NFTx is a protocol for incentivizing liquid markets for illiquid non-fungible tokens (NFTs).
NFT liquidity protocol
The NFTx protocol provides the following features
- wrapping similar-value NFTs into fungible ERC20 "vTokens", and
- incentivizing liquid markets for these vTokens, which in turn creates liquid markets for NFTs.
Each vToken contract also acts as a vault to hold the corresponding NFTs. vTokens are backed by NFTs at a 1:1 ratio, so if there are 100 CryptoPunks in the PUNK vault, there are 100 PUNKs in circulation.
When a user buys NFT on NFTX, the exchange works in an ETH -> vToken -> NFT scheme, meaning the user sends ETH, it is wrapped and exchanged for vToken via AMM, and then the vToken is burned to get NFT, which is sent back to the user after deducting the redemption fee in ETH.
When the user sells an NFT on NFTX, the exchange is NFT -> vToken -> ETH, which means that the user sends their NFT to the vault in exchange for one new minted vToken. The vToken is then sold for WETH, which is sent back to the user after deducting the minting fee. Vaults charge a fee in ETH when a user buys, sells, or exchanges NFTs, and AMM pools charge a fee in vToken or WETH for each vToken-WETH transaction.
All fees received go to the inventory and liquidity providers. Inventory creation and liquidity provision are two ways to generate revenue with vTokens on NFTX. Inventory staking requires only vToken/NFT staking and is designed to incentivize more NFT deposits and therefore more NFT diversity for end users. Inventory stakers receive 20% ETH of the vault's fee. For liquidity providers (LPs), the experience is similar to LPing on Uniswap V3. However, LPs on NFTX can earn 80% ETH vault fees on top of their AMM trade fees.
NFT owners should be aware that if they deposit an NFT into an NFTX vault, they may never get it back. When an NFT is sent to a vault, the owner effectively relinquishes ownership in exchange for a single vToken, which gives them ownership of any NFT in the vault, but not necessarily the NFT they deposited (if someone else took it first). Vaults are designed to attract the most accessible layer of "floor" NFTs for escrow to create a fungible primitive, vTokens, that can be used in a variety of DeFi/NFT usage scenarios.
Create and manage vaults
You can create vToken/vaults using the Vault Factory contract. Each vault is bound to an ERC721 or ERC1155 collection.
When each vault is created, its "manager" is set to the address of the creator. Vault managers can change vault settings and invoke allowed functions.
The three basic vault operations are minting, redemption, and swapping.
- Minting is when a user sends one or more NFTs to the vault and receives a newly minted vToken.
- Redemption is when a user burns a vToken and receives one or more NFTs.
- Swapping is when the user exchanges the NFTs in their wallet for NFTs from the vault.
All three vault transactions have a percentage fee in ETH determined by the vToken's TWAP. However, vaults can have their own commission settings.
Liquidity positions and timelocks
Inventory positions are represented using the ERC721 "xNFTs" implemented in the NFTX InventoryStaking contract. LP positions are implemented using a modified version of UniV3's NonfungiblePositionManager. When both inventory and liquidity positions are created, "timelocks" occur that prohibit their unlocking/withdrawal. A liquidity timelock is valid for two days and an inventory timelock is valid for three days, unless the staker/LP chooses to timelock for 1 hour, provided they canэt override or enable it with NFT. The main purpose of timelocks is to keep users from bypassing vault fees (for purchases, sales, and swaps) by entering one asset type (or token ID) and immediately withdrawing another.
Most positions allow the owner to cancel the time lock by paying an early withdrawal fee. The early withdrawal fee is paid in vToken, starts at 10% and decreases linearly to zero over the life of the time lock.
