Published on Feb 15, 2022

Down the Rabbit Hole: NFTX, making NFTs liquid

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Down the Rabbit Hole: NFTX, making NFTs liquid

Developer Alex Gausman released NFTX in January 2021 to develop NFT index funds or ERC-20 tokens backed by NFT collectables. NFTX allows the NFT ecosystem to benefit from DeFi's recent liquidity advancements. NFTX index funds provide novice investors with balanced NFT exposure while making NFT assets more liquid. NFTX DAO owns and governs NFTX in the end. NFTX token holders can amend the NFTX smart contract if a consensus is obtained.

Users deposit NFT into a vault, generating a fungible ERC-20 token representing a claim on a random asset from the vault. A specific NFT can also be redeemed from a vault using vTokens.

The following are some of the advantages:

  • To get yield rewards, LP and stake newly created vTokens.
  • For NFT initiatives, better distribution and price discovery are assured.
  • Any NFT can be instantly sold by minting it as an ERC-20 token and swapping it via Sushiswap.
  • Investors and speculators in NFTs will benefit from increased liquidity.

NFTX token holders are ultimately in charge of the protocol.

How does it work?

  • Vault Creation: Anyone on Ethereum can construct a vault for any NFT asset. After creating a vault, any user can deposit qualified NFTs into the vault to generate a fungible NFT-backed token known as a "vToken."
  • Minting vTokens: Anyone can deposit NFTs into a vault to mint a fungible vToken that reflects a 1:1 claim on a random NFT from within the vault.
  • Floor price: Users can then pool their newly created vTokens in Automated Market Makers (AMMs) to establish a liquid market in which other users can trade. The NFT-backed vToken enters price discovery, and a "floor price" is identified after liquidity and trading volume are established. The lowest price for a given NFT is known as the floor price. Users set a floor price for their NFT by minting and selling vTokens in marketplaces where they believe it is overvalued. NFTX assists in establishing solid NFT floor price feeds, allowing for its greater use in decentralized finance on Ethereum.

    For the vaults, here is the data showing the active vault volumes:
Source: https://dune.xyz/nftx/NFTX-Dune-Dashboard-Protocol-View

Benefits from NFTX

  • For Collectors: NFTs do not earn yield in their most basic form. When they're utilized to create vTokens, though, they can enter the world of decentralized finance. Simply put, collectors can use NFTX to get additional value out of their NFTs by earning protocol fees, trading fees as a liquidity provider, and farming with stablecoins while using vTokens as collateral.
  • For Content Creators: Launching on the NFTX protocol allows content creators to earn protocol fees in perpetuity while simultaneously increasing distribution reach and fairness. Earn protocol fees, distribute NFTs in the form of vTokens via an AMM, and create instantaneously liquid markets for new content.
  • For Investors: NFTs are notoriously illiquid and difficult to value. NFTX simplifies the process of speculating and investing in the NFT market by providing access to the most liquid markets for NFTs and the opportunity to track the price of specific NFT categories.

    Due to the range of impressive benefits offered, NFTX has an impressive performance and user acquisition rate. Here are the statistics depicting the total value locked for it in the past year.
Source: https://dune.xyz/nftx/NFTX-Dune-Dashboard-Protocol-View

Minting an NFT

By adding your NFT to an NFTX vault, you mint an ERC-20 token (vToken) that has a 1:1 claim on a random NFT inside the vault. Unlike an NFT, an ERC-20 is fungible, allowing it to be Instantly sold at an AMM, Pooled in an AMM to earn trading fees, Staking, and Used as collateral to borrow stablecoins.

vTokens can be used to redeem a random vault NFT at any time. Here is the process for that:

  • Select your vault: The initial mint view displays all of the current NFTX Vaults into which you can mint based on the contents of your connected wallet. Suppose, we choose the vault for Avastr, as follows:
  • Choosing NFTs: Select the NFTs you want to mint in the vault from your wallet. Remember that the vaults are frequently floor vaults, so minting a higher value NFT will get the same result as a lower value NFT from the collection.
  • Mint Basket: The mint basket displays the NFTs you've chosen, their approval status, mint charge, and the number of tokens you'll receive once they've been minted.
  • Approval: Before your NFTs can be minted into an ERC-20, they must first be approved for use via the NFTX contract. Click "Approve all" to approve all of your NFTs in this contract.
  • Tokens received and mint fee: This is a new feature in version 2 and will be dispersed entirely to liquidity providers. The charge is set at 5% by default; however, it can be modified to any value during the vault construction procedure. Only the DAO can alter the mint fees by a governance vote once the vault is public. With a 5% mint fee, each NFT will be awarded 0.95 vTokens, with the rest to liquidity providers.
  • Minting: To produce your vTokens, click the "Mint" button after your NFTs have been accepted, and your mint value has been confirmed. A single vToken will be returned for each NFT, minus the mint cost.

    Here is the total data of NFTs minted, redeemed, and swapped in the past 3 months:
Source: https://dune.xyz/nftx/NFTX-Dune-Dashboard-Protocol-View

Redeeming an NFT

Users can gain possession of an underlying NFT by redeeming it from within a vault.

It means that a user can go to an AMM and buy a single vToken, then use that token to claim a random reward. Users can choose a specific NFT from the vault for an extra cost, typically 5% (1.05 vTokens).

Here are the steps:

  • Balance of vTokens: Your vToken and NFTX balances will be displayed on the right-hand side when you visit https://app.nftx.org/redeem and connect your wallet.

Each vToken represents a claim on a randomly selected NFT from the vault. You can also pay the Targeted Redeem cost — usually 5% or 1.05 vTokens — to target certain NFTs from the vault.

  • Redeeming-Random: To redeem an NFT, enter the quantity you want to redeem next to the "Random" area in the redemption base set and approve the NFTX contract. You will be able to redeem the desired number of NFTs from the vault once the approved transaction has been completed.
  • Redeeming — Targeted: In V2, you may select which NFT you want to redeem from the vault. Select the NFTs from the vault that you want to redeem, and they'll be added to your redemption basket. Note that each targeted redeem will cost one vToken plus the fee imposed on the vault for targeted redeems. This cost is set to 5% at vault construction, but the vault creator can adjust it before the vault is finalized. The DAO can only modify the fees via a governance vote once finalized. Each targeted redeem will cost 1.05 vTokens if the vault is left at its default settings.

Staking in NFTX

Earn fees from the vault; at the moment, 100% of protocol fees are distributed to people who bet. Stakers additionally get an ERC20 "xToken" that represents a claim on the staked SLP. Other projects are expected to create use cases for these xTokens.

You must first obtain a token for one of the NFTX vaults to stake on NFTX.

  • Obtain a vToken: Two methods can obtain a vToken (vault Token) from NFTX. Visit https://app.nftx.org to get a list of the current vaults into which you can mint NFTs based on the amount of NFTs in your wallet.

Now, suppose we mint from the AVASTR vault again to get a single AVASTR token back.

  • Add Liquidity: Select the pair you want to provide liquidity from the Staking page.

You can add NFT to the pool from this page, and the appropriate amount of ETH will be calculated below. If you are the vault's first liquidity provider, you must specify the starting price, equal to the NFTs' vault floor price.

You will be given pool tokens once you have validated increasing liquidity.

  • Stake your LP: Return to the Staking screen with your pool tokens, approve the use of the SLP, and then "Deposit SLP."

Any pools you're presently staking will be listed at the top of the staking page, along with information on your APY, Staked amount, Earnings, and Claimable tokens.

Bug Bounty

The NFTX Bounty program offers predefined bounties to users who identify and correctly disclose defects. Anyone who wants to help strengthen the protocol by actively looking for problems in NFTX contracts is encouraged to do so.

The NFTX bounty scheme is based on the Ethereum Bounty Program, the industry standard for appropriately rewarding bug bounty hunters.

Before you begin your hunt, please review the bullets below!

  • Bounty awards are not available for issues that another user has already reported or are known to the NFTX team.
  • When a vulnerability is made public, it is no longer eligible for a payout.
  • For bug hunting, you can start or fork a private chain. Please treat the NFTX main and test networks with care and not attack them.
  • Rewards are not available to any NFTX members who the DAO has compensated.
  • The bounty program does not include NFTX webpages or organizational infrastructure in general.
  • In awarding awards, the NFTX bounty program considers a variety of factors. The NFTX DAO has sole and final authority over determining eligibility, score, and all terms associated with an award.

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