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nftperp Use Cases — Filling Gaps in NFT Finance

nftperp Use Cases — Filling Gaps in NFT Finance

It’s no secret perpetual futures are the most widely used financial instrument in Defi. At the height of the last bull market, Q3 2021, perpetual futures saw over $13 trillion in volume. Even in the current bear market, perps platforms are thriving, allowing traders to long or short assets as they please.

NFTs have experienced a similar explosion of growth over the past two years, but the glaring issue with this new asset class is its long-only nature. If floor prices aren’t rising, opportunities for profit on NFTs are scarce. Nftperp is built to fill this hole in the market, opening up a whole new suite of possibilities for NFT traders, collectors, funds, and other ecosystem participants.

What Does Nftperp Do?

Simply put, nftperp allows users to take long or short positions on the floor price of select blue-chip NFT collections using ETH as collateral. The protocol uses a virtual AMM (vAMM) based on Perpetual Protocol’s model for price discovery, storing all collateral in a smart contract vault. With a vAMM, one trader’s losses are another trader’s profits, and quote prices are determined by a dynamic bonding curve based on open interest. This model allows nftperp to facilitate trading without the need for a liquidity pool, while also minimizing slippage.

The protocol uses an in-house Chainlink oracle for price feeds, filtering out wash trades and outliers to create a true floor price. This serves as the mark price for a given collection. The other major component of perpetual futures is the funding rate, which works to balance open interest and minimize the deviation between index and perps price. The funding rate operates by having longs pay shorts a small fee, or vice versa, depending on funding rates being positive or negative.

Use Cases

There exist some clear flaws in the NFT market:

  • Hedging is nonexistent
  • Blue chip collections are inaccessible to most
  • No simple and capital-efficient way to obtain leverage
  • Marketplace fees and royalties cut into profits

In order to give a better understanding of why perpetual futures are key for the development of NFTs as an asset class, let’s walk through several scenarios illustrating each of these problems, how they’re solved by nftperp, and highlight who can benefit.

Scenario 1 — Hedging Yourself Against Your NFT Positions

Let’s imagine that you bought a Moonbird earlier this year and found yourself sitting on some serious gains after only a couple of days. You like the project and community, so you want to hold on to your bird, but at the same time want to lock in some profit in case the floor price retraces. Back in April when Moonbirds launched plenty of traders/collectors found themselves in this scenario. They were forced to either sell and give up a sweet NFT, or hold on through deteriorating market conditions and risk their gains. With nftperp, holders gain a new alternative, hedging their position with a short to protect their gains.

Executing a hedge with nftperp is relatively simple, the strategy involves opening a short position with an amount of exposure equal to the price of the NFT being hedged. This way if the floor price decreases the short will be paid equally to the value decrease on the NFT. This does assume the NFT being hedged is a floor-level piece. Hedging a rare NFT or 1/1 can be more difficult to execute accurately, as its price may not correlate exactly with floor price moves, but the same strategy would typically result in a significant level of downside protection.

This hedging strategy is useful to protect gains while retaining ownership of an NFT, so the holder can still access all the associated benefits such as whitelist opportunities, airdrops, and private group access. Another potential strategy involving hedging is delta-neutral airdrop farming, where a trader or NFT-owning fund or DAO would purchase an NFT and a corresponding short position simultaneously. Thus eliminating any market price risk while maintaining airdrop eligibility. The only costs here are the fees associated with opening/closing the position, and potentially the funding rate costs depending on which way open interest leans.

Scenario 2 — Retail Traders Who Can’t Afford Expensive NFTs

In this scenario, you’re an average retail trader who’s been priced out of blue-chip NFT collections due to double-digit ETH floor prices. Nftperp will allow you to create positions on Punks, BAYC, MAYC, Squiggles, Azuki, and Moonbirds with as little as $1 of collateral. For 99% of NFT traders, exposure to these collections has previously been unattainable.

With a major goal of Defi being to increase equality of financial opportunities, lowering this barrier to entry was one of the main drivers behind building nftperp. Not only will this flexibility cater to existing retail traders, but it will also make getting started with NFT trading much more user-friendly, which is huge for adoption. For traders of all sizes, there are additional benefits that will work in favor of everyone, whether you’re new to the game or are running an NFT-focused fund/DAO.

Scenario 3 — Benefits for Institutional Trading

In this third scenario, you’re a whale trader/fund manager/DAO treasury, and you feel confident that Bored Apes will see some short-term price appreciation and decide to purchase a floor Ape on Opensea for 70 ETH. You were right and the floor rises to 75 ETH over the next few days, and you decide it’s time to sell. At this point, you’ll be looking at 5 ETH in gains, but that’s before Ethereum gas fees, OpenSea’s 2.5% service fee, and BAYC’s 2.5% royalty fee, yikes. On a 75 ETH sale that’s 3.25 ETH + gas fees, slashing profits down to under 2 ETH. In the past 6 months, Opensea has taken in a massive $500 million in fees, which not only cuts into traders’ profits, it sucks liquidity out of the NFT market.

Opensea cumulative 6-month fees via Token Terminal

Nftperp offers a superior option for optimizing profit on short-term trades, with base fees for opening/closing a position set at .3%. This fee does scale depending on open interest in order to incentivize the balance between shorts and longs, but it would take an extreme scenario for this to even come close to OpenSea level fees. Additionally, the protocol lives on Arbitrum, which has significantly lower gas fees than Ethereum, and in fact the lowest of any Layer 2. These benefits exist no matter what amount of volume you’re trading with but are especially important for larger players.

On top of lower fees, perpetual futures are much more liquid than NFTs, since there’s no need to find a specific buyer who wants the NFT you’re selling. Instead of a time-consuming listing that may go unpurchased, or an auction that risks underselling, a position on nftperp can be closed at any time in just a few clicks. Liquidity is king, especially for institutional trading, but again these perks apply to all traders.

Scenario 4 — Leverage for Degens and Advanced Traders

Leverage is a powerful tool, and nftperp offers up to 5x leverage on longs and shorts, but with great power comes great responsibility. When you lever up on a perpetual future you effectively multiply your exposure, magnifying all gains and losses compared to your collateral. As a result, your position is much more sensitive to liquidation, so typically leverage usage requires expertise in NFT market dynamics and catalysts for the specific collection being traded. For traders with higher risk tolerance or strong conviction on a certain trade, leverage can provide increased capital efficiency.

Applications Across the NFT Finance Ecosystem

Perpetual futures aren’t the only piece of the puzzle when it comes to bridging the gap between DeFi and NFTs. Next let’s examine nftperp’s place within the larger NFT finance ecosystem that’s being built up, specifically focusing on interactions with options, lending, and market-making protocols.

Scenario 5 — Delta Neutral Yield Farming Strategy

NFT collateralized lending protocols like BendDAO and Jpeg’d present a relatively new opportunity for users to deposit their NFTs in a vault in exchange for fungible tokens. Users can then take these tokens into the wider Defi ecosystem to earn yield, later paying back their loan to unlock the deposited NFT. The main risk for borrowers is a liquidation of their NFT if its value drops and lowers their collateral ratio below a certain threshold. This is another scenario where hedging with a short becomes a useful tool. In the case of the deposited NFT losing value, the short will profit, providing a depositor with additional capital to repay enough of their loan and avoid liquidation.

This type of delta-neutral yield farming strategy is often used with fungible token collateral loans, and nftperp makes it available to nonfungible collateral, opening up the door for wider usage of these lending protocols.

Scenario 6 — Hedging for Put Options Sellers

Options are another form of derivative product making their way into NFT finance, a set of useful tools for locking in prices and earning yields. Another common downside protection strategy for holders is to buy a put option, granting them the right, but not the obligation, to sell an NFT at a predetermined price within a set time period. The put seller on the other side of the transaction takes on this downside exposure, in exchange for earning yield in the form of an option’s premium paid by the buyer. In order to hedge away this risk using nftperp, the put seller would take out a short on the same collection, protecting them if the option is exercised.

Scenario 7 — Hedging for Market Makers

NFT market makers and users of NFT AMMs can benefit from hedging as well. With platforms like Sudoswap introducing liquidity pool-based trading to the NFT market, liquidity providers can now deposit their NFTs and/or fungible tokens into these pools and specify bid/ask prices at which they will buy/sell NFTs. Traders can then buy/sell NFTs into the pool with prices determined by the pool’s bonding curve. When LPs have access to hedging through nftperp the bid/ask spreads should tighten, as bidders are able to mitigate downside risk by opening shorts in case of price drops. This will lead to improved liquidity within the pools and likely higher utilization by traders.

Example of wide spreads on Sudoswap

On the Current State of the NFT Market

Now that we’re fairly deep into bear market territory and the first wave of NFT hype has slowed, market participants are realizing the deficiencies of the asset class’ long-only nature. The common utilities associated with holding a certain NFT, private group access, whitelist privileges, airdrop access, etc. don’t hold up nearly as well during adverse conditions, making it hard to justify long-term holding while collection floors drop. Capital efficiency is another issue, as having capital tied up in such an illiquid asset prevents holders from accessing other yield opportunities. For these reasons NFT finance is seeing a surge of projects being built to fill these gaps in the market, and make NFTs a more attractive asset class in a diversity of market conditions. It could be compared to the run-up before DeFi summer, when so many new financial products were introduced to the fungible token market. A resurgence in bullish sentiment and reintroduction of liquidity into the NFT market could kickstart a similar narrative for NFTfi counterparts.

While the bear market continues it has become relatively clear which NFT projects are surviving, and it’s largely the same ones that achieved blue-chip status well before. Team and community strength are almost always the deciding factors in the longevity of NFT projects, and the market downturn has resulted in a much-needed cleanse of formulaic PFP projects, copycat derivatives, and other assorted soulless cash grabs. Nftperp is launching with support for selected collections that have proven their durability, enhancing holders’ ability to protect their investments, and widening the audience of traders who will be able to speculate on them. Overall, the new wave of NFT finance protocols being established can be seen as a sign of maturation for this novel asset class.

Article Written by @Rxndy444

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