Original link: https://mp.weixin.qq.com/s/uM1diLBYHIys8x2RIMVVdQ
Author: Ggg, Redline DAO
Editor: Alyson, Redline DAO
* The full text is about 3500 words, and the estimated reading time is 8 minutes
introduction
With the Fed's interest rate hike and a series of crashes, Crypto has ushered in another round of deep bear market. Back in 2018, after ICO was regulated, the market value of the Crypto industry fell by 80%. Then DeFi innovation emerged, and Crypto once again refreshed the ATH of the previous cycle by 3 times. Thanks to the high transparency and excellent capital efficiency of Blockchain, the Crypto industry is self-correcting and iterating at a very fast speed. Similarly, the NFT market is also reshuffling, rugging and building round after round at a very fast speed:
In 2022, the NFT market transaction volume continued to decline. In November, the daily transaction volume was less than 15 million US dollars for many days. In this round of bear market, BAYC, as a representative of blue chips, has fallen by 54% of its price (149-69), with the lowest point being only 49E.
The 81 NFT series analyzed by DappRadar have an average decline of 59.6% in 22 years, and the market value has dropped from $9.3B at the beginning of the year to the current $3.7B;
After the launch of BendDAO, it also experienced a liquidity crisis due to a sharp drop in the price of BAYC, and the staking pool was almost emptied;
APE coin launched by BAYC has fallen from its ATH of $26.7 to the current $5.2, a drop of 80%.
In 2022, we also ushered in a huge explosion of NFT use cases. From the Peer to Protocol lending pool proposed by BendDAO to the NFT DEX design of sudoswap, the NFT market is becoming more mature:
In 2022, the number of NFT collections has increased significantly compared to 2021. At the beginning of the year, there were only 39,300 NFT series, which has increased to 226,000, an increase of 475%;
In DeFi use cases: trading platforms continue to innovate. Looksrare and x2y2 use their own tokens to incentivize users to Trade to Earn, and launched a vampire attack on Opensea. Blur innovated and used Bid to Earn to bring deeper liquidity and narrower spread to the entire NFT market. Sudoswap's vAMM design makes NFT purchases more homogeneous tokens. Lending platforms such as BendDAO provide a Peer to Protocol lending model to more efficiently release NFT liquidity.
The derivatives market has also seen new breakthroughs: NFT Perp launched contract trading with NFT Floor Price as the index; Hook launched NFT options products, allowing users to hedge the risk of falling prices of the NFTs they hold.
NFTfi products on the market are relatively complete: blur, which issued its tokens on 2.14, greatly improved the liquidity of the entire NFT market through bid to earn; sudoswap introduced the AMM algorithm for NFT purchases for the first time and provided a new NFT market-making paradigm; in terms of lending, Taker will also launch a new liquidation plan in 2023, which will no longer use the auction model for assets that trigger the liquidation price, but will simulate Aave to be liquidated directly by the protocol or arbitrageurs. However, the market discussion on NFT derivatives is still lacking, especially in this bull-bear transition, NFT players have no solution to the price drop of JPGE in their hands except to take bid stop loss or diamond hand. This article will take this opportunity to sort out the industry status of NFT derivatives.
01 The current NFT market lacks hedging means
The process of deleveraging is painful, but it is also a good time to review and plan for the next cycle. At present, the NFT market is not perfect and is still a long-only market. Speculators can only make profits through the floor rise of NFTs. When the market falls, there is no way to deal with it except holding and dumping. As a result, many NFTs will not return to zero but completely lose liquidity. After the hot spot fades, no one places orders or trades.
Sudoswap provides a way for LPs to enter the market based on the pain point of low capital efficiency, allowing LPs to enjoy a share of the handling fee while providing liquidity to NFTs. However, in the current NFT market, LPs have no way to hedge their own risks, expand the scale of liquidity, or support long-tail assets. The current NFT market has the following pain points:
Blue-chip NFTs are expensive, and ordinary players cannot benefit from the rising prices of blue-chip NFTs;
In various financial markets of NFT, due to the difficulties in liquidation and market making caused by discontinuous price changes, capital efficiency is still very low and the market scale cannot expand;
Unable to short NFT prices and hedge holding/LP risks.
NFT derivatives are indispensable to the healthy development of the NFT market. The improvement of NFT derivatives will bring healthier liquidity and more use cases to NFTs. Common derivatives include: contracts, options, insurance, and funds.
Contracts or options: Building NFT-based contracts, which requires a continuous NFT price mechanism (oracle) and an automated market maker that can provide sufficient depth
Insurance: Insure NFTs against theft, loss, etc. based on their value. The model may be the same as our traditional insurance model, but it is necessary to introduce clauses specific to the characteristics of NFTs.
Fund: You can establish an "index fund" based on the value of different NFTs, or use NFTs to establish a foundation (similar to DAO) and then invest, etc. There are already many attempts in this form in the market, including the Metaverse Index/Whale Token, etc., which will not be elaborated in subsequent articles.
The following content will be covered in this article:
Overview of NFT derivatives market
Analysis of the advantages and disadvantages of current NFT derivative products
02 NFT Futures
NFTperp
NFTperp adopts the vAMM design, which does not require LP to establish a liquidity pool. Long/short traders are counterparties to each other. The beta mainnet will be launched in November 2022. The contract supports the use of ETH to trade 5 NFT series including AZUKI/BAYC/MAYC/PUNK/Milady, with a maximum leverage of 10x.
product
The transaction adopts the vAMM design. There are slippages in the transactions of both parties who open positions. The protocol dynamically adjusts the virtual pool depth by adjusting the k value to avoid excessive slippage caused by extreme price fluctuations. At the same time, the traders are both counterparties, and the loss of one party is the profit of the other party. All profits and losses are settled in the margin vault. The price feed adopts the True Floor Price model, obtains transaction data from NFTX, eliminates overpriced/underpriced transactions according to its own average price algorithm, and calculates the floor price through TWAP to avoid incidents such as Franklin manipulating the BAYC floor price.
data
Trader: 1444
Trades: 24,281
Volume: 57,308 E
Fee Generated: 168.9 E
Open Interest: 1,465.9 E
Liquidation: 502 E
Financing
On November 25, the NFT perpetual contract trading platform Nftperp announced that it had completed a $1.7 million seed round of financing with a valuation of $17 million. This round of financing was participated by Dialectic, Maven 11, Flow Ventures, DCV Capital, Gagra Ventures, AscendEX Ventures, Perridon Ventures, Caballeros Capital, Cogitent Ventures, Nothing Research, Apollo Capital, Tykhe Block Ventures, OP Crypto and other institutions.
A token swap of $100k with FloorDAO at seed round valuation ($17m FDV), and market making cooperation with FloorDAO and price feed of Uniswap v3 TWAP oracles.
potential risks
There is a risk of malicious team behavior: the True Floor Price Oracle algorithm is not public, and there are unknown risks;
The Oracle designed by TWAP cannot respond to extreme market conditions in a timely manner, such as the rapid drop of BAYC to 48E;
Generally, attacks on Perp are based on Oracle attacks (refer to GMX). Currently, there are no restrictions on short-term opening and closing of positions in seconds.
Key highlights
The vAMM design, rather than zero-slippage opening, avoids the risk of price manipulation arbitrage similar to the GMX design;
Collaborated with NFT call options market HOOK.
Market competition
There are different attempts at NFT contracts in the market. For example, Mimicry Protocol adopts the design of Prediction Market to provide a way to short NFT prices. Users only need to choose the direction and amount of opening a position to complete the transaction. Unlike nftperp, which balances the long-short ratio by the level of funding rate, mimicry adjusts the level of returns through True Odds, thereby incentivizing traders to balance the long-short ratio on the protocol: True odds only affect profits, not losses.
For example: Let's assume there is a market with $1M long and $2M short. The Short Side's True Odds would be 0.5x, and the Long Side's True Odds would be 2.0x. So, all other things being equal, a long position would double in value if the reference price for this fictional market were to increase by 50%
Summarize
03 NFT Options
Putty&Cally
Putty is an OTC marketplace for creating and trading options on specific NFTs (single or group of NFTs) and ERC20 tokens:
NFT holder: pledge NFT and buy put to hedge the risk of price decline
Speculator: Pledge ERC tokens and sell puts to get premium
product
The NFT collection floor price is obtained through Spicyest's data, and players set parameters such as strike price/premium/expiration date by themselves. The product has an options calculator as a guide, but it is still relatively complicated for options novices.
波动率计算：Volatility is calculated by taking the past 90-day log-price returns and extrapolating it forward by T days
Trade Option 
Exercise Option
The Putty team launched a new product, Cally, in March 2022, which allows NFT holders to create and trade covered call options for their NFTs to earn income. They can also package multiple NFTs into a Covered Call Vault to set a unified Premium, Strike price and Duration:
The auction of Option on Cally adopts the Dutch auction method, where the price decays over time and is on a first-come, first-served basis, thus protecting the interests of NFT holders to the greatest extent;
Because in the options market, it is basically a long-term stable profit, and the principal will be lost in an extreme market situation, so the design of the Dutch auction is essentially a design to protect the yield earner (earn more money on weekdays) and transfer the risk to the risk seeker.
data
Order Makers: 18
Matched Order: 93
Total Volume: $221,342
Premium: 8.21 E
Financing
Maven 11 Capital investment, funding and valuation unknown
risk
Low capital efficiency:
Putty is an OTC marketplace for creating and trading options on specific NFTs (single or group of NFTs) and ERC20 tokens:
The peer-to-peer OTC trading network relies on Bidder to have sufficient liquidity;
In the case of insufficient bidders, Putty's collateral ratio needs to be very high (low capital utilization), and the premium collected is very low (low APY).
Key highlights
Putty is the first OTC market for NFT options, applying the Black-Scholes formula to the volatility of the NFT market.
Market competition
Compared with nft contracts, nft options have more attempts: Fuku, incubated by @AlphaVentureDAO, minted options into ERC-721s NFTs. If users do not want to exercise the options after expiration, they can transfer and sell them on Looksrare and Opensea; Hook, which has reached a cooperation relationship with nftperp, focuses on call options, and feta adopts Write to Ear to encourage NFT holders to provide option liquidity, and Jpex has launched fee-free option trading.
Summarize
04 Insurance
Insurance has not been tried much in the NFT market. Pixpel is a one-stop platform that focuses on providing services for Crypto Games, including Market Place, Dex, wallet and insurance. Game projects can cooperate with Pixepl, and players can purchase insurance for their NFT items, which is equivalent to 70% of the price. The duration is 3 months and can be renewed up to 3 times. The current insurance terms are still being determined and have not yet been implemented.
05 Market Reflection
The Crypto market and NFT saw a small rebound at the beginning of 2023. There are probably several narratives driving NFT:
Blur's airdrop expectations drive trading volume
APE’s pledge has begun to bring a new wave of wealth effect
BendDAO increases the pledge rate of blue-chip NFTs so that the leverage ratio can be magnified
SUDO’s upcoming airdrop will further heat up the NFT market
But at the same time, the inflow of stablecoins has not improved. Binance stopped the deposit and withdrawal of US dollars, which made Binance in a state of continuous net outflow of US dollars. The total market value of USDC and USDT has remained basically the same in the past three months (no external capital injection). The low unemployment rate and strong economic data have kept the FED hawkish. The continued rise in interest rates is likely to break through 5. Everything shows that deleveraging activities are still continuing. Liquidity has not been injected. When will this wave of small bull market turn into a new round of silence? In this case, NFT holders have no other way to survive the cold winter except diamond hand, and the demand for NFT derivatives is still urgent at the moment.
Position statement: This article is only for industry academic discussion and exchange and does not constitute investment advice. Readers are advised to conduct investment research.
Original content, all rights reserved, no reproduction without permission
