This article will analyze NFTX index product design flaws, potential solutions, and prospects for the future market.
Written by: Leo Young
At the beginning of this year, when the NFT index fund “NFTX” was officially launched on Ethereum, I once wrote an article introducing the operation mechanism of NFTX and the token economy.
NFTX NFT is a way to invest more convenient and innovative products, rapid development in the past two months, even on NFTX block chain Crypto Briefing the media’s paid research institutions Simetri recently released a special report , called oriented Featured products of the month.
However, while NFTX is being touted, I think it is necessary to remind investors of a flaw in the product design.
Fund design review
Before delving into the design flaws of NFTX, it is necessary to briefly review the operation mechanism of the product. For details, please refer to the following two articles:
To draw the key points, NFTX funds are divided into two types: D1 and D2:
D1 is the basic fund. Among them, ERC-20 tokens and NFT mortgage assets are minted 1:1. For example, if a user has five NFTX basic CryptoPunk fund tokens (token code: PUNK-BASIC), they can exchange these five PUNK-BASIC tokens for any five primary Crypto Punk NFTs at any time. Punk-Female corresponds to the female type CryptoPunk token, PUNK-ZOMBIE corresponds to the zombie type CryptoPunk token, and PUNK-ATTR-4 corresponds to the CryptoPunk with four characteristics. For details of Crypto types and features, please check here . Anyone who holds any type of NFT can join the capital pool minting fund, and can exchange any NFT in the pool with D1 fund tokens.
D2 is a compound fund. The tokens in D2 are a combination of the underlying fund tokens in D1. For example, D2’s PUNK-CORE fund can be composed of five different D1 CryptoPunks (PUNK-BASIC, PUNK-FEMALE, PUNK-ZOMBIE, PUNK-ATTR-4, PUNK-ATTR-5). Each D1 fund component accounts for 20%.
- (20%) PUNK-BASIC
- (20%) PUNK-FEMALE
- (20%) PUNK-ATTR-4
- (20%) PUNK-ATTR-5
- (20%) PUNK-ZOMBIE
The above five token creation prices are:
- PUNK-BASIC — 5 ETH
- PUNK-FEMALE — 6 ETH
- PUNK-ATTR-4 — 6 ETH
- PUNK-ATTR-5 — 20 ETH
- PUNK-ZOMBIE — 83 ETH
As above, the starting price of the PUNK-CORE fund at the average price is 24 ETH. PUNK-CORE contains 20% of each D1 fund, and the average price of each D1 compound fund is 4.8 ETH (24 ETH * 20%). The average price of each constituent fund is 4.8 ETH divided by the price of a single fund to obtain the number of individual funds for each Punk-CORE held. Each PUNK-CORE token contains five separate fund quantities:
- 0.96 PUNK-BASIC
- 0.8 PUNK-FEMALE
- 0.8 PUNK-ATTR-4
- 0.24 PUNK-ATTR-5
- 0.06 PUNK-ZOMBIE
problem analysis
The problem with the NFTX fund stems from the pricing of D1. All NFTs in D1 are valued at the same value. In fact, there are price changes for each type within the same category. For example, the price of NFT in PUNK-FEMALE ranges from a dozen ETH to a hundred ETH.
In this case, no one will add the higher-than-average female type CryptoPunk to the PUNK-FEMALE D1 fund pool. Once the high-priced NFT is added to the capital pool, there will be arbitrage opportunities. Continue to trade and exchange, until the exchange is higher than the average value of the female type CryptoPunk so far.
As the individual basic assets in the fund pool increase in value, this type of arbitrage will be stimulated, and in the end only cheap assets will remain in the fund pool.
For individual investors, buying a single female-themed CryptoPunk NFT is better than investing in PUNK-FEMALE fund tokens. Because the value of the fund will go down as a whole.
D1 funds are limited to a small range of assets close to the value of the portfolio, which makes D2 funds built on D1 unable to diversify.
Simplify the problem. For example, the PUNK-FEMALE D1 fund pool has two NFTs of $1,000, and the total value of the fund pool is $2,000. Now, the price of A has dropped to 500 USD and the price of B has risen to 1500 USD. At this time, someone will buy similar CryptoPunk assets worth 500 USD and then join the fund pool to obtain PUNK-FEMALE tokens. With PUNK-FEMALE tokens exchanged for assets in the fund pool, there is a 66% probability of obtaining a female-themed CryptoPunk NFT asset worth $500, and a 33% probability of obtaining an asset of $1,500. The liquidity provider can continue to exchange back and forth in the fund pool until it obtains a high-value asset of $1,500 and exits the market with arbitrage. In the end, only two low-value assets of $500 were left in the pool.
This makes it impossible to maintain long-term value for token holders and fund liquidity providers, and the main profits will be taken away by arbitrageurs. To maintain the balance of asset value in the fund pool, it is necessary to constantly adjust the fund asset parameters, which increases the complexity of establishing a fund.
Another problem with NFTX is the distribution of NFTX tokens. Many of them are owned by CryptoPunk and its founders. No funds are reserved for future development of other team members and the community. The lack of financial funds is another problem for the future development of NFTX.
solution
The above problem stems from the gap in the valuation of NFT assets. There must be a solution to these problems, but we are still in the early stages of the development of NFT derivatives.
A possible solution is to use a similar question-and-answer protocol Upshot One to encourage users to continue to provide accurate data and NFT estimates. Such products that use swarm intelligence combined with AI algorithms are very likely to form the infrastructure of NFT, which is equivalent to ChainLink to DeFi. Without such products, NFT index products are difficult to perfect.
Asset valuation will be an important part of NFT index products. The token economy can be used to motivate users, index rewards contribute users, and users continue to provide accurate asset valuations.
The current situation is that the commission of the NFT index does not generate long-term value. It is very likely that some products will integrate all NFT index asset data, using algorithms, metadata, and income farming as sources of NFT asset valuation to help the index dynamically adjust product parameters. In the end, the product with the best incentives and network effects will win.
Outlook
There are many potential solutions. In the future, the NFT derivatives market is expected to reach billions or even tens of billions, just like real estate.
Will existing products become the backbone of the future market? It is possible, but it will be difficult. To achieve this goal, everything from smart contracts to token economic models needs to be completely improved. For many projects, the longer the time, the more difficult it is to change, and short-term success will become a burden for future development. The only thing that can maintain the advantage is the formation of a strong network effect, which has not been achieved by any project yet.
reference:
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