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Company:NFTprep

Participation:Seed

What is NFTprep?

NFTperp is an NFT perpetual futures exchange that allows anyone to go long or short on blue chip NFTs like Bored Ape Yacht Club, Crypto Punks, Azuki, and many more with any amount in $ETH. The protocol is built on the most scalable Ethereum Layer-2 solution Arbitrum.

Why we invested?

The crypto Derivatives market continues to dominate the space, as of January 2023, 70% of the entire volume which is $2.04T comes from the derivatives alone. NFTperp is tapping this huge market in a unique way by offering derivatives for the NFTs which has never been done before.

NFTperp is a unique platform that provides traders with various innovative tools and features specifically tailored to the NFT derivatives market. The platform's core offering is its perpetual swaps, which allow traders to take long or short positions on the value of NFTs without needing to own the underlying asset.

With its unique features and potential for indefinite growth through the introduction of new NFT projects, NFTperp is in an ideal position to capitalize on this expansion. Therefore, NFTperp is well-positioned to become a leader in the expanding NFT derivatives market.
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Investors

NFTperp has raised $1.7M at a $17M valuation from some of the best investors in the space.
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Audits

NFTperp is fully audited by tier-1 auditing firm PeckShield which has a record of auditing the biggest and the best in the space including BNB Chain, AAVE, dydx, Pancakeswap, Yearn, Convex, and many more.
The detailed audit report can be found here: NFTperp Audit Report

Achievements so far

  • Trading Volume:
    • NFTperp has done more than $300M in trading volume in their private beta, access to the beta is only given to a handful of users and the trading volume is expected to increase tremendously post-full public launch.
  • Decentralization:
    • NFTperp believes in the decentralized future of DeFi and has recently given power back to the community by establishing a DAO which will decide future listings on the platform.
  • Recognition:
    • The innovation of NFTperp has gained recognition from the biggest and the best of the space including Binance Research, Delphi Digital, Arbitrum, and many more Industry leaders.
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Challenges in the Current Landscape

  • Hedging is nonexistent:
    • In the current NFT market, there is a lack of effective hedging tools for investors to mitigate their risk exposure. This means that investors are more exposed to price volatility and are unable to protect their portfolios against sudden market downturns. Without effective hedging tools, the NFT market may become more volatile, which could negatively impact investor confidence and slow down market growth
  • Blue-chip collections are inaccessible to most:
    • The most valuable and sought-after NFT collections, also known as blue-chip collections, are often out of reach for most investors due to their high prices. This limits the number of investors who can participate in the market and may result in a lack of liquidity for these collections. This could slow down the growth of the market and prevent it from reaching its full potential.
  • No simple and capital-efficient way to obtain leverage:
    • Currently, there is no easy and cost-efficient way for investors to obtain leverage in the NFT market. This makes it difficult for investors to maximize their returns and may deter some investors from participating in the market altogether. Additionally, the lack of leverage could limit the amount of capital flowing into the market, which could slow down its growth.
  • Marketplace fees and royalties cut into profits:
    • When buying and selling NFTs on a marketplace, investors are typically charged fees and royalties. These fees and royalties can eat into investors' profits, making it more difficult to generate significant returns.In some cases, the fees may be so high that they deter investors from participating in the market.This could limit the liquidity of the market and slow down its growth.

NFTperp’s Solutions and Product Offerings

  • Hedging:
    • NFTperp's perpetual swaps provide a way for traders to hedge against price movements in NFTs.This is particularly important for traders who want to protect themselves from the volatility of the NFT market and manage their risk.
  • No slippage:
    • NFTperp uses a price oracle system to ensure that there is no slippage between the price of the perpetual swap and the actual NFT. This feature helps to protect traders from unexpected price movements and ensures that they receive fair market prices.
  • Access to Blue Chip collections:
    • NFTperp allows traders to speculate on the price of Blue Chip NFT collections without actually owning them. This feature is beneficial to traders who cannot afford to purchase these high-value assets or do not have access to them
  • Capital efficient:
    • NFTperp's 20x leverage provide traders to potentially increase their returns without having to risk as much capital.This feature is particularly attractive to traders who want to maximize their potential returns while minimizing their capital outlay.

How does it work?

Virtual AMM (vAMM) based, no order books and no liquidity providers

NFTperp uses a modified version of the vAMM (Virtual AMM) model pioneered by Perpetual Protocol. The vAMM model eliminates the need for an actual liquidity pool and instead stores the trader's collateral in a smart contract vault. The price is determined through the AMM bonding curve. All profits and losses are settled directly in the collateral vault.

The vAMM model ensures solvency by canceling out one trader's profit with another trader's loss. The vault always has enough collateral to pay back every trader. The vAMM model follows a procedure where investors deposit collateral, open positions, and eventually clear their positions, resulting in capital gains or losses.

The figure below demonstrates the solvency of the vAMM model and how one trader's profit cancels out another trader's loss:

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To address the limitations of the vAMM model, NFTperp introduces the Dynamic Virtual Liquidity (DVL) model. DVL allows for the dynamic adjustment of the x and y values in the virtual liquidity, preventing systemic risks caused by long and short imbalances and reducing slippage as the market price diverges from the vAMM initiation price.

NFTperp’s True Floor Price, Funding Rates, and Liquidations

NFTperp uses a True Floor Price oracle for NFT valuation, which is based on real buyer-seller transactions in a given NFT collection. This approach mitigates problems such as price manipulation and single NFT listing representation.

Funding payments occur every hour and are made between traders holding long or short positions. NFTperp introduces Dynamic Funding, which considers the total longs and shorts ratio for market equilibrium, preventing imbalances.
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Liquidations occur when a trader's position moves against them, risking the solvency of the protocol. Liquidations are triggered when the trader's margin ratio falls below the minimum maintenance margin ratio.

For example, if a trader opens a 5x leverage position using 1 ETH, their position would have a notional value of 5 ETH, of which 4 ETH were borrowed (20% initial margin ratio).

The protocol's smart contract requires a minimum ratio between the notional value and the margin — the minimum maintenance margin.

When the trader's margin ratio becomes lower than the minimum maintenance margin ratio, liquidation will be triggered by keeper bots. They earn 20% of the remaining notional as a reward for providing this service. The remaining margin will be deposited into the Insurance Fund.

Trading Fees

Every trade on nftperp has a 0.3% fee based on the position size.
The 0.3% is then broken down to

  • 0.15% goes to nftperp protocol Insurance Fund

  • 0.15% goes to nftperp insurance pool

In addition to the standard 0.3% fee, nftperp has a dynamic fee model:
if mark and Oracle is within ± 2.5% difference, tx fee is 0.3%
if the mark is above the Oracle price by 2.5-5%, tx fee is 1% for diverging trades(longs), 0.28% for converging trades (shorts)
if the mark is above the oracle price by 5-10%, tx fee is 5% for diverging trades (longs), 0.2% for converging trades (shorts)

Insurance Fund and Insurance Pool

Insurance Fund (protocol owned)

The insurance fund is a smart contract vault that ensures the solvency of the protocol. In the event of unexpected losses from the liquidation process, the Insurance Fund will absorb the losses. The main insurance fund revenue comes from fees collected and liquidations. As the insurance fund size grows over time, the protocol will be able to allow more open interest.

Insurance Pool (LP staked)

The nftperp insurance pool is similar to its insurance fund, but it is funded by liquidity providers. The purpose of the insurance pool is to cover protocol bad debt (same as the insurance fund). In exchange, the insurance pool shares incoming revenue (trading fees, liquidation penalties, etc) with the protocol-owned insurance fund.

Final Thoughts

NFTperp is an emerging platform that brings innovation to the NFT derivatives market. With its unique features such as perpetual swaps, access to blue-chip NFT collections, and capital-efficient leverage, NFTperp opens up new possibilities for traders looking to participate in the NFT space.

While the current NFT landscape presents challenges like the lack of hedging tools and limited accessibility to blue-chip collections, NFTperp addresses these issues by providing hedging options, allowing speculation on blue-chip NFTs, and offering leverage opportunities. With its strong growth, partnerships, and recognition from industry leaders, NFTperp is well-positioned to become a prominent player in the NFT derivatives market.