokens, which will validate the holding on the claimed NFT. The mechanism also applies to NFTs transferred between rollups, which would also generate vouchers.

Vitalik Buterin's proposal presents challenges to implement it.

One of the main challenges within this model put forward by Vitalik Buterin is that it will not use all rollups currently operating on the Ethereum network. The rollup must make use of Ethereum's EVM or virtual machine, which is the one that allows the execution of Smart Contracts.

Rollups such as Arbitrum and Optimism allow the full use of EVM. On the other hand, zkSync 1.0 does not allow complete execution, limiting the Smart Contracts deployed in them. Another obstacle lies in the adoption and implementation of this model across all NFT platforms. For now, NFT platforms settle on the Ethereum mainnet. Using rollups can mean an operational cost for the adoption and migration of their NFTs. Platforms may not be willing to bear that cost.

Zk-rollups for scaling Smart Contracts

Zk-rollups technology uses zero-knowledge proof-of-stake technology to verify the correctness of large numbers of transactions. Rollups are already operational, and it is only a matter of time before exchanges integrate them.

There are currently three companies working hard on scaling Smart Contracts with Zk-rollups technology. One of them is Hermez. According to them, "We just presented our plan in Paris, and people have been very excited about the expectations generated. We have brought a very different vision to how others do it. The important thing is that we are at a stage where we understand the problem much better and can accelerate. We are happy because, in one month, we have seen things possible on issues that seemed impossible before. Now a lot is evolving, and we can talk about scalability and consolidation. However, we still have to wait".

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