Author: 0x长安, @RealResearchDAO
NFT, one of the hottest tracks this year has grown about 210 times from a market cap of $82 million in 20 years to a market cap of $21 billion in 21 years. Just recently, the total trading volume of NFT has exceeded $5 billion, and the single-day trading volume of Opensea's Etherchain has broken the all-time high of $476 million.
NFT is the most accepted track by Web2 users in Web3, and one of the track with a lower threshold. Moreover, with many stars "leading the way", NFT has frequently come out of the circle and influenced a large number of Web2 users, so that more people outside the circle can learn about the crypto world.
However, NFT is a well-known problem: poor liquidity. NFT is a peer-to-peer trading, unlike FT, which can establish a liquidity pool to facilitate transactions between buyers and sellers. With the presence of market makers, FT transactions, and the resulting transactions can not be closed. In contrast, NFT, the user can only NFT pending on the platform, and if no one buys, the user's NFT will always be pending on the platform. And, the user's NFT can not be split, only a whole intact NFT for sale.
So, when a user holds an extremely bullish NFT and the user needs money urgently, a conflict arises. The conflict becomes more and more acute as the market value of the NFT rises. Because as the price of a particular NFT gets higher and higher, the fewer people are able to buy it. So how to release the locked-in value and solve the problem of poor NFT liquidity is the question we need to explore.
We can find solutions to poor liquidity in the real world. For example, the property market is a good example. People lock most of their wealth in their houses. If they suddenly need money urgently, or need big money for investment, people can't actually get it. However, when they are bullish on the property market/need to live in it and don't want to sell/can't sell, people usually rent out the house in their name and mortgage.
From the experience that can be learned from the real world, there are two mainstream ways to solve the NFT illiquidity solution in the market
In this article, we will discuss the issue of NFT liquidity from the perspective of NFT lending.
There are currently two products on the market: BendDAO and JPEG, although both belong to NFT lending products, but from the underlying logic, there are different points. bendDAO is similar to AAVE, Compound, belongs to the over-collateralized lending TOKEN class. And JPEG is similar to MakerDAO, which belongs to the over-collateralized minting stable coin category.
BendDAO is a decentralized peer-to-peer pool-based NFT liquidity protocol. Depositors provide ETH liquidity to the loan pool to earn interest, while borrowers can use NFT as collateral to immediately borrow ETH through the loan pool.
Agreement Revenue: The interest rate paid by the borrower minus the bonus given to the depositor by the agreement is the agreement revenue, for example, as shown in the figure below: 15.44% for the borrower and 4.78% for the depositor, 15.44% - 4.78% = 10.66%, 10.66% x the amount of ETH borrowed from the pool is the agreement revenue.
Interest rate: BendDAO implements a dynamic interest rate, which is related to the funds in the pool. When the pool is full of ETH, the interest rate will decrease. Conversely, when borrowers all borrow the ETH in the pool, the interest rate will increase, prompting borrowers to return the ETH. BendDAO uses this operation to flexibly and dynamically adjust the utilization rate of ETH in the pool, so that ETH is kept as sufficient as possible.
Prophecy Machine: The value of NFT is difficult to measure, so BendDAO uses Opensea, LooksRare's NFT floor price as the price feed data for NFT collateral, and all NFTs will be valued at the floor price.
But since the protocol measures value in terms of floor price, could someone intentionally be evil and deliberately peg the price so low that the protocol detects a drop in the floor price, causing users to collectively blow up? The answer is no. BendDAO offers a solution, and after six months of backtesting by BendDAO, the floor price and average transaction price of the prophecy machine is consistent with the TWAP price.
On-chain Time-Weighted Average Price (TWAP), which is a traditional algorithmic trading strategy that allows transactions to have a reduced impact on the market while providing a lower average transaction price.
Clearing mechanism: As the price volatility of NFT is very high, the NFT lending clearing mechanism must not be consistent with FT lending. Otherwise, it will lead to a collective explosion of users. For example, if the azuki project party ''self-destructs'', resulting in a major price explosion of azuki, borrowers will not use the agreement to borrow if there is no reasonable mechanism.
When the health factor of an NFT loan falls below 1, liquidation will be triggered. That is, when (floor price * liquidation threshold)/interest bearing debt < 1, the NFT will suffer liquidation. For example, suppose the current value of BAYC is 100ETH and the BAYC holder lends NFT the top amount of 40ETH. when the price of BAYC falls to 44ETH, (44 * 90%) / (40 + interest) < 1, NFT will then enter the liquidation mechanism.
BendDAO adopts 48 hours strong leveling guarantee mechanism, so the user has the right to return the loan and interest within 48 hours, and the NFT pledged by the user will not be liquidated. If the user does not return the loan and interest within 48 hours, BendDAO will start an auction, and the auctioneer will be able to participate in the auction at a price 5% below the floor price, BendDAO adopts this mechanism to encourage users to participate in the auction. Careful friends can notice that within the 48-hour strong leveling guarantee mechanism, if the price of NFT continues to fall below the amount of the user's borrowing, what can be done? The user can actually not return the loan because the price of the NFT is lower than the amount borrowed. How does BendDAO solve this problem?
JPEG'd is a decentralized lending protocol on the ethereum blockchain that enables holders of NFT blue chips to open collateralized debt positions (CDP) using their NFT as collateral. Users mint PUSd - the protocol's native stablecoin - enabling users to effectively use their funds more efficiently.
JPEG uses a lending approach similar to MakerDAO, where the project owner groups a pool of PUSD on curve and users pledge their NFTs to the platform where they can mint stablecoins PUSD. Users get PUSD and can go to curve to exchange it for stablecoins such as usdt and usdc.
Currently, this project has not long started, the pool of PUSd is also just formed. You can only exchange on curve for other stable coins outside. PUSd has no more application scenarios, and the depth of the pool is not high. It is easy to see off-anchor phenomenon.
Both BendDAO and JEPG give a very good liquidity solution, but the two protocols have different product implementation logic because of the difference in the underlying logic. Below I will compare the two NFT lending protocols in several ways.
Both BendDAO and JPEG provide a good solution for the liquidity of NFT. With the development of NFTFI, the liquidity of high net worth NFT assets will be released. And the development of NFTFI will be correlated with the heat of the NFT market, and the development of NFT will drive the fire of NFTFI. And the development of NFTFI will also release more liquidity of NFT and provide users with more efficient use of funds, thus increasing the heat of the NFT market.
With the development of NFTFI, I believe that NFTFI will become the catalyst for NFT to make the greatest contribution to the blooming of a more beautiful petal for NFT.
References:
BendDAO Whitepaper:https://docs.benddao.xyz/portal/
JPEG Whitepaper:https://docs.jpegd.io/
Vic TALK:https://www.youtube.com/watch?v=0Tys9auU2o8&t=377s
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