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NFTX



NFTX


WHAT IS AN NFTX VAULT?

An NFTX vault is a smart contract that holds NFTs from a single collection and
tracks the balance of NFT-backed tokens, called vault tokens (or vTokens, for
short). For example, there is a PUNK vault which holds cryptopunk NFTs and
tracks the balance of PUNK vault tokens. The number of PUNK tokens in existence
is always equal to the number of cryptopunks in the PUNK vault. Anyone can mint
PUNK by depositing a cryptopunk, and anyone can redeem a random cryptopunk from
the vault by burning 1 PUNK token + paying a small fee.


WHAT IS A PRICE FLOOR?

The price floor of an NFT collection is the price of the cheapest NFT from the
collection. The term "floor NFTs" usually refers to entry-level, base-tier NFTs
that are within about 5% of the cheapest item in the collection.


WHAT ARE THE PRIMARY BENEFITS OF AN NFTX VAULT?

Benefit 1: Vault tokens.

Vault tokens (like PUNK) offer a way for NFT collections to get represented as
fungible cryptocurrencies that can be tracked on price charting sites like
CoinGecko and TradingView. Vault tokens can also be used as currencies within
collector communities and offer a way for investors to get partial exposure
without buying a full NFT.

Benefit 2: Floor liquidity.

Having good floor liquidity means that large amounts of floor NFTs can be bought
or sold without changing the price significantly. If two assets have 5% of their
holders decide to sell, then the asset with better liquidity will go down in
price less. Good liquidity is also necessary to attract big investors who wish
to make large orders without price shooting up instantly.

Benefit 3: Floor inventory.

Having good floor inventory means that there are lots of floor NFTs for
collectors to pick from. Usually in P2P marketplaces there are a few cheap items
for sale, and then rising prices for other items, however NFTX vaults price all
assets equally, so it is possible for collectors to pick from a larger selection
of NFTs that all have the same (low) price.

Benefit 4: Yield generation.

Every time someone uses NFTX to buy, sell, or swap an NFT there is a fee which
goes to stakers. There are two types of stakers, inventory stakers and liquidity
stakers, and fees are split between the two groups with 20% going to inventory
stakers and 80% goings to liquidity stakers. Inventory staking is simpler and
only requires staking the vault token itself (e.g. PUNK), whereas liquidity
staking is more complex and requires staking a combination of the vault token
plus an equally valuable amount of ETH (i.e. PUNK + ETH).


WHAT IS LIQUIDITY AND WHAT DOES IT MEAN TO PROVIDE IT?

Liquidity refers to the ease with which an asset can be converted to or from ETH
without changing the price. Providing liquidity means depositing two different
assets that can be traded against each other for a fee. For example, users can
provide PUNK and ETH, which allows traders to trade PUNK for ETH or (the
reverse) ETH for PUNK. As more people trade ETH for PUNK, the price of PUNK goes
up, and as more people do the reverse, the price goes down. Users who provide
liquidity are referred to as liquidity providers, or LPs.

NFTX currently uses Sushiswap for liquidity provision, but abstracts most of the
complexity away on the frontend to simplify the process for stakers.


WHY DO LIQUIDITY STAKERS RECEIVE MORE OF THE FEES THAN INVENTORY STAKERS?

The main reason that liquidity stakers earn 80% of fees and inventory stakers
only earn 20% is that liquidity stakers have to take on a form of risk called
impermanent loss.

Impermanent loss is a phenomenon specific to DeFi liquidity providers (LPs), who
deposit two different assets that get traded against each other (e.g. PUNK +
ETH). The effect of impermanent loss is that, as the two assets diverge from
their original prices at the time of depositing, LPs end up owning less of the
asset that goes up in relative value and owning more of the asset that goes
down. So, if the price of PUNK is 50 ETH at the time of an LP depositing, and
the LP deposits 1 PUNK + 50 ETH, and the price of PUNK later increases to 60
ETH, this means that the LP will end up with less than 1 PUNK and more than 50
ETH. Alternatively, if the price of PUNK were to go down to 40 ETH, then the LP
would end up with more than 1 PUNK and less than 50 ETH.

The more that the two assets diverge from their original prices, the worse this
effect is for the LP. For example if PUNK were to go up 10x to a 500 ETH price,
then the LP would be left with far less PUNK than they originally started with.
For this reason, we recommend that users only choose to take part in liquidity
staking if they are well versed in the risks of impermanent loss. You can learn
more about impermanent loss by googling the term, as it is a common concept for
DeFi LPs.


IF LIQUIDITY STAKERS EARN 80% OF FEES, THEN WHY ARE INVENTORY STAKING APRS
SOMETIMES HIGHER THAN LIQUIDITY STAKING APRS?

Even though a larger portion of fees go to liquidity stakers, the amount of
income that each individual staker receives depends on the size of the staking
pool they are a part of. For example, if 10 ETH of fees have been earned by a
vault in the last month, then 8 ETH of fees have gone to liquidity stakers and 2
ETH of fees have gone to inventory stakers—so, if the size of the liquidity
staking pool is 80 ETH and the size of the inventory staking pool is 10 ETH,
that means that liquidity stakers earned 1 ETH for every 10 ETH of capital they
had staked, whereas liquidity stakers earned 2 ETH for their 10 ETH of capital.


WHAT DOES IT MEAN IF ONE TYPE OF STAKING HAS A % APR GREATER THAN 0, AND THE
OTHER TYPE OF STAKING SHOWS UP AS JUST A DASH (—)?

When you see a dash (—) as the APR for one type of staking, that means that the
size of the pool is likely 0, and since calculating APR involves dividing by the
size of the pool, the % APR is actually infinite but not being received by
anybody because nobody is in the pool.

In such a situation, it is often shrewd to stake just a tiny bit of capital to
whichever side is displaying a (—), because even if the size of your staked
position is only 0.01 ETH in value, if you are the only person in the pool then
you will receive all the fees for that type of staking—at least until another
staker joins and “dilutes” your relative position.


HOW DOES SELLING AN NFT VIA NFTX WORK?

When a user sells an NFT on NFTX the process, behind the scenes, begins with the
NFT being converted into a vault token. For example, if Alice is selling a
cryptopunk then her cryptopunk gets converted into 1 PUNK token. Then 0.95 of
that PUNK token is sold on Sushiswap for ETH and the proceeds are returned to
Alice. The remaining 0.05 PUNK is set aside for PUNK vault stakers.


HOW DOES BUYING AN NFT VIA NFTX WORK?

When a user buys an NFT on NFTX the process, behind the scenes, begins with the
buyer’s ETH being converted to the vault token via Sushiswap. For example, if
Alice is buying a cryptopunk then her ETH first gets converted into 1.05 PUNK
tokens. Then 1 of those PUNK tokens is burned to redeem the specific NFT that
Alice has purchased. The remaining 0.05 PUNK is set aside for stakers.


HOW DOES SWAPPING ONE NFT FOR ANOTHER NFT VIA NFTX WORK?

NFT-to-NFT swaps allow a user to exchange one NFT from a vault for another NFT
from the same collection, for a fee. When a user swaps an NFT on NFTX the
process, behind the scenes, involves taking the ETH fee paid by the swapper and
converting it into a vault token. For example, if Alice is swapping one
cryptopunk for another, then her ETH fee payment gets converted into 0.1 PUNK
token. Then 0.95 of that PUNK token is sold on Sushiswap for ETH and the
proceeds are returned to Alice. The remaining 0.05 PUNK is set aside for PUNK
vault stakers.


WILL I GET THE SAME NFTS BACK AFTER STAKING?

No, chances are that you will get different NFTs back after staking. Vaults are
like vending machines and anybody can come and redeem any item if they have the
correct amount of vault tokens. Moreover, even if your NFTs are still in the
vault when you decide to stop staking, due to the nature of random redemption,
it’s possible you don’t receive them unless your NFTs are the only ones in the
vault.

We strongly discourage stakers from staking NFTs that they wish to keep.


HOW ARE STOLEN NFTS HANDLED BY NFTX?

By default, stolen NFTs are treated like any other NFTs from a collection. The
smart contracts that define the NFTX protocol are permissionless in the sense
that anyone can use them without needing permission from a central party.
Moreover, when a thief sells or swaps a stolen NFT into a vault, the asset they
get in return (either ETH or a different NFT) is irretrievable due to the nature
of Ethereum.


HOW DO STAKERS EARN FEES?

Every time a user buys, sells, or swaps an NFT on an NFTX vault there are fees
paid by the user which go to the stakers for that vault. Fees are always paid in
the vault token itself (e.g. PUNK), so stakers end up earning the vault token
for whichever vault they stake on, whenever it gets interacted with.

There are five different user operations: selling, random buying, target buying,
random swapping, and target swapping. The word “target” means that the user gets
to choose which item they are receiving as opposed to it being randomly
selected.

By default the fees for each of the five operations (in percentages) are
10/5/10/5/10, meaning that selling has a 10% fee, random buying and random
swapping have a 5% fee, and target buying and target swapping have a 10% fee.
Using TOADZ vault as an example, buying a specific Cryptoadz NFT costs 1.1 TOADZ
tokens which means that 1.0 TOADZ tokens get burned and 0.1 TOADZ tokens are
then given to the stakers on the TOADZ vault, with 0.08 TOADZ going to liquidity
stakers, and 0.02 TOADZ going to inventory stakers.


WHAT ARE THE RISKS ASSOCIATED WITH STAKING?

For both inventory and liquidity staking, some of the risks include:

 1. Different items. Your items may get sold or swapped while you are staking,
    and unstaking is a random process, so the NFTs you receive when you are
    finished staking will likely be different from those you staked. The NFTs
    you receive may also be stolen, if a thief has swapped or sold a stolen NFT
    into the vault.
 2. Redemption fees. Currently, stakers must still pay a redemption fee when
    they are finished staking in order to get NFTs back for their vault tokens.
    We plan to remove this in the future, and are working on a solution. Once a
    solution is built it will work for both new stakers and existing stakers.
 3. Smart contract risks. There is always technical risk when using any smart
    contracts because it’s possible that there may exist a previously undetected
    bug or exploit.

And, for just liquidity stakers, the risks include:

 1. Impermanent loss. Liquidity staking requires depositing an amount of ETH
    equal to the value of the NFTs you are staking, and as the price of the NFTs
    (in ETH) change, so do the quantity of NFTs and ETH that you will receive
    after staking. For example, if the price of the NFT goes up, you will
    receive fewer NFTs when you are done staking. And, if the price of the NFT
    goes up, you will receive less ETH.
 2. Fractional amount of NFTs. Since staking NFTs is actually staking vault
    tokens (which represent NFTs), it is likely that you will receive a number
    of vault tokens after staking which is not a perfect whole number. So you
    will likely end up with some amount of vault tokens > 0 and < 1, which can
    not be converted to NFTs on their own and either need to get sold on
    Sushiswap or topped up with more vault tokens in order to be used for
    redemption.


WHAT ARE IMPORTANT CONSIDERATIONS BEFORE MAKING A VAULT?

 1. Gas costs. Creating a vault and bootstrapping it with inventory and
    liquidity requires at least five transactions, each of which may cost over
    $30 or perhaps much more if traffic is high.
 2. Inventory requirements. A succesful vault should aim to have at least 10-20
    NFTs in it. Sometimes if one person makes a vault, other people will come
    and mint into it, but often it requires a single user to "take the plunge"
    and mint at least 10 tokens.
 3. Liquidity requirements. It's important to have at least 10 vault tokens
    deposited in sushiswap so that price impact isn't too large. The more vault
    tokens deposited in sushiswap, the less price impact there will be. Users
    must also deposit ETH in equal value to the vault tokens when providing
    liquidity on sushiswap.

In summary, the minimum requirements for bootstrapping a succesful vault are
about 5-10 transactions worth of gas, at least 10 NFTs, and an amount of ETH
equal to the value of the 10 NFTs.


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