Paradigm new research: How RICKS solves the NFT fragmentation reorganization and liquidity problems

Note: The original author is Paradigm research partners Dave White, Dan Robinson, and Fractional protocol founder andy8052. In this article, they describe a NFT fragmentation solution called RICKS. This design solves the reorganization problem and ensures RICKS can always be converted back to its underlying NFT while avoiding the liquidity and coordination issues of all-or-nothing buyout auctions.

Content directory

1 Introduction

2. Today’s NFT fragmentation

2.1. Reorganization issues

2.2. Buyout auction

2.3. Purpose of Buyout Auction

2.4. Unexpected buyout

2.5, reserve price

3 Real case study: zombie Punk buyout

3.1 Buyout

3.2 Unhappy holders

4、RICKS

4.1. Overview

4.2. Examples

4.3 Potential results

4.4. Complete the buyout

4.5. Auction details

5. Additional functions

5.1 Arbitrage

5.2. Auction reserve price

5.3, fragmented release

5.4. Apply for auction proceeds

6, the next step

introduce

This site introduces a new NFT fragmentation primitive: RICKS (full name is Recurrently Issued Collectively Kept Shards).

When you split the NFT into RICKS, the protocol will mint new pieces and sell them at a constant rate (for example, 1% per day or 5% per month). The proceeds will be distributed to existing RICKS holders as staking rewards.

This design solves the restructuring problem and ensures that RICKS can always be converted back to its underlying NFT, while avoiding the liquidity and coordination problems of all-or-nothing buyout auctions.

Today’s NFT fragmentation

Restructuring issues

It is very difficult to split NFT, because it will face an all-or-nothing problem.

If you want to sell 25% of 8 biscuits, you can sell two of them. If you want to sell 25% of a company’s shares, you can sell 25% of its future cash flow. In either case, the remaining 75% is still useful to you.

On the other hand, having 75% of in-game assets may not allow you to use part of that asset in a given game. If you sell 25% of this type of asset to a buyer and they refuse to sell it back, or even if they lose their private key, then you are in trouble. Since the NFT cannot be reorganized, even if you have a nominal 99.99% ownership, the ownership may become worthless.

Therefore, the fragmentation protocol must provide some method to reorganize the NFT fragments back to the original NFT. We call this design constraint a reorganization problem.

Buyout problem

The most popular solution so far was pioneered by fractional.art, namely Buyout auction.

Situation: Alice uses a fragmented protocol with a buyout auction mechanism to sell 25% of her NFT to Bob.

Buyout auction: A third-party Clara can trigger a fragmented NFT buyout auction at any time: the person who bids the highest ETH (probably Clara) will get the entire NFT, and the sales proceeds will be distributed to Alice and Bob at a ratio of 75/25.

Purpose of buyout auction

The buyout auction exists to ensure that Alice and Bob’s fragments maintain their fair market value by solving the reorganization problem.

To understand why, suppose Alice uses a protocol that does not provide a buyout auction to divide her NFT (representing in-game assets) into 100 shards. In this case, only people with all 100 shards can rebuild the NFT.

If someone accidentally destroys or loses one of these 100 fragments, then no one can rebuild this NFT, and the remaining fragments will lose all value. Due to this risk, even when fragmented, the value of each of the 100 fragments is much lower than 1/100 of the original NFT value.

And through a buyout auction, losing one of the fragments will no longer destroy the value of the other fragments. For example, if Alice loses one of her shards immediately after casting, she can initiate a buyout auction and submit the winning bid to retrieve the NFT, 99% of which goes to her.

In this sense, the buyout auction is not so much a function as it is a necessary evil . They are certainly not for the benefit of potentially interested buyers like Clara. They are not stakeholders of fragmented NFTs from the beginning, so they are not worthy of special consideration in the agreement.

Accidental buyout

Unfortunately, due to funding constraints, buyouts may encounter problems: if the NFT is valuable enough, once the auction starts, no one may be able to raise enough money to pay a fair price.

For example:

Alice has an NFT worth 1,000 ETH. She uses a fragmentation protocol with a buyout auction mechanism to split it and sells 50% of the fragments to Bob. Subsequently, the market conditions suddenly changed, and the fair value of this NFT jumped to 100,000 ETH, which is the value that the NFT might obtain when sold under the best conditions (for example, at a Christie’s auction).

Capital constraints: It may be unrealistic to find buyers who are willing to purchase the NFT at a full valuation in a short period of time. Perhaps this NFT can only receive up to 10,000 ETH in an on-chain auction within a week.

Shard holders are divided: Since 10,000 ETH is far below the fair value of this NFT, Alice will strongly object to selling at this price. On the other hand, Bob does not have a strong sense of fair value and is willing to sell this NFT at a lower price because it is still 10 times the original purchase price, so that he can buy other NFTs he prefers.

Collector Opportunity: Clara, a savvy collector, discovered this opportunity and initiated a 10,000 ETH buyout auction. And no one, including Alice, could beat Clara’s bid in a short time, so she won the ownership of this NFT, and then a few months later she sold the NFT for 100,000 ETH at the Christie’s auction.

Reserve price

To avoid this situation, fractional.art includes a reserve price in its buyout auction mechanism, which specifies the lowest price at which a buyout auction can be initiated. In the above example, if the reserve price is set to 100,000 ETH, Clara will not be able to initiate an auction with 10,000 ETH.

The problem comes when users try to set a reserve price. In the above example, Alice does not want to sell the NFT at a fair value well below 100,000 ETH, but Bob does not mind. Reaching an agreement here can be very difficult and controversial, especially when the parties involved may change as the pieces change hands.

In practice, setting a reserve price requires the active participation of fragment owners. Therefore, they will not be updated frequently due to the attention needs of the participants. No one has yet found a reserve price mechanism to solve the problem of accidental buyouts.

Real case study: zombie Punk buyout

Paradigm new research: How RICKS solves the NFT fragmentation reorganization and liquidity problems

The Party of the Living Dead is a group of NFT enthusiasts. They united to bid on a rare zombie CryptoPunk, and then they bought a zombie CryptoPunk for 1200 ETH, and then they submitted it on fractional.art Fragmentation is carried out, and the fragments are allocated to contributors according to their contribution ratio.

During the initial fragmentation process, 5 whale addresses collectively owned 56% of the NFT fragmentation share, while the remaining fragments were scattered in the hands of other 451 participants.

Buyout

The fragments of this zombie Punk were subsequently traded on Uniswap , and an anonymous collector realized that the price of these fragments was underestimated relative to the value of other zombie Punks . The collector purchased enough fragments to increase his personal reserve price voting rights, then lowered the buyout reserve price and initiated a buyout auction.

This buyout auction started with a price of 1,100 ETH (lower than the purchase price of the Party of the Living Dead) and finally closed at 1,900 ETH.

Note: If you make a contribution to this end PartyBid, make sure you’re here to collect your dead token, so that you can in here to receive your final buyout price section.

Unhappy Fragment Holder

Many non-whale fragment holders are not satisfied with this buyout auction, and they think the price of this acquisition is too low.

Unfortunately, they found themselves basically powerless. Taken individually, none of them can get enough liquidity to beat the bid and buy NFT directly. Even if they want to join forces to purchase NFTs as a single bidder, coordination costs and limited available time make this path infeasible.

RICKS

Overview

RICKS solved the restructuring problem while avoiding the liquidity and coordination problems of a complete buyout.

The agreement is not an all-or-nothing buyout auction mechanism, but is to issue new RICKS for a given NFT at a constant rate (for example, 1% per day, or 5% per month), and these new RICKS are in auction Sold in ETH, the proceeds will be provided as staking rewards to existing RICKS holders.

As we will explain below, buyers who wish to increase their ownership and have limited liquidity can always trigger an auction for less than the number of new RICKS in a whole day.

This means that the ownership of NFTs always flows gradually to those who are willing to pay the most for them, while existing owners benefit from it.

RICKS allows motivated buyers to acquire most ownership of the NFT over time. We solve the restructuring problem by adding an extremely majority owner to complete their ownership and reorganize the NFT mechanism.

for example:

When Alice’s NFT is worth 1000 ETH, she uses the RICKS mechanism to sell 50% of her NFT shards to Bob. Now that market conditions have changed, the fair value of the NFT at the time of the best execution sale is 100,000 ETH. However, no one can provide it with so much liquidity in a short period of time.

The shard holders are divided: the third party Clara wants to buy the entire NFT at a price of 10,000 ETH. Bob is satisfied with the proposal, but Alice does not agree. She does not want to sell the NFT at a price lower than fair value. At this point, Alice and Bob each have 50 RICKS (100 in total), and the issuance rate is 1%.

Collector opportunity: Clara participates in the daily auction and bids at an estimated price of 10,000 ETH. For 1% of this NFT, the total value of a RICKS is 100 ETH.

Protect the fair price: Alice realizes that the bid is too low, and bids at a valuation of 90,000 ETH, or 900 ETH to buy a RICKS. Since she owns half of the existing RICKS and will receive half of the auction proceeds, she only needs to provide 450 ETH to fund her bid.

Potential result

After that, the following two results may occur:

1. If Clara’s bid does not exceed Alice, Alice will win the auction. She will pay 450 ETH to Bob and will receive an additional RICKS, so she now has 51/101 RICKS, or 50.5% of the supply. Alice and Bob trade with each other at a price that they both consider favorable.

2. If Clara’s bid is higher than Alice, for example, a fair price of 1,000 ETH is paid, then Alice and Bob will each get 500 ETH, and Clara will get a RICKS, so she now has 1/101 of the shard, or slightly less 1%. Similarly, Alice, Bob, and Clara all traded at a price they were satisfied with.

Either way, if this activity persists over time, it will attract attention and buyer liquidity, thereby increasing the likelihood that all parties involved will trade at a fair price.

Complete buyout

Suppose that Clara’s goal is to own this NFT and repeatedly bid for RICKS at a valuation of 100,000 ETH, which is a price that no one can match. In the end, she owns 99% of RICKS (perhaps 458 days after winning the auction). Now, she wants to claim this NFT. For this reason, an additional mechanism will be required in the agreement.

One way is to admit that RICKS has some inherent flaws and use a lottery mechanism. For example, if a holder controls 99% of the NFT shards, they may trigger a coin toss procedure. If the coin is face up, they get the entire NFT (so they get an additional 1%), if the coin is face up, Then the positions of other owners will double (therefore, this holder will lose 1%). From the perspective of expected value, this procedure is completely fair.

In order to avoid strange situations near the 99% boundary, we can allow major shareholder holders of NFT shards to trigger the coin toss procedure at 98%, 90%, or even 75%, but it should be noted that the farther away from the 99% threshold, The lower the probability of winning the remaining shards.

Auction details

If fragmented NFTs become expensive enough, even a 1% bid may be prohibitively expensive for most people. In addition, on certain days, no one may be interested in auctions, so holding an auction would be a waste.

Therefore, the RICKS protocol can implement an on-demand auction system instead of holding auctions every day: if it has been t days since the last auction and the issuance rate is r/day, then the agreement will auction

Paradigm new research: How RICKS solves the NFT fragmentation reorganization and liquidity problems

Pieces. We take the elapsed time and the minimum value of 1 day to avoid sending too many RICKS at once.

For example, if the issuance rate is 1% per day, so r=1.01, and half a day has passed since the last auction when a new auction is triggered, then the agreement will issue and sell

Paradigm new research: How RICKS solves the NFT fragmentation reorganization and liquidity problems

A new supply of RICKS.

Incidental function

arbitrage

Just like the current fragmented NFT, we hope that RICK can trade on AMM DEX such as Uniswap. This provides a convenient arbitrage mechanism to ensure that the RICKS auction will not be completed at an excessively low price: if the closing price of the auction is significantly lower than the RICKS price on Uniswap, arbitrageurs can purchase RICKS in the auction and then immediately Sell ​​on Uniswap to make a profit.

Auction reserve price

We can consider taking this logic further and specifying that the RICKS auction bid must be at least 5% or 10% higher than the Uniswap TWAP price.

Because a sufficiently active buyer can still accumulate ownership of the NFT for a long enough time frame, the restructuring problem will still be resolved. Moreover, since auctions are traded at higher prices than Uniswap, they may cause minimal selling pressure.

On the other hand, this modification will reduce the consistency of staking rewards for RICKS holders. It also makes restructuring more difficult, and it is difficult to judge its impact on the market a priori.

Fragmented release

RICKS provides a natural mechanism to start a new part of NFT fragments. NFT owners don’t have to provide fragments on Uniswap and choose a price. Instead, they can simply use RICKS to split and start as a 100% owner. Automatic auction to handle the rest.

Claim auction proceeds

Holders of RICKS need to pledge their RICKS to obtain auction proceeds.

However, this poses a challenge to composability. In particular, it is always impossible to determine how many RICKS are held by each centralized liquidity position on Uniswap V3, which means that auction proceeds cannot be directly provided to Uniswap V3 liquidity providers.

On the contrary, the RICKS protocol will track the total RICKS owned by all Uniswap V3 LPs, and use all the auction proceeds for the Uniswap V3 pool’s liquidity mining rewards, as described in this article. In this way, market participants are encouraged to provide liquidity to the fund pool as efficiently as possible.

There are other potential solutions to this problem, including (1) creating a packaged RICKS token containing RICKS and ETH auction proceeds; (2) redirecting auction proceeds to RICKS repurchase, but both have obvious disadvantages .

Six, the next step

We hope that RICKS will make NFT fragmentation more interesting and useful.

They also opened up a whole new design space. For example, we can allow RICKS pledgers to automatically use their rewards for bidding in future auctions. RICKS can also be brought together to form a “committee” on the chain, composed of RICKS with similar attributes, such as Zombie Punks or Wizard Hat and Scarf Ocelots.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/paradigm-new-research-how-ricks-solves-the-nft-fragmentation-reorganization-and-liquidity-problems/
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