JPEG'd: Unlocking NFT Liquidity with DeFi

Author: Chole, Chain Tea House

The total value of the NFT market exceeded $40 billion in 2021, with popular collectibles like CryptoPunks and Bored Ape Yacht Club valued at well over $1 billion at current market prices.

As NFTs continue to evolve, they are no longer just static artworks; they have gradually begun to derive more functionalities and utility-related applications. Holders want more ways to access other layers; otherwise, these valuable NFTs will be restricted, and holders will have to sell them to truly deploy their value.

In some ways, this situation is similar to early Ethereum, where, before the emergence of DeFi, token holders had very limited ways to realize the value of their tokens other than selling them on secondary markets. Thus, DeFi emerged to introduce many different ways for users to gain liquidity and deploy their previously locked capital, such as through lending, leveraged yields, and loan agreements.

With the emergence of new DeFi, users have gained more liquidity and achieved more effective capital allocation.

Today, as NFTs have gained immense value, they have transformed from simple digital art into self-sustaining ecosystems with built-in token releases, airdrops, and other revenue-generating mechanisms.

However, much of their value remains locked, and holders still need to sell their NFTs to realize value. Therefore, the emergence of JPEG'd aims to develop a novel DeFi with original, non-fungible debt positions (NFDP) to unlock that value.

NFDP allows holders to deposit their NFTs as collateral into JPEG and borrow a portion of their total value. These collateralized debt positions are trustless and permissionless, and they even allow users to use their NFTs as capital collateral to access the value of their NFTs.

1. Project Overview

JPEG'd is developing this new DeFi primitive in the field, aimed at enabling NFT holders to leverage their NFTs as collateral. The original, non-fungible NFDP is very similar to traditional collateralized debt agreements in DeFi but includes some additional features specific to NFTs, with some functionalities relying on the liquidity and market capitalization of specific collectibles. Therefore, only selected collectibles will be added to the protocol.

Thus, minimizing volatility, utilizing high price floors, and focusing on mature collectibles will help JPEG'd minimize its potential bad debt risk and retain internal collateral. Over time, the DAO management can vote to whitelist new projects to join the protocol.

The process of using NFDP with JPEG is very simple. Users can deposit their whitelisted NFTs as collateral into JPEG's smart contract and start utilizing it for lending mechanisms. Once this NFDP is opened, JPEG will mint a synthetic stablecoin $PUSd that corresponds to the loan amount and send $PUSd to the user. The user can then deploy their stablecoin loan elsewhere while their NFT remains locked on the JPEG platform.

This will effectively transform NFTs from static artworks into yield-generating products. Once users have utilized their loans, they will repay the principal and accrued interest and retrieve their NFTs from JPEG's vault.

To enhance liquidity, JPEG's DAO initially acts as the primary liquidity provider. The protocol employs various mechanisms to incentivize the broader community to provide additional liquidity. This is particularly important for maintaining a 1:1 peg of $PSUd to the dollar and enabling users to easily convert $PUSd to other stablecoins, minimizing slippage as much as possible.

2. Application Scenarios

The loan interest rate is generally around 2% per annum and adjusts dynamically over time. Users also need to pay a 0.5% withdrawal fee, and both fee structures help provide continuous liquidity to the treasury. Interest will accrue as long as users have outstanding debt positions, and full repayment is required for users to retrieve their NFTs from JPEG's treasury.

However, JPEG allows users to take on debt positions of up to 32% of the collateral value, and they can increase their borrowing limit by depositing and locking $JPEG tokens for one year. This helps maintain the value of the $JPEG token, and as the market value of NFTs continues to grow, demand for the $JPEG token can expand accordingly. If the debt-to-equity ratio reaches 33% or higher, the user's position will be liquidated.

Novel Insurance Mechanism:

JPEG'd has also developed a novel insurance mechanism that can only be realized when the JPEG'd DAO guarantees all issued debts. Users can purchase optional insurance to repurchase their NFTs upon liquidation, with the optional insurance premium set at 5% of the borrowed debt amount. If users purchase insurance and their position is liquidated, they can repurchase their NFTs after paying off all outstanding debts and liquidation fees. Users will have 72 hours to repay this debt; otherwise, JPEG's DAO will own the NFT, and the insurance agreement will become void.

3. Token Mechanism

$JPEG is the native governance token of JPEG, with a total supply of 69,420,000,000.

The distribution of JPEG tokens is allocated for the protocol team, its advisors, the DAO, and public donation activities, with the total allocation being:

Team: 20,826,000,000

Advisors: 3,471,000,000

DAO: 24,297,000,000

Donations: 20,826,000,000

The team and advisor allocations are distributed linearly over two years. Overall, the JPEG team, advisors, and DAO will control 70% of the token supply, while the remaining 30% will be allocated to public donation organizations. Currently, there are 20,826,000,000 tokens in circulation.

Token holders can participate in governance by submitting proposals and voting, primarily limited to modifying various parameters of the protocol, such as changing the treasury's debt limits, interest fees, or approving credit limits for certain NFTs. The token can also increase the governance-selected NFT limits by locking it in smart contracts.

The JPEG protocol involves deposits, interest, liquidation, arbitrage, and earning fees from treasury asset yields in the $PUSd liquidity pool. Therefore, as more loans are issued, the protocol will earn more fees, continuing to whitelist the most popular NFT collectibles and promoting more active user behavior to align with the protocol's best interests.

Moreover, each time users send their NFTs to JPEG's treasury and initiate NFDP, they will receive a loan amount priced in $PSUd, enabling seamless loan payments and allowing the protocol to control its services and debt repayment methods more directly.

By reusing liquidity plans and collaborating with other protocols (such as Abracadabra and Tokemak) to develop factory pool curves, users can withdraw their loans in $PSUd and then exchange them for other stablecoins like $MIM, $USDC, or $USDT. Users can also earn liquidity provider rewards by adding liquidity to that curve pool.

4. Investment Institutions

While JPEG'd is not the only service in this field, it has also gained support from Dapper Labs CEO Roham Gharegozlou, the company behind Cryptokitties and NBA Top Shot. The protocol will initially provide loan services for Cryptopunks holders and will later expand to NFT projects like EtherRocks, Art Blocks, Dino Pals, Autoglyphs, and Bored Ape Yacht Club.

Additionally, Chainlink is building a custom price oracle for JPEG'd, which will provide a floor price in ETH for the smart contract treasury.

5. Team Introduction

JPEG'd is an anonymous team, but the team envisions expanding NFTs into music royalties and albums in the future.

6. Chain Tea Review

NFTs are digital assets in cryptocurrency that can be linked to content such as images or videos. For instance, CryptoPunks form a collection of 10,000 randomly generated punk pixel art images, each with a unique set of attributes, and many rare CryptoPunks have been sold for millions of dollars each. However, CryptoPunks and other NFT projects often exist in an isolated market, and the team behind JPEG is working to eliminate this phenomenon. Their goal is to integrate these collectibles more comprehensively into the broader DeFi ecosystem so that users can gain liquidity by using their NFTs as collateral while still retaining ownership of their NFTs.

In the long run, JPEG'd may face many competitors. Therefore, if it does not seize a leading advantage in the market and quickly produce usable mechanisms, JPEG'd could easily be surpassed by better competitors.