​Ouyi Research Institute: Simple analysis of the advantages and disadvantages of NFT liquidity solutions

For most people in the crypto-asset space, liquidity is very important. There is liquidity mining in the Defi project, and Token rewards can be obtained by providing liquidity for trading pairs. In centralized exchanges such as Ouyi, there are coin earning services. Just like fixed deposits, you can get Token interest by locking assets for a certain period of time. . But in the NFT market, if you are optimistic about an NFT that you want to hold for a long time, then this part of the funds to buy the NFT is equivalent to being locked for a long time. Because of the unique characteristics of NFT assets, there are also big differences between NFTs in the same series, and whether the transaction can be subject to a large subjective impact, which leads to the lack of unified pricing standards for NFTs and the difficulty in valuation, which further leads to the fact that most NFTs currently face the The problem of poor liquidity.

On the one hand, new NFT projects continue to emerge, and celebrities and big brands follow to launch NFTs; on the other hand, the liquidity problem of NFTs is becoming an important factor limiting the ecological development of NFTs.How can liquidity be released from NFT?

In response to this problem, some solutions have been proposed in the industry. They can be roughly divided into three categories: NFT fragmentation, NFT-based Token issuance, and NFT mortgage lending. Let’s take a look at these solutions in detail.

Fragmentation of NFTs

NFT fragmentation refers to dividing a complete NFT itself, so that buyers can obtain a part of the entire NFT at a price of 1/N, and improve the liquidity of NFT by lowering the purchase threshold.

However, this solution faces the risk that NFT fragments cannot be reorganized. If someone accidentally loses or destroys one of the shards, the original NFT cannot be reorganized and all other shard NFTs will become worthless. For NFT holders, using this scheme risks completely losing the NFT and pays a certain amount of gas fee, but the income is equal to or less than the value of the NFT itself. In contrast, it is more efficient to directly sell the NFT. , so there are few users of this scheme.

Token issuance based on NFT

On March 17, Bored Ape Yacht Club (BYAC) announced the issuance of ApeCoin (APE) for building its decentralized community on Web3. It will be airdropped to users who hold BAYC and MAYC. Token holders enjoy exclusive access to the APE ecosystem and can also vote on the governance proposals of ApeCoin DAO. This is a typical representative of issuing Token based on NFT.

Some projects put forward a more grand narrative on the basis of NFT, such as integrating NFT into the Metaverse and Play to Earn games, adding Token issuance to the project roadmap, and launching ERC-20 Token as the currency of the NFT ecosystem. Tokens are often issued to NFT holders. In this way, NFT holders can sell these Tokens to obtain liquidity, and they can also use Tokens for liquidity mining to earn income, supplementing the lack of liquidity in their own NFT holdings.

However, the issuance of Token is dominated by the project party, and NFT holders are very passive here, and the corresponding value of different project Tokens still depends on the ecological richness and landing ability of NFT itself, which is of little significance to ordinary projects. At present, most of the tokens issued by NFT projects have become a bubble of temporary speculation because they have no inherent support.

NFT mortgage lending

NFT mortgage lending is also a solution that people have high hopes for. It can be divided into three categories: centralized model, P2P model and fund pool model.

Centralized model

The centralized model is an NFT mortgage loan business carried out by a centralized institution. Similar to bank mortgage loans, NFT holders need to fill in the application first, and then obtain liquidity funds by mortgage NFT, and need to pay interest for this and repay on time. Compared with traditional assets, NFTs are highly volatile products. In order to control risks, such platforms often only provide a very small loan-to-value ratio. In addition, this type of business is currently only carried out for head NFT projects with relatively stable prices such as BAYC and CryptoPunks.

For the pledgers, the centralized platform has never been able to eliminate the risk of platform running away and the risk of people doing evil, which requires the platform to be strong enough and have a better reputation as an endorsement in order to attract users to use it.

P2P mode

NFT P2P mortgage lending is similar to real P2P lending. When borrowing on the corresponding platform, you need to mortgage NFT first, and set the desired currency and repayment time, and then wait for someone who is willing to earn interest to quote this NFT mortgage order , mainly to submit the loan amount and loan interest that the lender deems appropriate. Similar to an auction, everyone can bid. You can then choose an order from these offers with the optimal amount and interest rate to complete the loan, but if the offer received is far below your expectations for the value of the NFT, you can only continue to wait for someone else’s offer. If the borrowing needs are urgent, then you will need to make appropriate concessions to get the loan quickly. When the loan expires, you need to repay the principal and interest in time to get back the NFT in the smart contract, otherwise the mortgaged NFT will be automatically transferred from the smart contract to the lender’s address.

This means that lenders have to bear the risk of borrower default. As risk controllers, they will carefully evaluate the value of the project when quoting for NFT borrowing needs, in order to seek to match the loan order at a reasonable price as much as possible. This not only gives ordinary projects the opportunity to obtain loans, but also perfectly solves the problem that NFT prices in the same series are not difficult to quote.

In terms of lending experience, since it is difficult for both lenders and borrowers to agree on the value of NFTs, it is difficult to ensure the response speed of lending demand, and the uncertainty of lending also reduces the lender’s capital utilization rate.

Fund pool model

The fund pool mode can be divided into two types. One is to directly establish a liquidity pool for a specific NFT series (such as Punk) and a certain Token (such as stablecoin, ETH). All people who have a consensus on the series can put the Token into the pool. To earn interest, NFT owners can inject NFT into the platform pool to directly lend Tokens. The other is that users deposit NFTs into the pool, mint a derivative token, and can redeem the assets in the pool at any time, and then put these tokens into the liquidity pool to exchange other tokens.

In this model, the loan has no maturity date and the interest rate is calculated based on the utilization rate of the asset.The oracle monitors the floor price of the NFT in real time. If the floor price of the NFT falls to the liquidation line, the NFT will be liquidated, and the system will compensate the fund providers with the liquidation funds.

Compared with other schemes, this method can be closed instantly, and the lender’s funds can be directly left on the agreement to generate interest without the problem of funds standing guard, so the interest rate of this scheme is lower.However, the fund pool model has the problem of oracle failure caused by price manipulation, as well as the possibility of serial liquidation, and the current solution basically uses the average floor price of NFT as a reference, which is not enough for the scarce funds in the NFT series. friendly.

Scheme comparison


Under the background of the NFT liquidity dilemma, which type of solution has more potential?

Comparing the advantages and disadvantages of the above solutions, the NFT fragmentation solution has few users due to the risk of irreversible recovery; the issuance of tokens based on NFT is generally promoted by the project party, and the NFT holders are relatively passive, and the exploration in this direction has little effect. ; NFT mortgage lending is a better solution at present. Among them, the P2P model is more common in terms of project adaptation. Both blue-chip projects and general projects may be successfully matched, but in terms of user experience, its response speed is slow. The bidding system makes it impossible for lenders to match orders after quotations. cause funding problems. The centralized model relies on strong platform endorsements and only serves other leading projects.

In contrast, the liquidity fund pool model can provide token rewards for both parties providing liquidity, which is obviously more advantageous. In order to ensure that the mortgaged NFTs can be successfully sold during liquidation, most of these projects control the liquidation risk by providing services for the top projects. In addition, the data on the NFT chain can be checked, which can effectively avoid the occurrence of repeated pledges of a single NFT. Therefore, Whoever can first attract more mainstream NFT access in such projects will have the advantage.

Of course, compared to the population of the entire NFT market, the number of users attracted by these liquidity solutions and protocols is still very small. The reason is that, on the one hand, the current liquidity scheme is not universal, and is often more friendly to blue-chip projects, while the holders of blue-chip projects belong to a minority; on the other hand, there are many NFT projects emerging every day, which can It is said that the development of NFT is still in its infancy, the pattern has not yet been completed, and new projects still contain greater opportunities. In the eyes of the NFT user group, compared with the sharp rise in the floor price of a few ETHs for individual NFT projects, the income of the NFT liquidity agreement is negligible, so they are more focused on discovering new projects.

With the continuous development of the NFT ecosystem, the liquidity problem will definitely become the focus of breaking through the development bottleneck in the NFT field, and the protocol to solve the NFT liquidity problem will capture great value in the future.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/ouyi-research-institute-simple-analysis-of-the-advantages-and-disadvantages-of-nft-liquidity-solutions/
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