This blog post was produced from a transcript of our live AMA with the NFTX and Scalara team on May 5, 2022. To participate in future AMAs or learn about other events, please join our Discord and follow us on Twitter.
What is NFTX?
NFTX is a platform for creating liquid markets for illiquid Non-Fungible Tokens (NFTs). The protocol allows users to deposit their NFTs into a vault and mint a fungible ERC20 token in return that represents a claim on an NFT in the vault. In addition, users are able to earn rewards for providing liquidity.
What is Scalara?
Scalara is an index provider and methodologist that is part of DeFi Pulse. Notable indices that Scalara created and maintains are the DeFi Pulse Index and the suite of Flexible Leverage Indices. The Scalara NFT Index NFTI is the newest addition, opening up a new market segment to DeFi users by utilizing NFTX tokens.
|>>||Can you tell us a little bit about yourself and how you got into DeFi and/or NFTs?|
|NFTX-Gaus||I started getting into Ethereum/crypto/web3 around 2017 while working on my CompSci degree. I ended up finishing that degree in summer 2020 right when DeFi was taking off, so I had time to start experimenting as a developer more. I was amazed with how vibrant the NFT ecosystem had become so I decided to build something at the intersection of DeFi and NFTs. Originally the idea was to make just a Cryptopunk ERC20, but then the idea snowballed into what became NFTX.|
|NFTX-Javery||I saw Virtual Bacon talking about NFTX during the NFTX community raise back in December 2020 and thought it sounded interesting. Joined the discord and swallowed the red pill. Myself and a few other community members decided to build a gallery to show off all the NFTs and a few months later we were on the core team building what you see now.|
|NFTX-Toes||For me, classically trained in DeFi starting back in 2017 then started contributing full-time in the industry. Fast forward a few years, to when NFTs started kicking off, I was drawn to the cross-section of the two industries. With NFTX providing the most important financial primitive (imo), liquidity, I hopped onto the team to help push things forward and connect them together!|
|Scalara-Christoph||I joined DeFi Pulse last year in September after having spent 8 years working for a TradFi index provider building equity indices. But at that time I was personally already following crypto for a few years. When I discovered the DeFi space, indexing in particular, I decided to take a dive into this new exciting world.|
|Scalara-Nathan||My story is pretty similar, I went from TradFi to Fintech and eventually full time into DeFi at DeFi Pulse/Scalara, after moonlighting for a while at the Index Coop.|
|>>||How did you come up with the idea to build NFTX? What problem did you see existing which you tried to solve with NFTX?|
|NFTX-Gaus||I originally built NFTX as a platform for creating fungible NFT index funds. I saw NFTs as an asset class that was more difficult to invest in than ERC20s (and also a “meme”). NFTX was meant to solve this problem by making NFT investing more accessible and meme-able, with tokens like PUNK and GLYPH to represent CryptoPunks and Autoglyphs.|
|>>||Can you elaborate on how NFTX makes NFTs more accessible?|
|NFTX-Gaus||NFTs can cost a lot of money and steepen the learning curve for investors who only have experience buying fungible tokens and using sites like CoinGecko to check prices. Having an ERC20 token like PUNK is more familiar for such investors instead of having to learn about where to buy and view NFTs and check prices. In addition, being able to buy fractional amounts also lowers the barrier of entry.|
|NFTX-Javery||One of the things that people always seem to appreciate, when I tell them about the platform, is the ability to apply Dollar-Cost Average (DCA) into an NFT. CryptoPunks cost a fortune and it’s difficult to buy them outright, but if you have faith in the collection you can buy little by little and build up to 1 token over time, all the while being exposed to the ongoing price action.|
|>>||Can you describe how the basic vault mechanics of NFTX work? No need to get into the staking part yet, we will jump into that later.|
|NFTX-Gaus||NFTX vaults hold NFTs and track vault token balances, otherwise called vTokens. Every NFTX vault is linked with a single NFT collection address, and for every NFT that gets added to the vault, there is 1 vault token which gets minted. Likewise, for every NFT removed from the vault there is 1 vault token that gets burned. This means that the number of vault tokens in circulation always equals the number of NFTs in the vault (e.g. 10 CryptoPunk NFTs = 10 PUNK vTokens)|
|>>||At Scalara, after the DeFi Pulse Index and FLI leverage indices, why did you get into NFTs next?|
|Scalara-Christoph||As an index provider we are always interested in providing new and uncorrelated returns to our users. Access to uncorrelated asset classes, available through indices, allow users to implement better investment strategies.|
As you mentioned, we already had indices for ETH and BTC exposure, the FLI suite of leverage indices, and DeFi exposure through the DeFi Pulse Index.Compared to those, NFTs behave quite differently from risk and return perspective, and in addition the NFT user base is also quite distinct compared to DeFi. We saw this index as an opportunity to provide exposure to that NFT theme.The Scalara NFT Index, if available as an ERC20, would lower the barrier of entry significantly since it essentially fractionalizes high-value NFTs.
|>>||Having learned above how the NFTX platform works, why and how are you using NFTX tokens in your index?|
|Scalara-Christoph||The NFTX tokens mentioned before are the components of the index. Without the NFTX protocol we would not be able to create this index and allow for it to be investable.The vault mechanics that Gaus described are the “trick” in this – they turn a non-fungible ERC721 into a fungible ERC20 that is ready for DeFi.To get even more innovative, we are using the xToken version from NFTX, that generates yield for the index.|
|>>||Christoph mentioned the yield feature of the index, can you explain how NFTX xTokens generate that yield? There seem to be two types of staking?|
|NFTX-Javery||Even though the number of vTokens circulating always equals the number of NFTs in a vault, there are usually fees added on top. For example, redeeming a specific CryptoPunk NFT from the PUNK vault costs 1.03 PUNK tokens. The added 0.03 is a vault fee which then goes to inventory stakers and liquidity stakers. These stakers are sometimes referred to as inventory providers and liquidity providers (IPs and LPs). Similar to how Uniswap needs LPs to function, NFTX vaults need IPs and LPs. In return for providing inventory and liquidity, IPs and LPs get to split the fees earned by a vault. IPs get 20% of vault fees and LPs get 80%.|
IPs come in with no (or better: very little) risk, whereas LPs have impermanent loss to consider. Hence the variation of the rewards.
|>>||Adoption and volumes are increasing on your platform. To give us an idea of the scope of the project, do you have some interesting stats? What’s the largest vault, what is the highest yield you have seen?|
|NFTX-Toes||We currently have about $48M worth of NFTs across our vaults. Our monthly active user count is up to about 2100, and monthly staking revenue is about $1.3M.I believe our largest vault (by TVL) is the PUNK vault which has about 140 cryptopunks worth about $23M.In terms of the highest staking APRs, it’s a little difficult to compare because the APR depends on the amount of capital being staked, but it’s not uncommon for vaults to have over 500% APR. One of the newest (big) vaults is an Otherdeeds vault made just a few days ago and its APR was around 275% last time I checked. Typically, the newer an NFT collection is, the higher the vault APR will be since newer collections tend to attract more traders.|
We also have a Dune dashboard to track everything live: https://dune.com/nftx/NFTX-Dune-Dashboard-Protocol-View (shout out to OmniAnalytics!) If you follow the charts, you can see that the MAU count exploded the past few months and so has the TVL thanks to our awesome ecosystem partners like Scalara and FloorDAO – MetaFi at work!
|>>||Aside from an index such as Scalara, what other user stories do you observe? Do you think you convert more NFT natives to DeFi or vice versa?|
|NFTX-Javery||There are some other index tokens like JPG which incorporate NFTX vaults and we have also heard from a number of NFT/DeFi projects which plan to incorporate NFTX vault staking into products they are building (no alpha for anyone just yet though). To your second question, I think NFTX will probably introduce more NFT natives to DeFi than the reverse. One reason for this is likely just that NFT users tend to be newer entrants with less experience in the space, so we often end up answering a lot of questions for them. It can be a difficult role for us because it’s easy to forget how a lot of people out there don’t fully understand DeFi and the lingo that goes with it, such as terms like AMM and LP. I spend a lot of time on Intercom onboarding new users.|
Overall it’s quite fulfilling, though, having the opportunity to expose NFT collectors to what DeFi has to offer.
|>>||Looking at the index constituents of the Scalara NFT Index, we notice some larger collections missing, is there a reason for that?|
|Scalara-Christoph||Yes, this is a good observation. In the index are not just the largest tokens – even though that is the primary index objective.But we think that “blue-chip” also means that the NFT collection is well established, has a following, and is past its launch spike.And secondly, investability is important. |
For the index, when implemented as a token, to trade efficiently, there has to be some baseline liquidity in the underlying market. So for example if NFTs are frozen on OpenSea there could be a problem in the token redeeming process, so we may exclude that collection.
I think the collections currently in the index though, CryptoPunks, Doodles, Meebits, World of Women, Cool Cats, Squiggles, and CrypToadz are seen by most as “blue-chip” NFTs.
|>>||At NFTX, what are you guys working on right now, any new features we can expect soon?|
|NFTX-Toes||On the protocol side, we are currently working on a large upgrade which will migrate vault liquidity from Sushiswap over to UniswapV3. Our hope is that this enables us to support concentrated liquidity in the future, and there are also other benefits such as built-in TWAP feeds. On the webapp side, our team is working on a total overhaul of our DeFi staking dashboard so that stakers have more tools in their arsenal for maximizing their returns and also interacting with their positions and taking profits. I’m personally quite excited about this and I think it will go a long way to showcasing how powerful NFTX is.|
Usability is the name of the game and as Javery mentioned, a lot of NFT users are unfamiliar with the complications that DeFi users are accustomed to. Our role in the ecosystem is to unleash NFTs to realize their full potential and help unlock the $20bn plus currently sitting idle to become yield generating.
|>>||For Scalara, do you plan to add new NFTs to the index? Which are the rules for adding a new collection?Is there any LP opportunity for NFTI anywhere?|
|Scalara-Nathan||We rebalance the Index quarterly and will add/remove collections when we rebalance.There’s a hard 20,000 ETH collection floor market cap cut-off.And then there are more qualitative criteria where we consider historical price performance, if the collection has survived its first bear market, strength of community following, recognizability, and time since launch.Something like Moonbirds, for example, which hits a lot of criteria and is obviously buzzing in the community, we want to see how it performs over time and if it lasts through a cycle before we include it in the index.|
As far as LPing for NFTI, there are Uniswap v3 pools on Mainnet, Polygon, and Arbitrum where anyone can buy, sell and LP.
|>>||Can you share the social handles and links from both the Scalara side and NFTX side, so that people could go and explore this more?|
|NFTX-Toes||Come join our Discord and have a chat: https://discord.com/invite/hytQVM5ZxR |
Twitter for the latest: @NFTX_
And the Academy to learn more: https://academy.nftx.io/
|Scalara-Nathan||Find all our index methodologies and where they are available as tokens at https://www.scalara.xyz/ |
Twitter for any index updates and news: @Scalara_xyz
Disclaimer: None of the above should be considered investment advice. Keep in mind that NFTs are risky assets and past performance is no indicator for future performance. In addition, it is always advised to do your own research regarding any protocol that you use.