Verse: The Hyperexchange Protocol
0xe5E4
March 30th, 2022

TLDR; The ability for digital objects to be their own medium of exchange enables a paradigm shift for media, culture, infrastructure, and identity on the internet.

Over the past few months I’ve been obsessed with the concept of NFTs as digital objects, and how this framework necessitates a whole new paradigm for how internet-native objects are exchanged.

Let’s first consider the impossible scope of physical objects. You can argue that literally anything made of atoms is an “object”, and trying to pin down a concrete definition here is unhelpful. But we can focus on one important characteristic of IRL objects that’ll help us understand the true potential of a “digital object”: ownership.

The core innovation of blockchains as public ledgers delineates the notion of digital ownership from physical ownership, which lacks any mechanism of decentralized consensus. However, although we’ve created this powerful infrastructure to redefine the nature of ownership for digital objects, we still rely on skeuomorphic systems of exchange built for physical objects.

In the physical world, any form of object exchange requires a marketplace within which the object transiently lives between the purview of its owner. As we know, traditional marketplaces require both supply and demand-side liquidity in order to succeed. For Uber, the “liquidity providers” are riders and drivers. For Airbnb, you have guests and hosts. For StockX, you have sneaker buyers and resellers. With any of these marketplaces, if volume on one side dries up, the other soon follows until the whole thing collapses.

Over the past year, we’ve seen a market explosion for the first truly ownable digital objects: NFTs. NFTs have taken on a multitude of form factors that stretch the imagination to the long-tail of capabilities digital objects confer: membership passes, access tokens, interactive games, status symbols, artworks, certificates, and much more.

Coinciding with the meteoric growth of NFTs has been the predictable rise of NFT marketplaces - albeit all structured very similarly to marketplaces for physical goods and services.

For example, on Opensea, the structure and design of the marketplace is what you’d expect from a classic physical-good monolith like eBay. This type of traditional marketplace structure produces a winner-take-all environment where success is binary: if you have the most buy and sell-side liquidity, you’ll likely win. If not, you’ll probably suffer a painful death. It’s not surprising that OpenSea and Magic Eden both consistently enjoy a >90% market share of NFT trading volume despite having higher fees and more downtime than a bevy of competitors. Of course, there’s much more to be said about aggregation theory and it’s nuances with respect to crypto, but I’ll let this post handle that.

It’s easy to imagine a progression in the NFT marketplace ecosystem by which today’s big aggregators are unbundled over time. We’re already seeing the proliferation of niche marketplaces like Catalog Works specifically designed to trade narrow categories of NFTs. And there’s no doubt that specialized marketplaces will serve as useful destinations for certain types of unique collectibles.

In all cases, though, nearly all NFTs are exchanged using some form of an auction model and are economically tethered to third-party marketplaces. Whether the marketplace is big or small, I still have to go there. I still have to price-hunt. The economic outcome is still a race for liquidity lock-in. Ultimately, although we have these new, internet-native digital objects, we’re still exchanging them as if they’re physical objects and subjecting them to the same restrictions of centralization, dependence, liquidity, and inefficient pricing.

But what if there was another way to exchange digital objects - one that enabled the objects to be truly autonomous and decentralized? What if the object didn’t need a marketplace to be exchanged? What if the object was the exchange?

Introducing Verse, the hyperexchange protocol.

The Verse protocol enables every digital object to have an embedded, autonomous exchange. Structurally, this means that every ERC-721 NFT created through Verse is natively backed by an underlying ERC-20 market. Let’s break down how it works.

Through the protocol, a creator deploys a contract Pair consisting of an ERC-20 Exchange contract and an ERC-721 Hyperobject contract. The dynamic price and supply of the ERC-20 token is managed by a bonding curve acting as an AMM. Simply, this means that anyone can buy and sell the token at any time with instant liquidity, and the contract will programmatically adjust the price based on the circulating supply. Holders of at least 1 atomic unit of the ERC-20 token can then redeem their token. Redeeming a token transfers the holder’s ERC-20 to the paired Hyperobject contract, which mints a new NFT and transfers it to the redeemer in exchange.

Verse Protocol Mechanism
Verse Protocol Mechanism

For example, let’s say I’m a creator and I create an NFT through Verse of a digital basketball court called “Swish Court”. On Verse, I deploy a contract Pair with an ERC-20 $SWISH contract and an ERC-721 Swish Court NFT contract. Anyone can then instantly buy and sell $SWISH tokens. Holders of at least 1 $SWISH can redeem their token, burning 1 $SWISH and receiving a Swish Court NFT in return.

Thus, the digital object acts as its own medium of exchange and has an autonomous market. Since the object essentially supplies its own liquidity, it can be exchanged without living under the jurisdiction of a middleman.

This new exchange structure produces numerous benefits for both creators and consumers.

Consumers now have instant liquidity to buy and sell continuous quantities of the NFT. Those individuals who may have been priced out of participating in a fixed-price NFT can now buy fractions of the underlying ERC-20, while whales can still scoop up larger quantities. Thus, the mechanism enables exchanging all along the price curve and maximizes efficiency in the market.

Additionally, creators have complete control in determining how their NFT is priced throughout its lifecycle. The creator can specify the underlying reserve ratio and initial slope of the ERC-20 price curve, fine-tuning how they want their object to be priced as demand rises and falls. In this way, creators can set a practical limit on the NFT’s supply and enforce a level of scarcity.

Perhaps most importantly, Verse enables digital objects to live autonomously, anywhere on the internet, without ever needing to link out to a marketplace. Imagine scrolling on a website, seeing a Verse-created NFT, and being able to exchange it right then and there. It’s like if you were walking down the street, saw a pair of Nike Dunks, and could snap your fingers to put a pair on your feet - rather than having to track down the lowest price, go to the store, and then buy them. Thus, the protocol catalyzes new forms of discovery with the ability for objects to be exchanged where they are consumed.

I’m most excited for the new capabilities that are created when you can combine ERC-20 mechanics with NFTs. There are three core characteristics of digital objects that open up a world of possibilities compared to their physical counterparts. Digital objects are stateful, programmable, and networked. Digital objects can represent, well, anything you can code, and having an exchange built into an object doesn’t just facilitate a better form of trading.

For example, consider a Web3 media network like Mad Realities. It’s fun to imagine a future where there’s a Verse-created Mad Realities “Episode Idea NFT”, where owners of the NFT can set the tokenURI to be their pitch for a new episode idea. Then, all the owners of the underlying ERC-20 could stake their tokens to the different NFTs, effectively curating their favorite ideas and choosing which ones make it onto the show. As the show becomes more popular, more people mint the underlying NFT to pitch their idea, the token price rises, and stakers are rewarded for their work in curating.

Or consider a digital Kith hoodie, which exists at mint as a blank NFT. Instead of minting a random pattern (akin to the MO of traditional 10k PFP projects), you could custom construct your digital hoodie’s pattern based on a limited selection of attributes available in the contract, and “build-your-own-NFT”. Then, let’s say each owners’ designs were available in a virtual marketplace, and you could purchase other creators’ patterns to display on your hoodie using the underlying ERC-20 as an NFT-specific currency. Such a system would incentivize building an economy around the NFT and enable value creation for token-holders without the need to part ways with the asset.

All of a sudden, you have an object, marketplace, and social graph all wrapped into one. Each object becomes its own microeconomy with native incentives for invested builders to develop spaces and systems for the object to live in. With recent projects like OKPC, we’re already seeing innovative experimentation treating NFTs as objects with their own state and operating system. Verse is designed to supercharge these concepts at a protocol-level.

It’s important to note that Verse is most well-suited to objects which are, by nature, not necessarily unique - or don’t have varying degrees of “rarity”. Long-term, I think the protocol will incentivize the creation of NFTs that feel more like usable objects rather than collectibles. As cliché as it is to say “we’re still early”, I do believe we haven’t scratched the surface of what digital objects can truly enable. By introducing a better way to exchange digital objects, I firmly believe Verse will catalyze the development and proliferation of previously untenable and underexplored NFT use cases.

Today, I’m excited to open up the Verse beta and start working with NFT creators and builders to explore the best projects that Verse can help enable. If you’re a creator interested in building a new paradigm for NFTs, let’s talk. And if you’re an elite fullstack engineer, solidity dev, or community lead, DM me. ;)

The scope of digital objects is impossible to comprehend, but one thing is certain. They will fundamentally transform the construction of the internet, affecting our relationships with media, culture, digital infrastructure, identity, and more. Verse is a hyperexchange: a hyperstructure enabling the autonomous exchange of digital objects and creating a composable, infinite internet.

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