JPEG’d is a novel project launched on March 1st, 2022. The goal of the project is to unlock liquidity from illiquid non-fungible tokens (NFTs). JPEG’d will allow NFT holders to stake their NFTs within a vault so that they can be used as collateral in order to take out $PUSd loans. The $PUSd can then be used within a variety of decentralized finance (DeFi) protocols as the borrower desires. This bridge between NFTs and DeFi aims to give NFTs additional layers of utility.
Whilst JPEG’d aims to give holders the ability to turn any NFT into collateral for a debt position, they have yet to release support for any collection. However, it has been determined that the first NFT vault will be for the CryptoPunks collection. The CryptoPunk vault will begin capped at $10 million until the total value locked (TVL) reaches acceptable amounts, by which it will be scaled according to votes from the DAO.
More about Staking
JPEG’d will work by allowing holders to deposit their CryptoPunks (soon to be more NFTs) into a vault. This allows the holders to retain ownership of their NFT. Depending on the valuation of the CryptoPunk deposited, users will be able to mint PUSd, a stablecoin pegged to a dollar that was created by JPEG’d.
Borrowers will be able to take a maximum $PUSd loan of 32% of their NFT’s collateral value. JPEG’d will charge a 2% interest rate and a vault withdrawal fee of 0.5%, both based on the valuation of the NFT submitted to the vault. This is subject to change depending on market conditions and voting via the DAO. The team believes this to be a fair interest rate, as several DeFi protocols currently offer double digit returns on stablecoins.
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Should a borrower surpass a debt-to-equity ratio of 33%, their NFT will be liquidated. In this situation, the DAO is able to choose whether they shall retain the NFT or sell it. JPEG’d will additionally offer insurance to protect borrowers against liquidation. Borrowers may purchase insurance for a 1% fee which provides them with an opportunity to repurchase their NFT by repaying their debt, interest and an additional 25% liquidation fee.
Valuing an NFT
One of the issues regarding using NFTs as collateral is determining how much an NFT is worth. NFTs are an illiquid and young asset class and hence are subject to enormous swings in valuations.
There are several issues to deal with when valuing an NFT:
- Should the NFT be valued depending on their floor price?
- Should NFTs be valued depending on the price of their most recent sales?
- How does a valuation mechanism deal with the potential of washtrading?
- How does one ensure the prices are accurate and trustless?
- How are different NFTs valued within an NFT collection?
JPEG’d’s solution to some of these valuation issues is the creation of a custom decentralized oracle solution. Working alongside Chainlink, JPEG’d will leverage their price feed to create a Time-Weighted Average Price (TWAP) which is blended between the sales and the floor price. Additionally, Chainlink will remove all instances of washtrading and other outliers that may skew the price feed, allowing for a clean, accurate data feed with minimal market manipulation.
The remaining issue of how NFTs are valued within a collection were addressed by JPEG’d using the CryptoPunks collection as an example.
The CryptoPunk Example
JPEG’d outlined how the first supported NFT collection would be the CryptoPunks, hence, it can be assumed that a similar valuation framework for other NFTs will be used going forward.
For distinctly notable traits, JPEG’d has already determined a corresponding valuation. To begin, CryptoPunk Aliens will be valued at 4000 ETH, CryptoPunk Apes will be valued at 2000 ETH and the remainder will be valued at the floor price determined by the Chainlink Oracle.
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Should the JPEG’d DAO decide that it is, the borrower will have to lock $JPEG into a smart contract for a year. The amount of $JPEG will depend on the maximum loan the borrower is interested in drawing. The equation to calculate how much $JPEG will have to be locked up is shown below:
JPEG amount = (Collateral value*x*0.25)
The value of x corresponds to the maximum size of the loan that the borrower may wish to draw (which is capped at a maximum 0.33 or 33% of their collateral value).
The collateral value is the price agreed upon between the borrower and the DAO.
Note: JPEG has yet to roll out Punk staking, yet there are opportunities to earn a yield on their website. Interested in learning more about JPEG’d partnerships, tokenomics and opportunities? Check out the spreadsheet here!
– By Edward Bush and Garrett Graham
JPEG’d has been audited, but there are no ultimate guarantees in DeFi. So, always do your own research, and never invest more money into any project than you can afford to lose. Read more about the audits here.