Original Author: Kylo

Original source: Zonff Partners

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Start with BendDAO

BendDAO is a story of straw boat borrowing needs. BAYC’s airdrop mobilized NFT holders’ demand for expanding their NFT exposure. Lending ETH with NFT as collateral can maximize the holder’s interests, and BendDAO’s permissionless mortgage P 2 Pool The advantage of the lending model compared to the previous P2P Lending is that the borrower has a smooth experience of borrowing money. As long as BendDAO can solve the problem on the funding side, the subsequent lending process will become natural.

The core of BendDAO is the lending agreement in DeFi, but the difference is that for the lending agreement of the traditional fund pool model, the user's collateral position is part of the loan supply funds. This means that the borrower is also providing excess liquidity to the funding pool of the lending agreement. The excess liquidity here means that when double borrowing is not considered, the funds deposited by the user in the lending agreement are greater than the funds lent by the user. Under this mechanism, the TVL of the lending agreement will be positively correlated with the demand of the borrower.However, the difference between NFT lending is that the collateral itself does not have capital attributes or the capital attributes are not strong, and its commercial attributes cannot directly provide TVL support for the lending agreement, which makes the agreement itself need to use its own pass. As a liquidity incentive to attract a large number of lendable assets into the fund pool of the NFT lending agreement, it has caused an imbalance between the supply and demand of the protocol token to a certain extent.

The issue about tokens is still secondary and can be resolved by increasing the benchmark lending rate and reducing liquidity incentives. The problems of BendDAO mainly focus on two aspects: liquidation mechanism and floor price manipulation. The current trading plan for NFT is still based on the order book, which is reflected in the seller's pending order waiting for the buyer to make a move. This transaction mode is not suitable for liquidation mechanisms that have high requirements for liquidity. When the health factor of an NFT mortgage loan position in BendDAO is too low, the NFT mortgage position will auction the NFT in the secondary market. Since there is not so much liquidity on the NFT that already exists in the market, the number of NFTs that need to be auctioned continues to accumulate in the short term, resulting in a further decline in the floor price of NFTs and panic among depositors;Floor price manipulation is very similar to oracle attacks in DeFi. Due to the lack of liquidity in NFT transactions, giant whales can manipulate the floor price of NFT by placing malicious low-price orders on the NFT Marketplace and manipulating the NFT floor price through self-transaction, so that it can achieve the purpose of deliberately clearing the target NFT loan position.

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What are the solutions?

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Hybrid Mechanism

Collectivism is a description of the P 2 Pool model. Since the common creditor of the NFT loan position is the ETH fund pool, the last asset returned in the event of a default must also be ETH. Therefore, the P 2 Pool model must go through the NFT-ETH asset conversion process, which must rely on good NFT liquidity to achieve. However, the P2P model is different in that the final liquidation essentially does not have an auction process. After a default occurs, it only needs to be realized through the transfer of NFT, thus bypassing the liquidity problem of NFT. However, there is a problem of inefficiency in the P2P model. Therefore, NFT lending projects can actually adopt the hybrid model, with P2P as the lining, but a P2Pool skin. A possible form of expression is to first attract ETH Lender to open an NFT Lending Pool for different NFTs, and set the conditions for lending in the Lending Pool, such as interest rates, supported NFTs, and loan periods, etc. Those who meet the conditions can borrow unconditionally. The first-level person in charge of the NFT Lending Pool belongs to the creator of the Lending Pool. The Lending Pool can accept third-party deposits and act as a direct creditor of the Lending Pool creator. Therefore, the above mechanism builds a hierarchical structure:

Third-party depositor —> Lending Pool creator —> NFT mortgage borrower

The Lending Pool creator is the direct creditor of the NFT mortgage borrower. When a default occurs, the NFT collateral will be deposited in the multi-signature address, and then the third-party depositor, as the creditor of the Lending Pool creator, will claim back the ETH deposit. At this point, the Lending Pool creator can choose to sell the NFT or keep the NFT himself to repay the debt owed to the third-party depositor. If the creator of the Lending Pool fails to repay the debt within a certain period of time, it is equivalent to giving up the ownership of the NFT and being fined a part of the funds, and then agrees to execute the liquidation of the NFT and return the auction proceeds to the third-party depositor.

The above mechanism is a possible form of hybrid mechanism,The advantage is that the use of a hierarchical structure gives the first-level creditor the right to dispose of NFT, which can choose to auction or retain. More options and extended auction time are also conducive to smoothing the NFT price curve. Moreover, since the above-mentioned mechanism is generally a fixed-term loan, there is no problem of default and liquidation during the duration of the loan. Default and liquidation only occur after the end of the duration, so it also avoids the situation of group liquidation caused by the downward market environment.first level title

NFTs are priced individually

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Machine Learning Pricing

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asset class replacement

The general logic of asset class replacement is that a third party forms an asset package by locking additional liquidity to back the value of a single NFT, and then uses the asset package as a collateral position for mortgage lending. This method is essentially a nesting doll, which is equivalent to NFT holder paying interest twice for its own borrowing, and converting liquidation assets from NFT to ERC-20 assets. The specific structure is as follows:

NFTHolder —>ERC-20 Asset Package —> DeFi Mortgage Lending

The first interest payment is the bribe that needs to be paid when obtaining the ERC-20 asset package from the C-end. There are two points to note in the bribery process: First, this mechanism is generally aimed at high-rarity NFTs. Since mainstream NFT lending agreements use floor prices as pricing methods, high-rarity NFTs are generally excluded from the NFTFi ecosystem. Through this pricing model, NFTholder can allow its NFT to participate in NFTFi in a form close to its true value after paying a certain fee, and bribery is only the cost that needs to be paid in this process; the second is the C-end user who evaluates the price of the NFT "If you receive money, you will have to bear more costs." Each price evaluation has a fixed period, and within the period, the ERC-20 assets paid by C-end users and the NFT of the NFT holder are escrowed by the pricing agreement. NFT holders can use the ERC-20 asset package to participate in DeFi mortgage lending and pay interest. The amount of assets that can be lent is LTV x $(ERC-20 asset package). Therefore, the main risk faced by the C-end when evaluating the price of NFT is that when the price evaluation period expires, if the borrower believes that the current value of the NFT is <LTV x $(ERC-20 asset package), he will have the motivation not to return the value from DeFi Then the corresponding ERC-20 asset package will be liquidated, and the C-end price evaluator can only get NFT in the end.

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NFT Liquidity Solution—Currently Common Trading Paradigms

The four transaction modes of order book, aggregator, fragmentation protocol, and AMM form the core of NFT transactions.secondary title

Order Book NFT Marketplace

NFT Marketplace is divided into two types: corporate system and community system. The corporate system is represented by Opensea, which aims to provide NFT trading as a service to customers and obtain transaction fees; while the community-based NFT Marketplace aims to use a reasonable token model to rebate community users, represented by X2Y2 and LooksRare.

At present, the leader of the order book NFT Marketplace is still the corporate Opensea. According to the assumption of rational people, the transaction fee on the X2Y2 platform is the lowest and can also obtain a part of the transaction mining income. NFT traders have the motivation to transfer to platforms such as X2Y2 for transactions. But in fact no such conversion occurred. The main reason may be related to the current character portrait of NFT trader.Most of the NFT speculators do not come from token speculators, and their wealth appreciation mainly comes from the NFT premium. Therefore, for them, trading is mainly a service. Compared with better, faster, smoother trading services and more and better NFTs, a little trading rebate is insignificant to them.Therefore, for the community-based NFT Marketplace, it is necessary to fully recognize the fragmentation between NFT speculators and token speculators, and to design an economic model taking this fragmentation into consideration. In fact, the mainstream community-based NFT trading platforms that have already issued coins have not carefully considered the separation of the two parts of the participants in the design of the token economy. Key questions include:

• Governance tokens do not provide transactional convenience or privileges for NFT traders;

• Since NFT traders have no incentive to buy governance tokens, they will not retain the token rewards for transaction mining, causing a lot of selling pressure;

• Governance token holders can obtain platform fee sharing through pledge, but the potential huge selling pressure reduces the motivation of token holders to pledge;

• The interests of NFT traders and governance token holders are essentially at odds, so there may be irreconcilable contradictions between the two in terms of community governance;

To sum up, the design of the token economy of the NFT Marketplace that has already issued tokens does not bind the interests of the community, tokens, and NFT traders to a certain extent. The core of the problem is how to make NFT traders actively hold coins. The demand for currency holding should match the essential needs of NFT traders, and the most essential needs of NFT traders include two points: better access to whitelisted NFTs and better trading of NFTs. Better acquisition of NFT needs to be done from the perspective of the community, while better trading of NFT needs to be considered from the perspective of product, liquidity and price.

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NFT transaction aggregator

The differentiated competitive strategy of aggregators has been a commonplace issue since Gem and Genie. From the very beginning of Car, to safe mode, to gas monitoring and then to the finer-grained secondary K-line, the aggregator iterates products step by step, Towards a more professional trading experience. At the same time, various data platforms such as NFTnerds and Uniswap have also started NFT transactions. At present, the competition in the NFT aggregator track is fierce.

There are several basic recommendations for NFT transaction aggregators:

• One is to carefully divide the user groups of NFT traders and grasp the underlying needs of different types of traders. NFT traders are divided into professional traders and ordinary traders. Blur’s simple UI and sufficiently detailed candlestick charts are prepared for professional NFT traders at the product level. Too much information interference will make the experience of professional traders very bad ; Element is mainly for ordinary traders, and the page has a wealth of NFT information, which is easy for ordinary traders to get started. This is a typical example of designing products according to user groups;

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Fragmentation protocol and AMM

Both NFTX and Sudoswap are instant liquidity pools, homogeneous treatment of non-homogeneous assets, and democratization of market maker identities. However, the fragmentation protocol has undergone multiple rounds of narrative changes since its birth, from share fragments to trading to collective ownership. Share fragments should be a narrative that has been eliminated at present, while the current banner of trading is mainly led by NFTX, and collective ownership is a new narrative proposed by Tessera.

Regarding trading, the mechanism of NFTX is essentially the same as that of Sudoswap. The difference in form is as follows:

• NFTX has an additional fragmentation and casting process in the trading process;

• In terms of NFT pricing, NFTX uses the ERC-20 UNIV2 pricing model, while Sudoswap uses a price curve (linear or exponential);

In addition to meeting the needs of NFT transactions, fragmented protocols such as NFTX can expand narratively:

• Like Sudoswap, it serves as a liquidation liquidity pool for NFTFi;

• The middle layer of NFT DeFi;

The phrase as the middle layer of NFT DeFi may be somewhat abstract. At present, there are actually some NFT options, NFT futures, and NFT structured products. In essence, the above three types of products are speculations in the process of NFT price fluctuations. It is also speculative. Derivatives based on fragmented NFTs based on the ERC-20 standard will be more granular than NFTs. Moreover, there is already a relatively complete and mature system for various derivatives of the ERC-20 standard. . But despite this,It may be too early to do NFT derivatives at this stage. The bottom-level NFT liquidity has not been properly resolved, and the derivatives field, which requires higher liquidity than lending agreements, will face more serious price manipulation and liquidity problems.

So where will the value of Sudoswap be?The bottom layer of Sudo comes from the existing NFTX, which was spawned by retail investors' speculative demand for royalty-free, fast transactions, and close to the floor price. Therefore, as long as NFT traders' speculative demand for NFTs close to the floor price does not disappear, Sudoswap will always exist as a reasonable trading model.first level title

What might be the new trading paradigm to address NFT liquidity?

The existing trading paradigms are fighting on the primitive continent, and gradually form a stalemate.On the one hand, the way to break the current deadlock is to open up new continents and introduce more NFT asset classes, and on the other hand, it is to introduce new participating roles and connect vertically and horizontally among different stakeholders.Just as the increase in NFT lending products will spur the NFT aggregate lending market, Sudoswap and other AMM DEXs and royalty fees will spur the emergence of NFT professional market makers.

As for why professional market makers appear after Sudoswap, the main reason is that the Sudoswap protocol itself does not charge LP market-making fees and income, and for the order book Marketplace, the handling fee for each transaction needs to be paid in the form of service fees. On the other hand, the existence of the royalty fee makes Opensea-based market makers bear excessively high market-making costs. Sudoswap and the follow-up NFT Marketplace royalty fee have drastically reduced market-making costs. Under the premise that the current market-making revenue based on ERC-20 currencies has dropped sharply, NFT itself has high volatility, and the slippage of each transaction is also higher. In the case of reasonable market making, the market making income of NFT projects may be higher than that of ERC-20 market making. Based on the principle of arbitrage, the original ERC-20 market makers on the chain have the motivation to switch to NFT market makers.

The introduction of the role of NFT market maker will bring some new changes to the entire NFT field. Before the emergence of NFT market makers, the value circulation of NFTFi on the chain can be expressed as:

ETH and NFT for Retail —> NFTFi —> NFT Liquidation —> NFT Marketplace

The emergence of market makers will add a link to the above path:

ETH and NFT for Retail —> NFTFi —> NFT Liquidation —> NFT Market Maker —> NFT Marketplace

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The extension of NFTFi: the relationship between gaming guilds and NFT leasing agreements

Game guilds often have a built-in NFT leasing system for use by game guild members. The common solution is to build an on-chain and off-chain account system, multi-signature or MPC collaborative management. Game guilds have great regional characteristics, and it is easy to absorb a large number of local GameFi gold players. The guild also uses this as a bargaining chip to obtain NFT gold assets of many GameFi games at a lower price. Going back to the motivation of the GameFi project party to cooperate with the game guild, is the GameFi project party coveting the regional characteristics of the game guild, or the game players behind the game guild? If it is a gold player who covets the game guild, what is the advantage of the NFT rental agreement with the same number of users compared with the game guild?

Both the NFT leasing agreement and the game guild essentially provide user leasing functions, so for a rent collection system, the number of users is the main indicator that determines the upper limit of the platform. It is true that game guilds can obtain income through NFT premiums, but this model is not necessary for NFT rental agreements. For game guilds, the strong regional characteristics are their advantages and also their disadvantages for future expansion. After all, GameFi players in a region are limited. But for the NFT leasing agreement, its users are all GameFi gold players on the chain; in addition, GameFi game assets that game guilds can provide gold service need to be purchased, and it is impossible to purchase all GameFi NFT assets on the chain for users However, for NFT leasing agreements, in theory, using liquidity incentives and other means can motivate all NFT holders to provide NFT leasing liquidity in the leasing agreement. However, the relationship between the game guild and the NFT rental agreement is not completely competitive.first level title

Is NFTFi a pseudo-narrative?

Is NFTFi a real need? So how can doing something based on a real need be considered a pseudo-narrative? At present, the market size of NFTFi is still small. In addition to being restricted by the liquidity of NFT, the current NFT asset class is too single, mainly PFP. PFP NFT has no utility other than social attributes, so how can the logic of Fi be closed?Whether it is DeFi or GameFi, the basic requirement of Fi is that its underlying assets have a certain interest-generating ability: the underlying assets of DeFi can generate interest in currency, and the underlying assets of GameFi can realize value feedback through leasing. So I want to put aside all the factors that currently limit the development of NFTFi, the logical gap of PFP NFTFi may be here.

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