NFT Utility and DeFi Composability
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May 11th, 2022

A New Era for NFT Utility and DeFi Composability

Move over. There's a new cook in the kitchen and he’s bringing the $BACON.

One of the most powerful features of Web3 is composability. To boil a huge concept down into a brief summary, “composability” describes the innate ability of open-source blockchain technology to be permissionless-ly built on top of by other projects and developers. This unlocks unprecedented innovation, creating global network effects that have (and will continue to) change the way we interact with everyday applications.

When we see composability in action across Web3, two terms often pop up: “DeFi legos” and “NFT utility.” But what are they and what do they mean for the Bacon Protocol? Lastly, how can we leverage these concepts to maximize the financial opportunities for everyday Bacon users?

In the Bacon Protocol, NFT utility and DeFi legos come together to allow users to invest in mortgages in an easy, open, fair, decentralized, and crypto-native way, all while offering the most competitive interest rates on mortgages possible.

That was a mouthful, so let’s dive in and explore in more detail.

NFT Utility

NFTs are a massive technological innovation, but most of today’s NFT utility is just scratching the surface of what is possible: Pictures of Bored Apes that give you access to parties, gated Discord communities, etc…Where is the real innovation? We believe Mortgages are a use case that demonstrates the real power of NFTs with sustainable utility.

Bacon Protocol is ushering in a new era for NFT utility by introducing tokenized mortgages. During the loan origination process, the protocol’s Originators will issue an NFT that represents the lien on an actual home. This NFT, known as an Egg, can then be staked in the Bacon Protocol and used as collateral to be borrowed against.

The model is very similar to what happens when people or institutions borrow against US mortgages. However, instead of these mortgages being held, assessed, and monitored in walled financial gardens, in the Bacon Protocol they’re represented as distinct tokens on the Ethereum blockchain. This allows them to be securely and indefinitely tracked across the Web without fear of fraud or lost recordkeeping, thus opening up access to a wider consumer base.

To take the utility of the NFT Egg one step further, Bacon Protocol is introducing Smart Loans. Smart Loans are sliding scale loans taken out against an NFT Egg that provides homeowners more freedom and flexibility in putting their mortgages to work. Smart Loans have a few significant advantages over loans taken out against traditional mortgages:

  1. Lower rates = Lower payments: Using Bacon’s AMM, as more funds enter the protocol, the interest rate for mortgages is lowered based on demand for loans vs. funds in Pans.
  2. Speed: Smart Loans with Bacon Protocol, when approved by Originators, can be processed in as quickly as one or two days in order to mint an Egg representing a lien on your home.
  3. Repayment Flexibility: Simply pay back monthly interest due, the entire balance, or anything in between.
  4. An open line of credit: You no longer have to refinance your home to get more money. You can have up to a 80% credit line against the value of your home that you can withdraw and repay as you need.

These are all critical innovations that were impossible prior to provable digital ownership in the mortgage industry. We call that a win-win-win-win. But the main dish hasn’t even been served yet.

DeFi Composability

$bHOME and Egg NFTs are each independently significant within the Bacon Protocol, but with composability, these two digital assets become immensely more powerful. Beyond the Bacon Protocol, $bHOME and Eggs will be able to be leveraged across the DeFi ecosystem and provide compounding benefits to users. This is what we call DeFi composability, or DeFi legos.

We envision a world where these assets live beyond the Bacon Protocol and are able to open up a new world of composability in DeFi. Take, for example, the tricky problem of DeFi collateral:

One of the holy grails of DeFi is secure, stable collateral. Nearly every major project relies on collateral and liquidity to superpower its permissionless offerings to consumers and institutions. The issue, however, is that these protocols are starved for resilient collateral. Currently, the three most common assets used as DeFi collateral are BTC, ETH, and USDT - none of them perfect. Each asset comes with its own set of risks:

  • BTC faces the price risk of liquidation. As a volatile asset BTC is not stable enough to be safely used as a widespread asset for collateralization.
  • ETH faces smart contract risk. Any small, exploitable bug can carry significant risks. As we get more composable, one small issue in a smart contract could cause a cascading “Jenga effect.”
  • USDT faces a “run on the bank” risk. Tether has never claimed a 1-1 backing of USD to USDT. If too many users attempt to exchange USD for USDT, Tether might not be liquid enough to cover user funds, causing Tether to lose its $1 USD peg.

DeFi has been steadily building its set of composable legos. First came borrowing/lending protocols like Compound and MakerDAO. Then we saw apps built on top of smart contracts to maximize yield in these borrowing/lending protocols such as Yearn Finance. What we have now is an immensely robust DeFi ecosystem ($125B USD on Ethereum alone), but a vast majority of which is collateralized with assets that, in the grand scheme of things, are unproven, inaccessible, and highly volatile.

In the search for alternative forms of DeFi protocol collateral, many teams are exploring using NFTs. However, in the current NFT landscape, we find that most of these assets are subject to the same type of volatility, cultural sway, and security risk as fungible digital assets. This doesn’t bode well for the stable utility of today’s NFTs as DeFi collateral.

How is Bacon different?

Bacon, on the other hand, is taking on a new approach, bringing the most historical stable and collateralized asset in history into Web3 and DeFi: homes.

What if we enabled these DeFi protocols to suddenly access a remarkably greater pool of collateral – say the $17.9T US mortgage market? Instead of having digital assets rely on other digital assets for support, we used a different layer of support and stability. This is where DeFi legos and Web3 composability come into play.

What does this look like? It looks like taking your mortgage out as an NFT Egg and then using that NFT Egg as collateral to take a loan out and use it across the DeFi ecosystem – powered by the Bacon Protocol.

Imagine a world where you could collateralize your home to buy derivatives to hedge your risk of oil price volatility if you were involved in the oil business.

Imagine collateralizing your farm home to short corn futures in the case that your crops die out and you lose a majority of your farming season. This is using your home as a financial instrument to protect yourself, your business, and your family.

We are at the absolute beginning of the financial possibilities that DeFi can unlock. As new paradigms continue to be innovated, so does the need for a better, safer piece of collateral - and Bacon is leading the charge.

Utilizing and Composing Bacon

Bacon Protocol is changing the DeFi and NFT landscape by bringing one of the largest, most secure, and most collateralized assets in history to Web3. Whether you’re a homeowner or investor, Bacon Protocol allows individuals access to a lucrative industry traditionally reserved for the institutional elite.

It all starts with #Bacon and #Eggs. Join us at baconcoin.finance.

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