Key Points:
At present, the NFT lending platform Papr’s products have been launched. How does it achieve lending?
Papr simplifies the realization of the lending market into a token transaction process, which involves three types of roles: Borrower, Holder, and liquidity provider (LP).
The borrower deposits the collateral into the Papr smart contract, mints a native token $paprMEME, sells it through Uniswap V3, and converts it into assets such as ETH. The interest on borrowing will be directly included in the target price of $paprMEME, and theoretically, the price of $paprMEME will gradually rise over time. When repaying the loan, the borrower only needs to pay $paprMEME equal to the borrowed amount, but because the price rises, the interest payment is also realized.
LP needs to provide the liquidity of $paprMEME and ETH in Uniswap V3 by itself. If you want the price of $paprMEME to be within the liquidity range, you need to own both $paprMEME and ETH. At present, the officially recommended transaction fee ratio is 1%, and among the loan products that have been launched, all LPs have chosen this level of fee.
The lender is also the buyer of $paprMEME. In the same way, the lender buys $paprMEME and holds it. As time goes by, the price rises and interest income is obtained.
This design refers to the mechanism of Squeeth (Opyn). Squeeth first implemented a perpetual contract with a continuous funding rate based on Uniswap V3. Because the transaction in Squeeth is the square of the ETH price, the benefits of direct long and short positions do not match, and the longs need to continue to pay the shorts a funding rate. In Papr, the borrower also needs to continue to pay interest to the lender. Both also require LPs to provide liquidity. Papr stands for Perpetual APR, which is continuous APR.
The advantage of Papr is very obvious; that is, the efficiency of capital utilization is 100%, and there is no waste of funds in projects such as BendDAO. But it also makes it difficult to start. The total funds of the lender and the borrower need to match, and it is impossible to simply motivate the borrower or lender to quickly improve various data.
This is because of the difference between two important $paprMEME price parameters – the Target price and the Mark price.
Because the transaction in Papr is based on the liquidity pool of Uniswap V3, when the lender buys $paprMEME or the borrower mints and sells $paprMEME, the transaction price will fluctuate, and there is a discrepancy between the market price of the transaction and the intrinsic value represented by the asset must be exactly equal. The transaction price on Uniswap is called the mark price, and the value of the underlying asset of $paprMEME is called the target price. Papr needs to encourage the mark price and the target price to be as close as possible, and the demand and supply of funds need to be as close to balance as the two ends of the balance.
In the beginning, the target price and mark price are equal, and the target price will increase over time as interest is accrued. Whenever someone deposits collateral to mint $paprMEME, the contract checks the gap between the mark price and the target price.
If the mark price is too low, it means that many people are willing to mint $paprMEME and sell it, that is, more people need funds, then the interest rate should rise. The target price and interest charges will be adjusted according to the following formula, which also refers to Squeeth’s funding rate formula.
In order to prevent oracle attacks, the result of the interest rate formula has a maximum value and a minimum value, which means that the APR of the debit side has an upper limit and a lower limit.
Usually, because the target price will continue to rise, the mark price is lower than the target price and moves with the target price. In extreme cases, the mark price may also exceed the target price, which represents a negative interest rate.
In a loan, whether the collateral can be used, the maximum amount of funds that can be borrowed, and when to liquidate are determined by the following parameters, including the type of collateral, the price of the collateral, the maximum loan-to-value ratio (LTV), and the value of the underlying asset. Papr uses Reservoir’s oracle machine, which can take a weighted average of the floor price over a period of time to prevent the price of the oracle machine from being manipulated through short-term transactions.
The maximum amount of $paprMEME that can be borrowed as collateral is:
NFT oracle price * maximum LTV / target price
For example, if the target price is 1.1 USDC, the time-weighted floor price of PUNK is 1000 USD, and the maximum LTV is 50%, then the amount of $paprMEME that can be borrowed is 1000*0.5/1.1 = 454 $paprMEME.
Borrowers may be liquidated if the target price rises because the value of the collateral falls or because interest has accumulated over a long period of time. The liquidation bid adopts the exponential decay Dutch auction, and the auction price gradually decays from high to low until someone is willing to bid, and the starting price is 3 times the floor price. If the borrower has multiple collaterals, each collateral will be liquidated separately, and there will be a minimum time interval between the liquidation auctions of each collateral, and the remaining funds after liquidation will also reduce the debt of the borrower.
In the above example, the collateral type can only be PUNKs, but not one $paprMEME can only use one kind of NFT as collateral, it can also be a collection of multiple NFTs. When using, the borrower can use multiple NFTs as collateral at one time. But different collaterals will be deposited into different vaults, each vault has its own LTV, and the liquidation standards are different.
At present, Papr’s products have been launched, and the first $paprMEME can be mortgaged and minted with the following ten NFTs.
As of February 24, the sum of the floor price of all collateral is 78 WETH; the sum of the generated debt, that is, the market value of $paprMEME is 21.9 WETH, and the mortgage ratio is 3.56. The TVL of the $paprMEME liquidity pool on Uniswap V3 is $54,423, the total historical trading volume is $233,981, and the trading volume in the past 24 hours is $1,178.
Compared with other similar projects, Papr has increased the capital utilization rate of the lender. It can be considered that the needs of the borrower and the lender are always matched, and there is no waste of funds.
But LP is also introduced. If the liquidity is not good enough, the experience of borrowers and lenders will be very bad. In the case of other projects that incentivize borrowers and lenders, Papr may need to incentivize LPs more in the future. At present, LP charges 1% of the debit and lender transaction fees, which may be too high and may need to be reduced in the future.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.
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Harold
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