introduction
introduction
Despite the coldness of the overall market, it seems that Blur's leap forward in NFTFi has not slowed down. According to its Twitter feed on May 2, Blur officially crossed from the direct transaction layer of liquidity aggregation to the lending market, successively launching P2P perpetual lending Blend, buy now and pay later BNPL, mining loan points, etc. The function has aroused widespread heated discussions in the community and set off aftershocks in the upstream and downstream of the NFTFi industry chain.
What is the difference between Blend and other NFT lending agreement mechanisms? Does this mean that similar to the development trajectory of DeFi, the process of NFTFi's protocol matrixing has begun ahead of schedule? How to predict the overall track of NFTFi? We give some simple reflections and comments below.
The "Three Mountains" Facing the NFTFi Industry
A credit mechanism needs to be improved: In DeFi, the most common model is over-collateralized loans, while in the NFTFi scenario, we can introduce more diversified loan models, such as unsecured loans such as BNPL. However, since KYC is not mandatory for participants in NFT lending and leasing, the risk control of the entire financial system is highly dependent on the capabilities of a single NFTFi project. In the future, we will inevitably need a more mature and reliable on-chain credit system to solve this problem.
Pricing mechanism that needs to be improved: As we have mentioned in previous research, due to its own subjectivity, illiquidity and other endogenous factors, NFT is difficult to be identified based on asset fundamentals or past transaction records like homogenized assets. Simple pricing. Refer to traditional artwork evaluation methods: similar comparison, cost calculation, average price and double sale, remove the cost calculation method, the remaining similar comparison, average price and double sale correspond to AI/ML evaluation in NFT pricing, TWAP and These three types of transaction pricing methods. However, none of these three types of evaluation methods can achieve perfect price discovery at present.
Supporting service system to be improved: Basic supporting services including banking, trust and insurance are necessary for any financial market. However, a theoretically complete financial flow system does not yet exist in the current NFT Fi industry. As the most basic module of the banking system, credit has reason to become the key function that is the first to be paid attention to and developed in the entire financial system in any scenario, which is why the improvement of the NFT lending agreement plays a key role in opening up the upstream and downstream liquidity of NFT Fi .
NFT lending motivation:
NFT collectors are often less willing to sell their high net worth assets (blue chip NFT collections) directly. However, holding NFT for a long time also means that a large amount of capital will be locked in illiquid assets. That's why we need mortgages.
In a bull market, holders may find better short-term speculative opportunities. Therefore, they have an incentive to use non-financial assets as collateral to unlock liquidity/cash out some money.
In a bear market, holders tend to use over-collateralization to hold more cash to prevent a shortage crisis, while ensuring that they do not lose their NFT (explaining why the default rate of overall NFT loans is lower).
Blend's mechanism innovation
The mechanism of Blend is directly operated by Paradigm. The co-authors in the published articles, Dan Robinson, etc., are senior contributors to leading DeFi protocols such as Comound and Uniswap. At the same time, they carry forward the concept of non-permission and composability in DeFi protocols It has also consistently continued into the design concept of Blend.
Blend is essentially matching NFT holders and fund holders to complete the effect of mortgage NFT lending funds. It is different from emerging peer-to-pool models such as BendDAO, but adopts peer-to-peer (P2P ) lending model, and made further paradigm adjustments on the basis of integrating the advantages of traditional P2P lending. In the figure below, we also briefly analyze the differences between P2P and P2P ool mechanisms:
Blend's innovation can be summarized in the following four aspects:
Oracleless: The general peer-to-peer model has this feature, that is, the interest rate and capital utilization rate are determined by the terms that the lender is willing to provide. A failed Dutch auction would trigger a liquidation.
Compared with other P2P lending of the same type, the removal of oracles is not a new narrative. The introduction of oracles in the P2P protocol itself largely provides price reference for users when setting terms (eg NFT.Fi will provide floor prices, in the past Several types of data such as transaction price, ML pricing such as Upshot)
Perpetual lending (Perpetual): The setting of the maturity date requires the borrower to manually roll back or close the position, which makes the borrower face the risk of NFT being confiscated on the one hand, and requires additional gas fees on the other hand. Therefore, Blend directly removes the maturity setting, and only needs to conduct on-chain transactions when interest rates change (new lenders propose new terms to take over) or one of the parties wants to withdraw from the agreement.
Compared with traditional P2P, the sustainable setting is very interesting and is likely to win the favor of more lenders. In a fixed-term reception, if the value of the NFT is already lower than the repayment amount, the borrower chooses not to repay the loan, and the lender cannot recover the principal even if the NFT is liquidated. In addition, the perpetual mechanism also provides other potential lenders with the opportunity to take over the loan, giving the borrower the opportunity to exchange the interest rate space for loan extension.
Although the sustainable mechanism seems to be beneficial to both borrowers and lenders, as Mr. Mindao pointed out, it is actually a protocol design that is "friendly to lenders but not friendly to borrowers". The borrower is more in a relatively passive state in the mechanism. When the lender initiates a "refinancing" auction, the withdrawal of the original lender, the intervention of the new lender, and the adjustment of the new interest rate are not controlled by the borrower. This also means that the "right to choose" and "autonomy" of lending are actually skewed towards the lender, and the wool comes from the sheep. Under the triple fence of repaying money, repaying debts, and accepting new terms, borrowers are likely to suffer losses due to malicious frequent "refinancing".
Liquidatable before maturity: Since the current P2P lending model actually provides put options for borrowers, funding providers need to require measures such as short-term maturity and high interest rates to compensate for the risk of possible insolvency of the position. In Blend, NFTs may be liquidated whenever a funding provider triggers a refinancing auction (Dutch Interest Rate Auction) and no one is willing to take over the debt at any rate. For example, once the auction reaches some defined maximum interest rate (say 1000%) without any new funding parties stepping in, the protocol deduces that the position is insolvent or not viable and liquidates the borrower. Existing lenders can then send transactions to take possession of the collateral.
This design is very friendly to the lender and establishes a guarantee for the lender to lend money. When the price of NFT falls, the lender is allowed to start the liquidation auction process in time, and supplement the lender's risk premium through the rising interest rate auction. We believe that this is necessary to promote the liquidity of NFT, and it is very important to stimulate the vitality of funds.
Fund efficiency improvement (Effective): The lender’s funds can be used in multiple ways, not only participating in Blur’s bidding (DEX liquidity provision) but also providing liquidity as a lender.
It realizes the capital aggregation of transactions + lending, and combines some advantages of the pool model, such as "perpetual" borrowing for borrowers. At the same time, for the lender, there is an auction competitive market on the capital side and can be shared with the bidding pool. At the same time, the agreement defaults to "optimistic" rollover, and there is no mandatory re-lending upon maturity. (Quoted from dForge founder Mindao)
NFT lending consideration dimensions
Traction: Attractiveness of the platform to lenders and borrowers, whether enough borrowers and lenders are exposed to and use the platform, user retention and conversion rates. Since blue chip holders are fixed, traction in the stock market means winners take all.
Risk Management: The risk control capability of the platform, whether there is a feasible design to ensure the safety of lenders and borrowers' funds and collateral, and how to punish default.
epilogue
epilogue
Although it is still in the early stages, we believe that the NFTFi protocol may eventually move towards the protocol matrix like DeFi, integrating the three models of transaction + lending + stable currency in the future. We have also been discussing the endgame of NFTFi internally. Is it a one stop service liquidity agreement (a project includes lending, trading and other functions at the same time), or is it similar to the current state of DeFi? Different protocols have different divisions of labor (such as Uniswap Responsible for transaction functions, Aave for lending functions, etc.). At present, the biggest problem of NFTFi is insufficient liquidity. Blur's bidding, NFTX's fragmented AMM, the liquidation of loans such as BendDAO, and some derivatives agreements are all increasing liquidity in various forms to optimize pricing. Blur, as the largest head player today, has accumulated a huge number of NFT holders. Blend is bound to become a key step in its protocol matrix. This is why we see that Blend focuses on stimulating the vitality of funds, and also It is to attract funds. The game between the funder and the NFT holder is the key to the final presentation of the product, and we will continue to pay attention.
