Detailed Explanation of NFTX: An NFT Lending Platform that Solves NFT Liquidity

Author: Chole, Chain Tea House

There are thousands of buyers and sellers in the NFT market, and each NFT transaction requires a buyer to meet a seller to complete the trade, indicating that it is a market with low liquidity. So far, NFTs are facing a liquidity problem, especially for projects that are not highly valued but have potential. Therefore, projects focusing on the financialization of NFTs are trying to make NFTs as fungible and liquid as possible.

Although the NFT market is on the rise, many assets' potential remains untapped. However, NFT trading volume on Ethereum has exceeded $13 billion, and as new types of assets are tokenized on the blockchain, trading volume will continue to increase over time.

Historically, blue-chip NFTs in the market (like Punks) have the highest liquidity, but due to their exorbitant prices, many collectors cannot access them. As a result, NFT liquidity protocols have adopted several methods to address this. The first method is to create liquidity by facilitating the creation of liquidity pools, where users can deposit similar NFTs into the pool and redeem them at any given time, while the protocol's benefits are effectively built on a liquidity pool of a set of assets.

The second method is to create shards/fragments of a single NFT, traded as fungible fractional tokens. For example, one NFT can be converted into 10,000 fungible tokens. This method promotes greater liquidity by lowering the purchase price in exchange for the entire NFT, similar to how Robinhood fragments stocks, allowing buyers to purchase parts of a Tesla stock rather than a whole one. This is also a benefit of the NFTX liquidity protocol.

In Q1 2022, many NFTFi protocols launched, whether they had issued tokens or not; whether they were lending or options-related, there were countless options. With the NFT market gradually warming up, there will surely be unicorns emerging amidst the competition.

1: Project Overview

NFTX is a platform that uses NFTs as collateral to create ERC-20 tokens for trading. Currently, NFT works like CryptoPunks and CryptoKitties can be traded here. The purpose of NFTX is to facilitate better liquidity for NFT artworks, making it easier for users to realize the value of their NFT art portfolios.

Typically, ERC-20 tokens like AAVE, MKR, and SNX on Ethereum can be split by units like fiat currency. NFTs using the ERC-721 model are non-fungible tokens, each representing ownership by a specific user and are indivisible. Wrapping NFT tokens into ERC-20 fungible tokens makes them easier to trade and circulate, which is an innovation in the field.

However, general NFT collectors prefer to search for and trade individual NFT works; they do not wrap their collectibles for trading, and most users do not have the time for professional investment or possess specialized knowledge of NFTs. Those ordinary users who want to easily participate in NFT investments become the target user group for NFTX.

One feature of NFTX's model is that users can gain instant liquidity for NFTs with high vToken liquidity. For example, BAYC owners can immediately deposit their Bored Apes into the NFTX vault to receive BAYC vTokens. However, owners can sell the tokens on decentralized exchanges like SushiSwap instead of collateralizing the BAYC vToken.

When faced with poor liquidity, NFT owners may sell their NFTs at prices lower than those on exchanges like OpenSea.

Some of these features are similar to WBTC, as most users trading WBTC do not mint or burn WBTC. Arbitrageurs can also exploit the price difference between collateralized assets and fund prices. The third type of user for NFTX is liquidity providers, who provide liquidity for the underlying fund tokens to earn rewards. Currently, NFTX supports multiple blue-chip projects, and as the overall market size increases, the projects will become more diverse. The assets currently supported by NFTX include CryptoPunks, CryptoKitties, Axie Infinity, Avastars, Autoglyphs, and JOYWORLD JOYs.

2: Application Scenarios

Creating a Vault:

Anyone can create a vault for any NFT asset on Ethereum. Once a vault is created, any user can deposit eligible NFTs into the vault to mint a fungible token supported by the NFT, called "vToken."

Minting vToken:

Users deposit NFTs into an existing vault or one they created to mint a fungible vToken, representing a 1:1 claim on a random NFT within the vault.

Floor Prices:

Users can deposit their minted vTokens into an automated market maker (AMM), providing other users with a tradable liquidity market. As liquidity and trading volume are continuously established, vTokens backed by NFTs will enter a price discovery phase, leading to the emergence of floor prices.

Here, the floor price refers to the minimum price of a specific NFT. Users establish a floor price by minting and selling vTokens in a market they believe is overvalued. Simply put, if a user has 5 HashMasks and is highly interested in two of them, it means the user believes the value of the other 3 HashMasks is lower than the market price of the Mask Vault on SushiSwap. Therefore, the user will deposit these 3 HashMasks into SushiSwap and sell their 3 MASK tokens, thereby lowering its price and ultimately achieving a price discovery mechanism.

Collectors:

Collectors primarily aim to earn protocol fees, earning trading fees as liquidity providers and using vTokens as collateral for stablecoin farming.

Content Creators:

Content creators can also earn protocol fees by distributing NFTs in the form of vTokens through AMM, or even creating an instant liquidity market for new content.

Investors:

Investors can enter the most liquid non-cash trading markets to track the prices of specific categories of non-financial instruments.

NFTX's mission is to become the primary issuer of NFT vault tokens, allowing anyone to trade and invest in the NFT market without needing to supplement their foundational knowledge or specialized expertise when investing in individual assets. NFTX achieves maximum utility through this mechanism.

Establishing Funds to Solve Liquidity:

To increase liquidity, NFTX purchases funds, currently offering two types of funds: D1 Fund - ERC-20 tokens minted 1:1 with individual NFT contracts, and D2 Fund - a Balancer pool mixing multiple D1 funds.

3: Token Model

Token: NFTX

Total Supply: 650,000

Governance: 60% (i.e., 390,000 $NFTX) is distributed through community fundraising for liquidity, with half of the tokens (195,000 $NFTX) used for ETH fundraising and the other half for D1 NFT fund token fundraising. Over 3,000 ETH and six NFT assets have been raised so far. Of the remaining tokens, 10% will be distributed to the founding team, locked for five years, 10% for liquidity rewards, and 20% for yield farming.

4: Team Introduction

NFTX was developed by well-known Ethereum developer Alex Gausman (also known as gaus.eth). Like many others, Gausman made a lot of money in the financial markets in 2017 but lost even more. It wasn't until the pandemic in 2020 that he had more time to turn towards the Web3 world. Like many others, he had no technical skills or funds, but after delving deeper, he realized that the NFT market indeed lacked a mechanism for improving the liquidity of NFT collectibles.

5: Chain Tea Review

The trend of combining DeFi and NFTs has quietly taken root. Although most people's attention and market hotspots remain focused on finding composability within DeFi, some projects that are crossing DeFi into the NFT realm are beginning to show tremendous development potential. Many key opinion leaders have also pointed out this new direction worth developing.

Currently, while the mainstream of the DeFi industry still revolves around trading-based Tradefi, it is about to shift towards gamified Gamefi. DeFi monetary policy will also become more gamified, and users' funds will become the equipment conditions used in DeFi games.