Welcome to the intersection of NFT and DeFi. Welcome to Fungify.
At its core, Fungify is an NFT Index fund. We all know about index funds when it comes to stocks but Fungify takes it to a whole new level with NFTs. The Fungify protocol is built with three overlapping goals in mind:
- Holding a token that grants exposure to the NFT market
- The ability to borrow against your NFT
- The ability to sell your NFT instantly
We’ll break them all down and by the end of this, you will be a Fungify expert.
The Gap Fungify Fills
The global crypto market cap is $1.22T. The global NFT market cap is $846M. That means the crypto market cap is 1,442x bigger than NFTs. That’s a lot of liquidity in crypto that isn’t flowing into NFTs. Part of the reason for this is that there isn’t a reliable, non-custodial way to invest in the NFT market as a whole. In addition, NFTs are inherently illiquid.
Over the past few months, a few companies have taken major steps to combat these issues. Namely, Blur created bid pools which added liquidity to NFTs and BendDAO allowed NFT holders to borrow ETH against their NFTs.
However, with the good often comes the bad. Over the past 12 months, swathes of liquidations took place which have had adverse effects on the NFT market. The reason for these liquidations is that NFTs are volatile assets priced in a volatile currency.
Fungify addresses the problems identified in legacy NFT borrowing / lending protocols and builds on top of these concepts in a novel way. Their goal is to make nearly every NFT as liquid as it can be. There are a lot of moving pieces within this protocol, so in order to best understand it in its entirety, we’ll first introduce the key concepts and take a deeper dive later on.
The Fungify MarketVault
Most NFT lending protocols are peer-to-peer, which creates fragmented liquidity and is frankly very inefficient. In contrast, Fungify is built to consolidate liquidity into a single MarketVault. NFT holders that want to borrow against their NFTs can come to Fungify and deposit their NFT into this consolidated vault and receive their liquidity.
Simply put, the MarketVault significantly reduces friction. There is a guaranteed counterparty for every market participant. You don’t have to wait to find someone willing to accept the other side of your loan.
But wait, there’s more. Instead of receiving ETH or USDC in return for depositing your NFT, you receive a fungible token, the NFT Index token ($NFT).
The NFT Index Token represents fractional ownership of the MarketVault. We’ll expand on the tokenomics of NFT more later on. But for now, it’s important to understand that because loans are priced in an NFT Index Token, the collateral accepted for a loan must not just lose value, but lose value against the broader NFT market, which is reflected by the MarketVault.
What NFTs are in the vault? As of now, Fungify supports the largest NFT projects:
- Bored Ape Yacht Club
- Mutant Ape Yacht Club
More NFT projects can be added through governance proposals but in order to be considered, the project must have a Chainlink price feed and a total market cap greater than $50M.
Additionally, there are two types of NFTs within the vault: (1) Unreserved and (2) Reserved.
- A seller directly deposits their NFT into the MarketVault in exchange for $NFT
- A loan collateralized by an NFT defaults or becomes liquidated
- Collateral for loans
In the case of reserved loans, the MarketVault is holding them but does not own the NFTs.
At the end of the day, the MarketVault provides a unified, global source of liquidity for NFT trading.
The NFT Token Index
The NFT Token index is the heart of the protocol. It’s what powers the MarketVault, the NFT borrowing and lending, and of course, allows users to invest in the NFT market without having to purchase an NFT.
Pricing: The price of the NFT token is set up to be pegged to the floor value of the collections contained in the MarketVault based on the Chainlink NFT floor price feed.
Token Minting / Creation: There are two ways tokens can be minted.
- When an NFT is sold to the MarketVault
- When a loan is originated against an NFT as collateral
Token Burning / Destruction: There are two ways tokens can be burned.
- When a collector redeems their NFT token for a random NFT inside the Vault
- When loans are closed out
NFT Token Price:
At first glance, this formula can look overwhelming but we’re going to break it down.
The $NFT price is calculated by taking the total value of the reserved NFTs and multiplying it by the loan to value (LTV) of the system. Remember, the reserved NFTs are the ones not owned by the vault. This number is then added to the value of the unreserved NFTs (the NFTs owned by the vault). The numerator in this equation can be simplified to be the market value of the NFTs in the vault.
This value is then divided by the total supply of the NFT token to arrive at a market price.
How does the NFT token stay pegged? The NFT token is backed by and redeemable for NFTs contained in the MarketVault. This means, as long as the NFTs in the vault have value, so too does the NFT token.
Additionally, there are arbitrage opportunities that could come to exist which market participants can take advantage of to re-peg the NFT token.
- When the price of $NFT is higher than the market value of the vault, sellers will sell NFTs into the Vault and redeem the $NFT token until the $NFT token repegs
- When the price of $NFT is lower than the market value of the vault, buyers will buy $NFT and redeem the token for the NFTs in the vault until the $NFT token repegs.
But in order for this arbitrage to be effective, the NFTs in the MarketVault have to be representative of the NFT market. That’s where Index Rebalancing comes into play.
Index Rebalancing: In order for the $NFT token to be representative of the NFT market, the NFTs in the MarketVault need be representative of the market. The protocol accomplishes this through additional fees and incentives depending on whether the Vault is underweight or overweight relative to the market.
This is where the magic happens…each time an NFT enters or leaves the Vault, a 15 day moving average of the price of the NFTs is taken. If it is determined that the Vault is overweighted towards a certain NFT then a penalty would be applied to anyone that adds that NFT to the vault.
Let’s go through an example. Let’s say we live in a world with only Crypto Punks and BAYC and the ideal weighted average is 50/50. However, in the Vault we currently have 7 BAYC’s and 3 Punks. Then in this case, the next user that wants to add an NFT would be punished (5.75% penalty) for adding a BAYC. However, they would be rewarded for adding a Punk (caps out at 5% reward).
Based on this penalty/reward system, the vault is able to keep an ideal weighted market average index.
The MarketVault is a two way street, users can deposit NFTs in and receive the $NFT token but they can also take NFTs out in exchange for the $NFT token.
So how does it work? A user has to deposit $NFT equal to the highest value floor of any given NFT collection. But, there are also non-floor NFTs in the vault (most likely through liquidations or defaulted loans). Because of this, Fungify implemented a random number generator to determine which NFT the user would claim. It’s done using Chainlink VRF and is completely transparent.
Additionally, if the value of the NFT obtained is less than the value of the $NFT deposited, the redeemer receives the difference back.
Why do it this way? This avoids the problem of providing free optionality to arbitrageurs. If any user could select which NFT they want to redeem, then they would just redeem the rarest NFT in the collection and only pay for a floor price NFT.
An important aspect of this functionality is that a non-floor NFT (ex: Alien Punk) cannot be redeemed through this redemption mechanic. If a non-floor NFT is selected by the random selector, the protocol mints a token called “LUQ” instead. A user can burn the required amount of LUQ tokens to redeem a non-floor NFT.
Now that we’ve covered the MarketVault, the NFT Token Index and the Redemption Mechanic, we can get into the finer details.
Pricing: NFT pricing will be obtained through Chainlink floor price feeds. Chainlink utilizes the “Adaptive Percentile Prediction” in order to predict what price the 5th quantile of sales will fall under in the proceeding 24 hours.
The most important part of the pricing feed is the fact that they reflect real time prices which enables margin calls and the ability to offer indefinite-term loans.
Borrower Mechanics: All loans are denominated in $NFT. This matters because it means that all loans made by the protocol are protected against broader NFT market volatility. The collateral for the loan has to move against the NFT market as a whole which is captured by the index.
A borrower also has the ability to sell their NFT two ways: (1) Buy-It-Now and (2) Bids.
- Buyers can set a buy price for their NFTs that must be higher than the outstanding loan plus accrued interest
- Collectors can put bids on NFTs that are put up for collateral as long as the bid exceeds the outstanding loan value
Interest Rates: The rate is determined by the supply of NFTs in the unreserved section of the MarketVault relative to the demand of the NFT token by borrowers collateralizing loans with NFTs.
Staking Reward: The reward for staking $NFT or $FUNG (the native governance token of the Fungify ecosystem) is equal to the proportion of circulating NFT Index Token staked, the Borrow Rate, the Utilization Rate of the MarketVault, and the amount held back by the protocol as reserves.
The rewards are split with 10% going towards staked $FUNG and 90% going towards staked $NFT.
Liquidations: The loans made by the protocol are indefinite loans. This means they continue until the principal with interest is repaid or the collateral is margin called.
The protocol is protected from losses since loans are priced in $NFT. Therefore, the collateral accepted for the loan must lose value against the entire NFT market in order to be liquidated.
Fees and staking rewards:
- Each sale made from the MarketVault incurs a 0.5% spread from the sale value
- 20% goes to staked $FUNG
- 80% goes to staked $NFT
- Each redemption incurs a 2.5% spread
- 20% goes to staked $FUNG
- 80% goes to staked $NFT
- The reserve that is held back by the protocol, which is a spread between the stake and borrow rate, is distributed to staked $FUNG and staked $NFT
- 10% goes to staked $FUNG
- 90% goes to staked $NFT
The FUNG token is the governance token of the Fungify ecosystem. In order to access protocol fees and use the governance power, it must be staked and will accrue veFUNG over time.
Total Supply: 1,000,000,000
- Treasury: 45%
- Establishing Contributors: 25%
- Seed Funding: 15%
- Liquidity Mining Budget: 7.5%
- Protocol Owned Liquidity / Public Token Sale: 7.5%
All proposals must be formally submitted as Fungify Improvement Proposals (FIP). From there, there will be a 3 day discussion and the proposer of the improvement must control > 0.5% of the circulating $FUNG.
Once the 3 day discussion is complete, the FIP moves to a snapshot vote that will result in 1 of 3 outcomes: Rejected, Needs additional refinement, Official vote.
In order to move to the next round of coding, there needs to be >50% of votes in favor of moving to an official vote and the proposer must control > 0.9% of the circulating $FUNG.
The last phase is the on-chain vote. There will be a 2 day period where DAO members can take the time to understand the proposal and ask any questions. From there, it moves to a 3 day voting period. This vote will take place on-chain and in order to pass, it must have at least 4% of the circulating $FUNG vote on the proposal.
If the on-chain vote is successful, the FIP will be implemented.
This covers how the Fungify protocol works, but there are still other elements to understand to get a holistic understanding of the protocol.
The team is anonymous but is led by 0xMob. He has a background in engineering and has been in the space since 2017.
The team raised $6M earlier this year in a round led by CitizenX. Other investors include:
- Distributed Global
- Infinity Ventures Crypto
- Taureon Capital, Anagram
- Flow Ventures
Additionally, the team has some angel investors consisting of DCFGod, Joe Eagan (ex-president of Polychain Capital), Mark Borsten (Merit Circle founder).
The Fungify team has built a strong following on Twitter and Discord with both boasting over 2k members. No matter how you like to consume information, Fungify has you covered. They have a blog for long form content, YouTube videos, and an active Discord group.
Most notably, the Fungify team opened their testnet to a small subset of applicants this month. I hung out in the “testnet-discussion” channel in their discord and the discussion was non-stop.
Any issues identified by testnet users are given quick attention by the Fungify team. I also saw users helping each other when running into issues. It was easy to see that the Fungify community is curious to learn more and willing to help each other in order to improve the overall health of the protocol.
The team is still adding new wallets to the testnet, if you’re interested you can apply in their discord.
There are a lot of moving pieces in this protocol but it’s because of how thoughtful the team was when designing everything. Here are some important takeaways:
How to buy NFTs:
- From the MarketVault with $NFT using the Redemption Mechanic
- Buy It Now Mechanic
- Bids Mechanic
How to sell NFTs:
- Sell to the MarketVault at the floor valuation through Chainlink price feed
How to borrow:
- Deposit NFT as collateral for a loan
- Can set a buy-it-now price on their NFT which would close out the loan if a collector purchases
- A collector may also make a bid on NFTs deposited as collateral and the borrower may accept those bids to close out their loan at a profit
What to stake:
- Stake $NFT to earn a portion of the interest rates paid by Borrowers as well as a portion of the spread whenever it is applied
- Stake $FUNG to accumulate $veFUNG and (1) earn protocol fees and (2) vote on governance proposals
The NFT market has longed for an investment instrument that gives participants exposure to the market as a whole. Fungify does this by allowing users to invest in $NFT, the first decentralized $NFT index token.
But it’s so much more than an index. The team has built an entire borrowing and lending economy around the NFT Index that gives it inherent value.
Fungify is one of the most innovative projects at the intersection of NFTs and DeFi. We’ve had separate hype cycles for each of these applications, but we haven’t had a cycle revolve around the combination of them. Fungify is well positioned for the inevitable time when that cycle occurs.
Website – https://fungify.it/
Twitter – https://twitter.com/fungifynft
Discord – https://discord.com/invite/fungifynft
Blog – https://blog.fungify.it/
YouTube – https://www.youtube.com/@Fungify