NFT topics

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Coinmonks

9 min readFeb 22, 2022

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Author: support@lunaray.co security team

0x01 Comparison of PoW, PoS, DPoS consensus algorithms

The data packaged into the block confirmed on the blockchain cannot be tampered with and will be permanently stored on the chain. After the data information of NFT is confirmed on the chain, it can no longer be modified. When miners or super nodes use consensus algorithm to complete block generation, they will broadcast to the whole network through P2P protocol (P2P protocol is a distributed network protocol, which appeared earlier than blockchain technology). After each node receives the confirmation of broadcast information , will update the information,This mechanism realizes a decentralized distributed record, and the consensus algorithm ensures that malicious nodes cannot
falsified information.
Consensus algorithm is the basis for blockchain to establish decentralized trust. The blockchain can be divided into three types of chains from the degree of decentralization, namely public chain, consortium chain and private chain, Bitcoin, Ethereum, Wax, Flow, etc. All are public chains, and nodes are completely free to participate without certification, while consortium chains are mainly used in groups between organizations, only certified nodes can participate, some nodes have the right to produce blocks, and the degree of decentralization is reduced. Private chains are generally built within the company, and there are few application scenarios. From the perspective of block production efficiency, the public chain is the lowest, and the consortium chain is relatively High, the private chain is logically the highest. The NFT we discuss mainly refers to the storage in the public chain and the digital asset certificate on the consortium chain.
The current mainstream public chain consensus algorithms are divided into three categories, namely PoW, PoS, and DPoS.
1) PoW algorithm: Bitcoin and Ethereum 1.0 adopt the PoW algorithm. Taking Bitcoin as an example, the SHA256 calculation is continuously performed, and finally a solution that satisfies the given value is found.
A node with a hash value with a leading 0 has the right to produce a block;
2) PoS algorithm: Ethereum 2.0 adopts this algorithm, Proof Of Stake, Proof of Stake, and introduces the concept of coin age. The more coins you hold, the higher the probability of getting a block. This algorithm reduces the amount of calculation and improves the TPS (per second (per second). Concurrent transaction volume), sacrificing a certain degree of decentralization;
3) DPoS algorithm: Delegated Proof of Stake, each node will stake the tokens in its hands to vote blocks for the most capable and reputable nodes. Taking the EOS blockchain as an example, the entire network voted to select super nodes take turns to produce blocks, this algorithm can greatly improve TPS,but the degree of decentralization is further reduced.
The core of the PoW consensus algorithm to ensure that data cannot be tampered with is that it is difficult for someone to control more than 51% of the computing power of the entire network to do immoral. If they have this ability, mining Bitcoin for incentives is a better choice. PoS Algorithm The core of the DPoS consensus algorithm is that nodes with a large number of coins are not inclined to do immoral, but are more willing to maintain the environment to gain benefits.
NFTs are deployed on the blockchain through standard contracts such as smart contracts ERC-721 and ERC-1155.A smart contract is a piece of executable code deployed on the blockchain. ERC-1155 is more used in games to identify a type of props. Automatic execution is triggered by a specific mechanism, and once uploaded, it cannot be modified. It can be simply understood as the mobile terminal.The phone bill is set to be automatically paid, and its trigger mechanism is that the mobile phone will stop due to arrears. Once this status is confirmed, the recharge operation will be automatically triggered. However, unlike the blockchain smart contract, the mobile phone recharge is completely centralized, and the rules are determined by the operator. and smart contracts are deployed on the decentralized blockchain, Once on the chain, no one can tamper with it.

0x02 ERC20, ERC721, ERC1155 smart contract standards

Smart contract transaction triggering and execution mechanism: The transaction is a bridge connecting the external world and the internal state of Ethereum, so Ethereum is also a state machine for transactions. After the deployment of the smart contract of NFT is completed, the RPC interface is called externally to access the Ethereum main network, miners Package the transaction, EVM (Ethereum Virtual Machine) finds the corresponding smart contract and executes the corresponding contract function according to the external parameters.After completion, the status will be updated on the chain.
Example: The Boring Ape NFT developer deploys the smart contract code to Ethereum, the NFT trading platform OpenSea included and displayed, when one of the users initiates the purchase of this boring ape NFT operation on the OpenSea platform, OpenSea execute the RPC interface to access the Ethereum main network to send a transaction request, and the miner packaged transaction finds the smart contract to execute, and updates the status on the chain to complete the transaction.

0x03 Function realization of NFT

It can be summarized as: realize the decentralized authentication and transaction of assets. Traditional centralized institutions can already achieve authentication and transactions, such as banks, auction houses, exchanges and other institutions. Why do you still need NFT technology for authentication and transactions?
1) From the perspective of authentication: the core reason is that the authentication is non-tamperable and permanent, and the non-tamperable property is based on the disclosure of the data transaction process based on blockchain technology and the distributed storage uploading to the chain. The authenticated asset is It belongs to the individual or organization corresponding to the address, does not depend on any organization, and has complete control and disposal rights. Accounts, data, etc. stored in centralized institutions are at risk of being banned, tampered with and roughly lost, and are based on the services of centralized institutions.Once the centralized institution disappears, the certification ceases to exist.

The current blockchain technology based on NFT is more focused on decentralization and security, at the expense of execution efficiency. For example Bitcoin adopts the PoW consensus mechanism, which processes 7 transactions per second, and the confirmation time of each transaction is nearly 1 hour. This mechanism meets the needs of sufficient security and de-neutralization. Ethereum It can process about 20 transactions per second, and the confirmation time of each transaction is about 4~8 minutes.
At the same time, due to the consumption of miners’ computing power caused by the consensus mechanism algorithm, the blockchain platform will charge a certain amount of tokens to motivate miners to produce blocks. With the congestion of transactions and the continuous rise of token prices, the fees paid in fiat currency will also be calculated. It seems to be getting higher and higher, and this mechanism also weakens the cost advantage brought by disintermediation.

The number of monthly active smart contracts on Ethereum from 2017 to 2020 (units)

The introduction and improvement of smart contract standards. The launch of smart contract standards is conducive to browser display and wallet and trading market support. Currently, the most used Ethereum ERC-721 and ERC-1155 standards were officially launched in 2018;
The aggregation trading platform lowers the threshold for participation. Under the smart contract standard, aggregated trading platforms OpenSea, Rarible, SuperRare, etc. have been launched after 2017. Game platform AxieInfinity, NBA official authorized trading platform NBA TopShot, metaverse platform Decentral and Other vertical platforms have also been launched one after another, which has greatly lowered the threshold for C-end user participation and established a foundation for subsequent breakthroughs.
Blockchain technology update and iteration. Public chains represented by Solana, Flow, BSC and Side chains represented by Polygon, WAX, and Ronin have been launched one after another.Ethereum chains, these chains have been optimized in TPS rate, fee expenditure, transaction confirmation and other links,Performance is greatly improved.
A representative example is the Solana chain, which adopts a consensus algorithm combining PoH and PoS, and the maximum TPS can reach 65,000 times, and transaction fees are low. Representative NFT projects include DegenerateApe Academy, Solana Monkey Business, and more.

0x04 Current limitations of NFTs

The transaction attribute can not only drive the prosperity of the industry, but the influx of funds also brings about a wave of speculation. The head effect of the NFT market is obvious, and most of the transaction participants lose money;
The head effect of the NFT trading market is obvious, and 78% of the participants who are not on the whitelist lose money on resale. According to nonfungible data, the transaction volume of the NFT series with the historical total transaction volume of the TOP10 accounts for more than 50% of the total transaction volume of the NFT market, reaching 2.3%. Poor, the head effect of the market is very obvious.
Whitelisting is the key to profitably trading newly issued NFTs. NFT creators set up a “whitelist” that allows Subs will buy their NFTs at a much lower price than other users during the minting period. OpenSea number
According to reports, users who join the whitelist and then sell newly minted NFTs have a 75.7% chance of making a profit, compared to only 20.8% for users who are not on the whitelist. According to chainalysis statistics, 78% of the non-whitelisted buyers have lost money on resale, and 59% of them have lost more than 50%. On the other hand, 78% of the whitelisted buyers have generated profits, of which 51% have generated profits. 2 times or more of the return on investment.

nonfungible.com TOP10 transaction volume NFT series proportion of total transaction volume (%)

The current scope of application is still more limited to digital collections and digital artworks, and the connection with real-world assets needs to be further improved in the ecology and supported by relevant laws and regulations. according to nonfungible counts the daily transaction volume data since 2021, and divides NFTs into metaverse, Games, utility tools, and digital art collections are divided into 4 categories, of which the transaction volume will account for the largest proportion in 2021.The highest is the digital collection art category, reaching 76.4%, such as BAYC, CryptoPunks,
Meebits, Art Blocks, SuperRare, etc. all belong to this category, followed by the proportion of games 17.8%, mainly Axie Infinity, the two categories of Metaverse and Utilities are not enough.10%, of which Metaverse is 5.2%, representing projects such as Sandbox, Decentraland, etc., and utility tools account for 0.6%, mainly ENS, the domain name service of Ethereum.

From the perspective of NFT architecture, it can be integrated into the real-world fields that require asset authentication, right confirmation and transaction. We believe that with: 1 the continuous innovation of the NFT public chain and the expansion brought by Layer 2; 2) the acceleration of the digitalization process of real-world assets and the corresponding regulations With the launch of NFT, the connection between NFT and the real world will be closer

At present, the speculation of some NFT projects is obvious and should be treated with caution, but from another perspective, the speculation wave has introduced a large number of users, and the bubble has brought a huge number of transactions, which is also beneficial for the development of NFT, and promotes the NFT industry in the market. Risk control, infrastructure construction, and talent absorption have gone a step further, driving the continuous improvement of the underlying blockchain technology.

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