DeFi and NFT are growing by leaps and bounds!
DeFi (Decentralized Finance)
According to DeFi Pulse (https://defipulse.com), there is currently over $60 billion USD of total value locked (TVL) in the DeFi ecosystem, up 60X in the last 12 months from just $1 billion USD.
NFTs (Non-fungible Tokens)
According to the Q1 2021 report at www.NonFungible.com, Q1 2021 has seen more than $2 billion USD traded value in NFTs, 20X the volume traded over Q4 2020, and a mind-blowing 131X the YOY change from Q1 2020. Of course, the most dramatic example of the explosion in the NFT space is the recent record-setting Christie’s auction of Beeple’s EVERYDAYS: THE FIRST 5000 DAYS on March 11th.
Due to the non-fungible token (NFT) market’s extreme lack of liquidity and tradability, NFTs are generally not acceptable as collateral in existing crypto lending markets, and a great deal of value is inefficiently locked up in the rapidly-growing NFT asset class with no easy way to access this value for diversification and borrowing purposes.
OpenSky has solved this liquidity and pricing problem with revolutionary bonding price curves and is set to unlock massive market value.
What is OpenSky?
At OpenSky, we aim to build an advanced smart contract blockchain platform at the nexus of DeFi and NFT that will empower anyone with an Internet connection to trade, stake, borrow and lend unique digital assets in a secure, trustless, and permissionless manner. In a nutshell, we are a DeFi protocol that enables NFT stakers to value their NFTs and borrow against them on demand while maintaining control and exposure to further upside.
OpenSky Introduces an Innovative Solution
OpenSky has created a breakthrough solution to NFT trading and staking problems with the development of a smart contract-based automated market making (AMM) protocol for NFTs based on sophisticated bonding curve pricing algorithms.
Each staked NFT has its own market (liquidity pool) which creates several advantages for both NFT stakers and liquidity providers (LPs).
- Real-time NFT valuation based on the ‘the wisdom of the crowd’
- Liquid and deterministic prices provided algorithmically
- On-demand borrowing by NFT stakers at market-determined interest rates
- Trading fees and interest payments shared proportionally by LPs
- Tokens can be staked at leading DEXs such as Uniswap to earn additional income in yield farming strategies
How Does OpenSky work?
NFT stakers send their NFT to the OpenSky protocol where it is staked into a smart contract which initiates the creation of a market that utilizes an automated market-making (AMM) algorithm based on bonding curve technology to generate a real-time market value for the locked NFT. The NFT staker has the option to choose between two bonding curve models:
- S-curve model -This dynamic bonding curve starts with very a attractive token price which attracts early adopters who hope to earn large capital gains from subsequent buyers driving the price up to a high plateau where marginal trading has minimal effect on price. At this point, the early buyers will be in an advantageous position with large unrealized capital gains. The defining feature of this model is that price changes can be quite volatile at different points on the S-curve. In other words, it is a high risk/high return pricing model suitable for aggressive traders who are aiming to earn sizable capital gains on the token price appreciation, above and beyond a proportional share of the trading fees and interest income derived from the NFT-staked loan.
- Constant price model — This stable bonding curve ensures that all tokens will be stable in price and only the quantity of tokens changes as tokens are minted or burned. In this market, LPs need not worry about losses from price changes and will benefit solely from trading fees and interest payments from NFT-staked loans. This bonding curve model is low risk/moderate return. Since the price is stable by design, LPs forego the upside price potential in return for not having to worry about downside risk.
Liquidity providers (LPs) play a major role in establishing the market value for the staked NFT. We expect two classes of LPs to emerge as key players in the OpenSky ecosystem. LPs with relatively low risk appetites will prefer the zero-price risk and steady fee-based returns of the Constant-price model. Aggressive LPs, on the other hand, will be attracted to the high capital growth potential offered by the S-curve model, as early token buyers have a significant opportunity to earn big capital gains as new buyers subsequently enter the market. These LPs will also enjoy trading fees and interest income but are primarily motivated by potential token price gains.
How do NFT Loans work?
Each NFT-staked market will have a predetermined collateral factor (0–100%) which will be multiplied by the total value locked (TVL) of the reserve tokens in market. We can call this the loan limit which simply represents the on-demand credit available to the NFT staker. The interest rate payable by the NFT staker will be algorithmically calculated by the smart contract based on the relative supply and demand of loanable funds.
When the NFT staker elects to borrow on-demand, the follow three outcomes are possible.
- The NFT staker can use the borrowed funds indefinitely as long as the interest is paid according to the smart contract terms. In this case, LPs will continue to earn trading fees and interest in perpetuity.
- The NFT staker can pay back the outstanding principal and interest at any time and the smart contract will automatically unlock the NFT asset and sent it to the NFT staker’s wallet address. All existing pool tokens will be burned and the appropriate value of reserve tokens will be sent back to the LPs’ wallets. At this point, the liquidity pool will be successfully terminated and deleted from the platform.
- The NFT price drops below the liquidation level triggering a liquidation event and temporarily places the market into an ‘unhealthy’ condition. At this point, the NFT staker can add a sufficient amount of reserve tokens to the market to restore it to a ‘healthy’ state and retain ownership of the staked NFT. However, if a liquidator pays off the loan in full before the NFT staker remits the required amount of reserve tokens, the NFT staker will lose the staked NFT to the liquidator. Therefore, the NFT staker must monitor the situation closely when the price is near the liquidation level.
Liquidators, who can be anyone including the existing LPs, stand ready to pay back the loan to restore the ‘health’ of the market when the staked NFT price has declined below the loan limit level and triggered a margin call. The liquidators will gain control of the staked NFT if they pay off the non-performing loan first. At this point, the NFT will be unlocked from the smart contract and sent to the liquidator’s wallet and the market will terminate.
In conclusion, OpenSky, through our commitment to a freer, smarter NFT marketplace, has solved the liquidity and pricing problem for the evolving NFT asset class and is poised to unleash massive market value that is currently locked up in hard-to-value, hard-to-trade NFTs.