The future of NFTs in DeFi: A conversation with Aavegotchi's Jesse Johnson

Where do NFTs fit into DeFi, what's next for a space awash with funding, and how do DAOs manage NFT content? Jesse Johnson discusses with Cointelegraph Non-Fungible Tokens (NFTs), once the red-headed stepchild to more popular smart contract implementations, are finally beginning to have their day in the sun. Average purchase prices of NFTs on peer-to-peer exchanges are rising sky-high. Six-figure sales are no longer uncommon. Dapper Labs, the minds behind the great-granddaddy of NFT collectible projects, CryptoKitties, have attracted significant investment for their native blockchain Flow -- including investment from NBA stars. All this progress leads some to wonder, however: where are NFTs going next?One person who might be able to glean some insight is Aavegotchi co-founder Jesse Johnson. Johnson was working with asset-backed products in the NFT space long before they became widely popular. One of his early efforts, Bullionix, was among the first platforms to offer NFTs backed by real-world commodities -- specifically, gold. With Aavegotchi, Johnson is moving beyond meatspace assets and taking asset-backed NFTs into a whole new realm: decentralized finance (DeFi). According to the Aavegotchi litepaper, Aavegotchi are digital collectibles backed by Aave interest-bearing aTokens. Using a blend of NFT token standards including ERC-721 and ERC-998, Aavegotchi feature a combination of traits that determine their value, including random traits determined at their minting, the value of aTokens staked, and NFT-backed “wearables” -- ‘child’ NFTs that can be programmatically tied to each Aavegotchi. In an interview with Cointelegraph, Johnson revealed that the Aavegotchi team is now up to 9 full-time employees, and that they also count a small army of volunteer artists and enthusiastic community members as part of their ranks. Moving forward, Johnson aims to bring Aavegotchi deeper into the DeFi fold, mixing NFTs and this explosive, emerging financial vertical in exciting new ways. After speaking with him, one thing became clear: this is just the beginning for both NFTs and Aavegotchi. NFTs Move Beyond FarmingCointelegraph: How do NFTs fit into DeFi in a meaningful way? An NFT can create digital scarcity and it can be individualized, but what unique properties of NFTs as smart contracts will be specifically useful and important for DeFi? Jesse Johnson: I think that there are certain things we're already seeing with yield farming. There's this idea of farming for NFTs, and that's fine -- I feel like right now everybody's just kind of trying it out -- but in terms of real DeFi you should be able to get more interesting NFT products.What if an NFT you farm is a key to a certain liquidity pool, or it's a promissory note -- it has some sort of action like that, where it's guaranteeing you something from another platform. I think you could start to see alliances, so to speak, because there's really not a word for it, but you’d have all this interoperability between all the DeFi platforms. If there could be standard NFTs that are accepted across platforms as a certain value or almost like badges that you earn at one platform and are accepted at another, you'll start to see NFTs used for integrating all these platforms in very interesting ways.Badges -- I used to think of badges just strictly in terms of gaming, but actually they could be a lot more. For instance, if you want a DeFi loan right now, with the great majority of the loans it's gonna be up to your collateral -- it's not your credit score, it's your collateral. "But I think one of the really exciting things that NFTs can help solve is this idea of reputation system that permeates across Web3, so regardless of which platform you're on, and even if you want to be quasi-anonymous." As long as you hold that NFT that shows you have this kind of reputation earned, and the NFT has been in this wallet X amount of time, you could start to find solutions to a kind of credit score system where, okay we do a check, you've got half a dozen badges -- because of those badges, their point of origin and their time in your wallet, you qualify for a better rate -- something like that. I don't think that we can point to a project that's doing that right now, but I see that as very possible, and it makes sense as a solution to needing a reputation system that preserves some degree of anonymity. I think that could be very exciting.CT: It sounds like you're almost bringing that NFT gaming concept of the metaverse to DeFi with the interoperability and the plug-and-play qualities. It’s sort of using NFTs as a reputation and interoperability layer.JJ: Yep, yep. Because all the wallets accept 721s, it just satisfies those requirements of something that is interoperable across anything, at least on Ethereum. So you could really go pretty far and wide and then. We'll probably see a lot of examples of that.It's not the primary use

The future of NFTs in DeFi: A conversation with Aavegotchi's Jesse Johnson

Where do NFTs fit into DeFi, what's next for a space awash with funding, and how do DAOs manage NFT content? Jesse Johnson discusses with Cointelegraph

Non-Fungible Tokens (NFTs), once the red-headed stepchild to more popular smart contract implementations, are finally beginning to have their day in the sun. 

Average purchase prices of NFTs on peer-to-peer exchanges are rising sky-high. Six-figure sales are no longer uncommon. Dapper Labs, the minds behind the great-granddaddy of NFT collectible projects, CryptoKitties, have attracted significant investment for their native blockchain Flow -- including investment from NBA stars

All this progress leads some to wonder, however: where are NFTs going next?

One person who might be able to glean some insight is Aavegotchi co-founder Jesse Johnson. Johnson was working with asset-backed products in the NFT space long before they became widely popular. One of his early efforts, Bullionix, was among the first platforms to offer NFTs backed by real-world commodities -- specifically, gold. 

With Aavegotchi, Johnson is moving beyond meatspace assets and taking asset-backed NFTs into a whole new realm: decentralized finance (DeFi). 

According to the Aavegotchi litepaper, Aavegotchi are digital collectibles backed by Aave interest-bearing aTokens. Using a blend of NFT token standards including ERC-721 and ERC-998, Aavegotchi feature a combination of traits that determine their value, including random traits determined at their minting, the value of aTokens staked, and NFT-backed “wearables” -- ‘child’ NFTs that can be programmatically tied to each Aavegotchi. 

In an interview with Cointelegraph, Johnson revealed that the Aavegotchi team is now up to 9 full-time employees, and that they also count a small army of volunteer artists and enthusiastic community members as part of their ranks. Moving forward, Johnson aims to bring Aavegotchi deeper into the DeFi fold, mixing NFTs and this explosive, emerging financial vertical in exciting new ways. 

After speaking with him, one thing became clear: this is just the beginning for both NFTs and Aavegotchi. 

NFTs Move Beyond Farming

Cointelegraph: How do NFTs fit into DeFi in a meaningful way? An NFT can create digital scarcity and it can be individualized, but what unique properties of NFTs as smart contracts will be specifically useful and important for DeFi? 

Jesse Johnson: I think that there are certain things we're already seeing with yield farming. There's this idea of farming for NFTs, and that's fine -- I feel like right now everybody's just kind of trying it out -- but in terms of real DeFi you should be able to get more interesting NFT products.

What if an NFT you farm is a key to a certain liquidity pool, or it's a promissory note -- it has some sort of action like that, where it's guaranteeing you something from another platform. I think you could start to see alliances, so to speak, because there's really not a word for it, but you’d have all this interoperability between all the DeFi platforms. If there could be standard NFTs that are accepted across platforms as a certain value or almost like badges that you earn at one platform and are accepted at another, you'll start to see NFTs used for integrating all these platforms in very interesting ways.

Badges -- I used to think of badges just strictly in terms of gaming, but actually they could be a lot more. 

For instance, if you want a DeFi loan right now, with the great majority of the loans it's gonna be up to your collateral -- it's not your credit score, it's your collateral.

"But I think one of the really exciting things that NFTs can help solve is this idea of reputation system that permeates across Web3, so regardless of which platform you're on, and even if you want to be quasi-anonymous."

As long as you hold that NFT that shows you have this kind of reputation earned, and the NFT has been in this wallet X amount of time, you could start to find solutions to a kind of credit score system where, okay we do a check, you've got half a dozen badges -- because of those badges, their point of origin and their time in your wallet, you qualify for a better rate -- something like that. 

I don't think that we can point to a project that's doing that right now, but I see that as very possible, and it makes sense as a solution to needing a reputation system that preserves some degree of anonymity. I think that could be very exciting.

CT: It sounds like you're almost bringing that NFT gaming concept of the metaverse to DeFi with the interoperability and the plug-and-play qualities. It’s sort of using NFTs as a reputation and interoperability layer.

JJ: Yep, yep. Because all the wallets accept 721s, it just satisfies those requirements of something that is interoperable across anything, at least on Ethereum. So you could really go pretty far and wide and then. We'll probably see a lot of examples of that.

It's not the primary use case of Aavegotchi, but it is something we're aware of. 

"We’re thinking of the Aavegotchi as existing within our world but also being an avatar that can traverse the metaverse, and more than the metaverse, traverse all of Web3."

Maybe if an Aavegotchi is in your wallet, and you go to visit Uniswap, they actually acknowledge, ‘oh you have an Aavegotchi that's two years old and has staked a lot of a tokens for X amount of time and holds five or six badges' -- because your Aavegotchi holds badges. So we are in a way making a play on that, where we want to start seeing how our Aavegotchi can communicate with other DApps and actually earn badges from those DApps. 

NFTs can do the job better than any one particular set of smart contracts or DApp, because with the contracts you're reliant on a certain UI or dashboard. But the NFT can run around through all these different DApps and kind of create a chain of custody or chain of history detailing how you earned it, when you earned it -- did you earn it? Or was it passed to you by another wallet?

It could be very exciting because in real-world finance they're kind of equally important, if not the credit score is more important than the collateral. But with DeFi right now pretty limited to the collateral side.

"Five years from now we're gonna be on a whole different level with real NFTs of consequence, which is one way I talk about it -- NFTs that really have an impact on your bottom line, and they're more than just a collectible."

New Money, New Users

CT: Speaking of the bottom line, it seems like NFTs are either on the cusp of in the midst of a huge moment. I’m thinking about Dapper’s monster raise, and the major sale numbers that seem to go up every week. What are NFTs going to look like when there's a whole lot more money sloshing around? 

JJ: I think there'll be good and bad. The bad is pretty obvious, and you're going to see the issues we've already seen, but on a larger scale.

"I love eliminating barriers to entry, but you can get a lot of scam artists, and NFT scams might be the trickiest of all the types of crypto scams."

When you look at a collectible on a marketplace, you think the visuals are there, the metadata looks ok on the front maybe, and then you realize you have check this smart contract and see if it's in the same smart contract as what you really think you're buying. You see these problems a lot.

Anybody can make anything, including scams. And that's tricky because the philosophy is all about breaking down the barriers. So I am totally with that. But you'll see more scams, and probably some big scandals and some people will get hurt, you know. So that's the part to look out for and try to prevent. 

On the good side, you’re going to see more participants, but you're going to see people that are just playing to earn. I love the idea of changing the idea of gaming, where you actually get some rewards for your attention, right? Every advertisement, everything's battling for people's attention, and technically, games are too. But the sincerity or the level of loyalty to the project is where it gets a little mystified, where you're going to have, you know, maybe huge numbers, but are they just going to leave as soon as the coins go down in price, or there's a dip or there's whatever, like, they just kind of leave the game for the next one that makes money. 

I think the only way to address that is with a very addictive game and a very strong ethos that everybody shares. And then you get through those rough patches and ultimately grow more and more. 

Scandals to Come

CT: I'm trying to imagine what a big NFT scandal looks like. Are people putting celebrity nudes on the blockchain or something? How does an NFT project go totally haywire, you know, aside from some big forgery?

JJ: That's an interesting one. I mean, if you have art or information that’s completely on-chain, you could see that kind of scandal where it's classified information or something extremely lewd, and you can't remove it. That'll probably happen at some point, right, somebody will do something to that effect. 

In Aavegotchi's case, we want to open things up where everybody can make wearables. It wouldn’t really be a scandal, but what if, oh, somebody made a wearable that is lewd or something.

So actually, there's an answer for that, too, with DAOs. I think Rarible is also doing something where you can whitelist or blacklist things based on community members that take the time to kind of flag certain content is not safe for work, that kind of thing. And we'll have probably something similar, I think most projects will have some sort of curation. Then the DAO can recognize that, say 'yes, what you claimed is true,' and then you get your reward.

CT: To wrap up, is there anything you want to tease the Aavegotchi community?

JJ: One key fact to be aware of is the upcoming raffle for network stakers. It's event based, and I like how it comes to a conclusion, it comes to a head at a certain time, at a certain place, and everybody gets that kind of pay off. They know they won, they lost, the winners are announced, NFT wearables are distributed, all automated. 

So that'll be November 10th, it will be the first one, and I think that's going to generate a lot of interest across the crypto space. The first 24 hours of $GHST staking saw over 24% of our entire token supply get staked. It was one percent an hour, so it's quite impressive. November 10th will be the first raffle and we want to do three of these before the mainnet launch around Christmas time.

 I don't think a lot of people are aware, they think it's a one-off, and then that's the end of the game. But no, this is just the first of many.