nftperp v2: A New Way Forward

The Road to v2

Since our private beta launch in November 2022, the NFT market has had one dominant trend: down only. With the top ten blue chips being down over 60% by floor price in 2023, it’s no secret that it’s been a rough year for apes and punks alike. Despite this, we’re confident there are few better times to build and ship in such an exciting space than right now. Our v1 private beta was certainly not exempt from these market conditions – this allowed us to take a step back and look at what exactly went wrong to determine how to best move forward in iterating on the first and top NFT derivatives exchange in crypto.

Private Beta (v1) Recap

v1 was launched on November 5th, 2022, for whitelisted users only and ran until sunsetting on July 6th, 2023. During this period, we saw over 2,500 unique wallets trading over half a billion USD in volume – an unprecedented amount for a product of its kind. Given the dominance of bearish sentiment in the NFT space, a vast majority of traders were short for the duration of the beta, with short OI making up over 99% total OI for some collections.

A traditional AMM (like Uniswap v2’s) functions by having liquidity providers supply two tokens in some ratio (xy=k) to back a curve of all possible prices between the two assets. For any given price of one asset, requisite liquidity is available for trading. Our v1 beta employed a virtual AMM model, where the price curve is backed by a single asset ($WETH), used to fill trades at any given price along the curve for the quote asset (an NFT collection’s floor price). 

Because of this, profit for traders is realized against the margin of open trades, with long and short traders paying funding rates to each other – with the insurance fund covering any differences when imbalanced. Given that the short OI was so high, the insurance fund was covering a substantial amount of imbalance, and our system was sunset to prevent further damages. No user funds were lost in this process, but any traders with unrealized PnL (uPnL) at sunset will be able to receive total compensation in $vNFTP at a discounted price of $0.063 or 50% of their positive uPnL in $WETH gradually from the v2 insurance fund inflow of taker fees and liquidation fees. You can read more about why we decided to sunset v1 here, and traders can redeem their unrealized PnL here. 

Fusion AMM Overview

In order to return with the best and most sustainable product possible for traders, a few critical features needed to be addressed:

1. Accurate mark pricing + lower price impact
2. Balance funding rate payments despite long/short imbalances
3. Providing Liquidity

In a nutshell, we wanted to maintain the benefits of our v1 system (available liquidity, customizable/isolated pool parameters, easy bootstrapping for new markets, permissionless market making) while also addressing the above issues. We believe our new Fusion AMM model is the best way forward.

The fusion AMM consists of a new and improved AMM and a decentralized limit order book (DLOB) to ensure the best of both worlds. The diagram below presents a high-level overview of how the system will function.

Decentralized Limit Order Book (DLOB)

The DLOB helps ensure deep liquidity with low price impact + slippage on trades via limit orders and direct counterparties between takers and makers at a given price, solving a crucial issue from our v1 beta. By having a place for taker orders to rest and be matched as necessary, the entire system becomes more scalable and mitigates the possibility of any LPs or our protocol having to cover significant imbalances between long/short positions. This also helps independent price discovery occur on nftperp – especially when combined with the new AMM.

AMM

The key benefit of an AMM is that it allows for low liquidity pools to be bootstrapped easily. Given the lack of liquidity inherent to NFTs relative to ERC-20s, we wanted to maintain this benefit while improving upon its limitations. The AMM now serves as a liquidity source that can fill in the gaps of the DLOB. Trading directly against an AMM results in slippage and price impact disadvantageous to traders. nftperp v2 picks the best path between orderbook and AMM depending on the size of the market order and liquidity available to achieve the best execution for any given order.

Order Types + Matching Engine

Another critical improvement in v2 will be the addition of new order types. In our v1 beta, market orders were a trader’s only option, creating less than optimal entries/exits and lacking risk management tools. V2 introduces limit, stop-loss, and take-profit order types. These orders are submitted on-chain and then executed off-chain by a network of keeper bots, which are incentivized by increasing keeper fees based on how close the execution price is to the mark price. Normal market and limit orders will incur a 15 bps fee while stop-loss and take-profit orders will incur 20 bps.

The matching engine will route orders differently based on whether it’s a market or limit order. Limit orders will rest on the DLOB until the conditions are met for it to be executed, at which point it will be treated as a market order. Market orders are executed immediately at the best available price provided firstly by resting orders on the DLOB while the rest of the order is filled by the AMM. This ensures optimal execution for users and minimal impact on the AMM.

To better illustrate how a trade is filled, let’s take a look at a quick overview of how the Fusion AMM routes a market order.

Liquidations

Liquidations in nftperp v2 transfer positions from the trader to the liquidator. This comes with a 2.5% liquidation bonus on the notional amount to incentivize liquidators. Post-transfer, some or all of these positions can be closed or held in perpetuity if desired. Accounts can be liquidated so long as the margin ratio is below 6.25%, calculated using the following equation:

Prospective liquidators can learn more and get started via our developer docs.

Insurance Funds

Last but certainly not least, v2 introduces a refined insurance fund model. The fund will be denominated in ETH and can be used to manage any bad debt within the system. LPs can freely deposit into the insurance fund to earn half of all taker fees and half of the leftover value from liquidated positions. This will allow the fund to slowly accrue value, returning value to LPs and serving as a crucial backstop in the few situations it may be needed. LP deposits are locked for 48 hours to ensure stability. 

Looking Forward:

The debate of AMM vs. orderbook has long been a prevalent one in the decentralized finance space. At nftperp, a hybrid model is the best way forward to bring out the strengths of both models while compensating for the weaknesses. Our new Fusion AMM is just one implementation of these models, which will help catalyze a breakthrough in trading non-fungible assets. 

Along with v2 Alpha comes new opportunities for users to earn and be rewarded for their support and usage of nftperp. More details are coming on how users can benefit from being an early supporter of nftperp. More details can be found in the coming weeks or in the ongoing conversation over on our Discord. Any announcements detailing v2 Alpha launch can be found first on our Twitter.