NFT Derivatives Market: Potential Breakouts And Opportunities

Key Points:

• The NFT derivatives market is having new breakthroughs to catch up with the new game.
• NFTperp and Putty&Cally are two typical markets of NFT Futures and NFT Options trading.

The issuance of Blur has driven the recovery of the NFT market, and its bid-to-earn method has greatly improved the liquidity of the entire NFT market. This article will take this opportunity to sort out the current status of the NFT derivatives industry.

Overview

With the Federal Reserve raising interest rates and a series of thunderstorms, crypto has ushered in another round of deep bears. Turning back the time to 18 years, after ICO was regulated, the market value of the crypto industry fell by 80%, and then DeFi innovation appeared, and crypto once again refreshed the ATH of the previous cycle by 3 times.

Thanks to Blockchain’s high transparency and excellent capital efficiency, the crypto industry is self-correcting and iterating at an extremely fast speed. Likewise, the NFT market is shuffling, rugging, and building round after round at breakneck speed:

• The trading volume of the NFT market has been sluggish for 22 years. In November, the daily trading volume was less than 15 million US dollars; in this round of bear market, BAYC, which is a representative of blue chips, has fallen by 54% of its price (149-69 ), the lowest point is only 49E;
• The 81 NFT series analyzed by DappRadar have experienced 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 pledge pool was almost emptied;
• The APE coin launched by BAYC fell from an ATH of $26.7 to the current $5.2, a drop of 80%.

In 2022, we also ushered in a big 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 and more mature:

• In 2022, the number of NFT collections will increase significantly compared to the number in 2021. At the beginning of the year, there were only 39,300 NFT series, and now it has increased to 226,000, an increase of 475%;
• In terms of DeFi use cases: trading platforms continue to innovate, Looksrare and X2Y2 use their own tokens to encourage users to Trade to Earn, and conduct a vampire attack on Opensea, Blur innovates and uses Bid to Earn to bring deeper liquidity and Narrower spread, sudoswap’s vAMM design makes NFT purchases more homogeneous tokens; lending platforms such as BendDAO provide a Peer to Protocol lending model to release NFT’s liquidity more efficiently;
• New breakthroughs have also been made in the derivatives market: NFT Perp launched contract transactions with NFT Floor Price as the index; Hook launched NFT option products, allowing users to hedge the risk of falling NFT prices.

The NFTfi products on the market are relatively complete: Blur, which issued coins 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 to do Market paradigm; In terms of lending, Taker will soon launch a new liquidation scheme in 23 years.

The assets that trigger the liquidation price will no longer use the auction model but simulate Aave and be directly liquidated by the protocol or arbitrageurs. However, the market’s discussion on NFT derivatives is still lacking, especially in this bull-bear conversion. NFT players have no solution to the price drop of JPGE in their hands except to accept bid stop loss or diamond hand. This article will Take this opportunity to sort out the industry status of NFT derivatives.

The current NFT market lacks hedging methods

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 it is still a long-only market. Speculators can only make profits through the rise of the NFT floor. When the market falls, there is no way to deal with it except hold and dump. As a result, many NFTs will not return to zero but are completely Liquidity was lost, and no one placed pending orders and transactions after the hot spot receded.

According to the pain point of low capital efficiency, Sudoswap provides a way for LPs to enter the market, allowing LPs to enjoy the share of handling fees and provide NFT with liquidity. However, in the current NFT market, LPs have no way to hedge their own risks and expand liquidity. scale, and cannot support long-tail assets. The current NFT market has the following pain points:

• The price of blue-chip NFT is high, and ordinary players cannot enjoy the benefits of rising prices of blue-chip NFT;
• In the various financial markets of NFT, due to the difficulties of liquidation and market-making caused by discontinuous price changes, the efficiency of funds is still very low, and the market scale cannot be expanded;
• It is not possible to short NFT prices and hedge position/LP risks.

NFT derivative is indispensable for the healthy development of the NFT market. The improvement of the NFT derivatives will bring healthier liquidity and more use cases to NFT. Common derivatives include contracts, options, insurance, and funds.

• Contracts or options: To establish NFT-based contracts, which requires a continuous NFT price mechanism (oracle machine) and an automatic market maker that can provide sufficient depth
• Insurance: According to the value of NFT, insure the theft and loss of NFT, the model may be the same as our traditional insurance model, but it is necessary to introduce clauses specific to the characteristics of NFT
• Funds: “Index funds” can be established according to the value of different NFTs, or a foundation (similar to DAO) can be established with NFTs and then invested. There are already many attempts in this form in the market, including Metaverse Index/Whale Token, etc., which will not be repeated in subsequent articles.

NFT Futures

NFTperp

NFTperp adopts the design of vAMM, no LP is required to establish a liquidity pool, long / short traders are counterparties to each other, the beta mainnet will be launched in November 2022, and the contract supports ETH for 5 NFTs such as AZUKI / BAYC / MAYC / PUNK / Milady series, with a maximum leverage of 10 times.

Product

The transaction adopts the vAMM design, and both sides of the opening position have slippage. The protocol dynamically adjusts the depth of the virtual pool by adjusting the k value so as to avoid excessive slippage caused by extreme price fluctuations. To make a profit for one party, all profits and losses are settled in the guarantee vault; the price feed adopts the True Floor Price model, obtains transaction data from NFTX, eliminates transactions that are too high/low in price 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, NFT perpetual contract trading platform Nftperp announced the completion of a US$1.7 million seed round of financing at a valuation of US$17 million. This round of financing was funded 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 that participated in the investment.

Reached a token swap of $100k with a seed round valuation ($17m FDV) with FloorDAO and reached market-making cooperation with FloorDAO and Uniswap v3 TWAP oracles price feed.

Potential risks

• There is a risk of the team doing evil: the True Floor Price Oracle algorithm has not been made 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 decline of BAYC to 48E;
• Generally, attacks on Perp are based on Oracle attacks (refer to GMX). Currently, there is no restriction on the operation of opening and closing positions within seconds.

Core Highlights

• The vAMM design, instead of opening positions with zero slippage, avoids the risk of price manipulation and arbitrage, similar to the GMX design;
• Reached cooperation with NFT call option market HOOK.

Competitors

There are different attempts at NFT contracts in the market. For example, Mimicry Protocol adopts the design of a Prediction Market to provide a way to short NFT prices. Users only need to choose the direction and amount of opening positions to complete the transaction, and nftperp is balanced by the level of funding rate The long-short ratio is different, and mimicry uses True Odds to adjust the level of returns, 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%.

NFT Options

Putty&Cally

Putty is an OTC marketplace for the creation and trading of options on specific NFTs (single or group) and ERC20 tokens:

• NFT holder: Pledge NFT, purchase put to hedge against the risk of falling prices
• Speculator: Pledge ERC tokens, sell put to get premium

Product

The NFT collection floor price is obtained through the data of Spicyest. Players can set parameters such as strike price/premium/expiration date by themselves. The product has an option computer as a guide, but it is still relatively complicated for options beginners.

• Volatility calculation: Volatility is calculated by taking the past 90-day log-price returns and extrapolating them forward by T days

The Putty team launched a new product, Cally, in March 2022, allowing NFT holders to earn income for their NFT creation and trading covered call options, and 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, and the price decays with time and is first-come-first-served, which protects the interests of NFTholder to the greatest extent;
• Because in the options market, it is basically a stable long-term profit, and an extreme market will lose all the principal, the design of the Dutch auction is essentially a design to protect the yield earner (make 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, financing, and valuation unknown

Risk

Capital inefficiency:

Putty is an OTC marketplace for the creation and trading of options on specific NFTs (single or group) and ERC20 tokens:

• The Peer to Peer OTC trading network relies on Bidder to have sufficient liquidity;
• In the case of insufficient Bidder, Putty’s collateral ratio needs to be high (low capital utilization rate), and premium charges are very small (low APY).

Core Highlights

Putty is the first otc market for NFT options, which applies the Black-Scholes formula to the volatility of the NFT market.

Competitors

Compared with nft contracts, nft options have more attempts: Fuku, incubated by @AlphaVentureDAO, has turned the option mint into an ERC-721s NFT. Users do not want to fulfill the options after they expire, so they can transfer and sell them on Looksrare and Opensea; and The Hook that nftperp has reached a partnership with is mainly call options, and feta uses the Write to Ear method to encourage NFT holders to provide liquidity for options, and Jpex has launched option transactions without handling fees.

Insurance

Insurance has not 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 project parties can cooperate with Pixepl, and players can Buy insurance for your own NFT props, which is equivalent to 70% of the price. The Duration is 3 months, and you can renew up to 3 times. The current insurance terms are still being determined and have not yet landed.

Market reflection

The Crypto market and NFT ushered in a wave of a rebound at the beginning of 2023. There are probably the following narratives for NFT:

• Blur’s Airdrop Anticipation Drives Volume Rise
• APE’s staking begins to bring a new wave of the wealth effect
• BendDAO has increased the pledge rate of blue-chip NFT so that the leverage can be enlarged
• SUDO’s airdrop is coming to further upgrade the fiery NFT market

But at the same time, the inflow of stablecoins has not improved. Binance stopped the deposit and withdrawal of US dollars, making 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 (without external capital injection),

The low unemployment rate and strong economic data keep the Fed in a hawkish style, and the continuous rise in interest rates is likely to exceed 5. Everything shows that deleveraging activities are still continuing, and liquidity has not yet been injected. What will happen to this small bull market? Time to turn for 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 present.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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Harold

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