Dynamic metadata-based dNFT: A new possibility in blockchain finance

What if NFTs are more than just simple digital artworks or collectibles? According to analysis by Nico Pei of Blockchain Capital, dynamic NFTs (dNFTs) are a key technology that can go beyond static image-based NFTs to tokenize complex financial positions and assets. Built on dynamic metadata, a dNFT refers to an NFT whose metadata updates in real-time based on external conditions and on-chain events, presenting the possibility to reconstruct significant parts of the financial system on the blockchain.

Why Can NFTs Be More Than Just Pictures?

Since early 2021, the NFT market has exploded, with traditional giants like Nike, LVMH, and Tiffany entering NFT projects. However, thinking solely in terms of collection-focused NFTs like Bored Ape or CryptoPunks makes it difficult to grasp their true potential.

The core question is: How many of these financial tools are truly non-fungible?

Existing fungible tokens (FTs) map users to balances (user → balance), but NFTs do the opposite: they map tokens to users (NFT ID → user). This fundamental difference allows NFTs to serve as tools beyond mere collectibles.

The Fundamental Question of Non-Fungibility and Financial Tokenization

Looking at the asset and liability statements of large corporations like Walmart, many non-fungible assets—real estate, futures, options, derivatives, art—dominate significant parts of the financial system.

To clarify the definition of non-fungibility: my Bitcoin and your Bitcoin are identical (fungible), but my apartment and yours are completely different (non-fungible). Yet, in the real financial system, there is a vast gray area.

Financial products with different maturities, interest rates, strike prices, underlying assets, counterparties—while technically non-fungible—gain liquidity through partial trading of stakes. These are negotiated via banks and OTC markets, and cannot be fully expressed with standard ERC-20 tokens alone. This is where the need for dNFTs based on dynamic metadata becomes apparent.

The Structure of dNFTs: Combining Static ID and Dynamic Metadata

To understand the basic structure of NFTs, two key elements are essential:

1. TokenID: A unique identifier representing ownership, which is immutable after creation.

2. Metadata: Includes name, description, CID (Content Identifier) of images/files, and other attributes. All information displayed on platforms like OpenSea originates from metadata.

Traditional static NFTs (e.g., Bored Apes) have fixed metadata at creation that does not change afterward. However, representing complex financial positions requires metadata to dynamically update based on external conditions.

A dNFT combines a unique TokenID (immutable ownership) with dynamic metadata (which can change in response to external data). Metadata update instructions are embedded in smart contracts, with necessary external data fetched from on-chain sources or tamper-proof oracles.

Metadata can include financial attributes such as:

• Maturity date, strike price, underlying asset
• Counterparty, interest rate, depreciation rate
• Game character level, remaining membership uses
• Membership QR scan count, access rights, etc.

How dNFTs Are Transforming Financial Systems: Real-World Examples

Solv Protocol: Tokenization of Financial Certificates

Solv has developed semi-fungible dNFTs based on the ERC-3525 standard. Whether a protocol raising funds or an institution selling structured products, flexible parameter configurations enable trading of derivatives.

Solv’s three core products:

• Vesting Certificates: ERC-20 tokens locked into NFTs, gradually released over time
• Convertible Certificates: Representing convertible bonds as NFTs
• Bond Certificates: Zero-coupon bonds with fixed interest or call options

Using dNFTs, there’s no need to deploy new ERC-20 contracts each time parameters change. A single NFT contract (collection) can encompass many NFTs with different underlying assets and ranges. SVG images are generated dynamically based on on-chain data, allowing direct trading across NFT marketplaces with guaranteed data integrity.

Swell Network: Liquid Staking with dNFT Innovation

Swell Network allows users to stake ETH via swNFTs and receive swETH. Similar to Lido’s stETH, but swNFTs enable users to directly trade vault positions.

Maximizing yield from staked ETH is more efficient by purchasing existing large vault positions rather than restructuring new ones. With swNFTs, users can:

• Trade vault positions without closing them
• Continue earning staking rewards while expanding positions
• Maintain market stability

Uniswap v3: Representing Liquidity Positions as dNFTs

Uniswap v3 represents liquidity provider (LP) positions as NFTs. Metadata includes:

• Fee tier (e.g., 0.01%, 0.05%)
• Price range
• Pool ID
• Position size
• Accumulated fees

Initially, some users sold these NFTs at very low prices without realizing they represented actual liquidity assets. This highlights an important lesson: visual clarity in representing complex financial metadata is crucial.

Innovative Uses of dNFTs in Gaming

Games are a testing ground for “low-risk, high-tech” experiments with new tech. Developers explore various dNFT patterns:

Wolf Game (late 2021): Smart contracts dynamically modify NFT parameters, e.g., “stealing” or charging fees.

Pak’s Merge project: Two NFTs in the same wallet automatically merge, increasing “mass.” These changes are reflected visually and in metadata.

Technical Challenges Hindering the Spread of dNFTs

Limitations in Metadata Display

Current NFT marketplaces lack the capability to clearly display complex financial metadata. As seen with early Uniswap v3, if users cannot understand the true value of an NFT, market distortions occur.

Different types of dNFTs (financial derivatives, game characters, membership tickets) require specialized metadata presentation. This necessitates the emergence of specialized marketplaces.

Disconnection Between Metadata and On-Chain Transaction Data

A major issue is that snapshots of dynamic metadata are not stored:

Case 1: An LP in Uniswap v3 trades at prices $X, $Y, $Z, updating their price ranges multiple times. Without snapshots at each change, analyzing transaction data meaningfully is impossible.

Case 2: A game character upgrades from Level 1 to Level 10. To calculate average prices at each level, timestamped metadata changes are needed.

Case 3: A gym membership card reduces from 10 uses to 9, then 8. Tracking market value changes at each step requires metadata history.

Currently, with limited secondary trading volume for dNFTs, these issues are less apparent. However, as complexity increases, storing snapshots at each metadata change and enabling easy retrieval will become essential.

Security and Cost Trade-offs

Protecting dynamic metadata is as important as safeguarding ownership, since metadata defines the asset.

Hosting Dilemmas:

• Centralized servers: low cost but trust and accessibility issues
• On-chain storage: high security and transparency but costly for each major change

Descriptive attributes, unless media files, should be stored on-chain, but costs are significant. Solutions are still under exploration.

Future: Growth Directions for the Dynamic NFT Ecosystem

Three Key Insights

1. NFTs Go Beyond Simple Data Containers

dNFTs transcend art NFTs (ERC-721) and fungible tokens (ERC-20). Complex, dynamic metadata is the true value of dNFTs.

2. Much of the Financial System Is Fundamentally Non-Fungible

Many financial assets (derivatives, liabilities, structured products) are inherently non-fungible. dNFTs can play a central role in tokenizing these assets and liabilities on the blockchain.

3. Market Segmentation and Specialized Infrastructure Are Essential

To properly display complex metadata, specialized marketplaces and tools supporting metadata-trade data linkage are needed. This evolution resembles how e-commerce diversified from single platforms to specialized marketplaces.

The maturation of the dNFT ecosystem will not only advance technology but fundamentally reshape the transparency, accessibility, and freedom of the financial system.

This analysis was crafted with valuable feedback from Kinjal Shah, Yuan Han Li, Spencer Bogart, Michael Blau (a16z), 0xBoFan (Dragonfly), and Richard Chen (1Confirmation).