The Case For NFT Perps

Fungible liquidity, leverage, and capital efficiency for non-fungible assets

TLDR:

Perps, or “perpetual swaps” are the largest market in crypto in terms of volume (over spot, options, or anything else).

NFTs are a relatively new sub-category of crypto, almost exclusively driven by spot trading with mostly retail money in play.

Our contention is that as the NFT space matures, we will see significant adoption of perps for NFTs, and in the process culture will become a deeply liquid asset class. For an early example of this, Milady perp volume was higher than spot volume in early January 2022:

hype.eth @hype_eth

Milady perp volume on @nftperp (339e) is much larger than the total spot volume (216e) over the last 24 hours. Pretty cool to see! This is the first time we're seeing perps for NFTs with meaningful volume + liquidity. Sources: - @blur_io (on top) - @nftperp (on bottom)

Let’s get into it. In short, perps offer a better NFT trading experience in terms of friction, leverage, and sizing. We’ll look at each in turn.

First, on friction. Normally, when you trade an NFT you have to buy it from a marketplace like Blur or OpenSea. With an NFT perp platform there is no underlying NFT to deal with, so going into and out of a position in a given project is more straightforward, cheaper (platforms exist on L2s with lower fees), and capital efficient (no royalties).

Second, on leverage. Before NFT perpetuals, traders would be limited to getting leverage from their spot assets on a traditional exchange, or borrowing against their NFTs on platforms like NFTfi and BendDAO, before they could ape additional capital into their spot NFT collection of choice. NFT perpetual platforms offer a more seamless experience. They take collateral in many currencies and offer a direct environment/platform to use those borrowed funds. So, for example, you could take a position in the NFT market using ETH as collateral, then settle in ETH when you exit your position. Clean.

Third, on sizing. Perps allow anyone to get exposure to any NFT collection at any size, whether that is trading 0.05 or 11.69 times the value of a given NFT e.g. a Bored Ape. This allows small holders to take positions in the NFT markets they otherwise couldn’t. It also allows larger players to trade in size without instantly impacting the spot floor price by sweeping NFTs on a marketplace.

While some people in the industry make the case that fractionalization of NFTs offers similar benefits for market participants to those we have suggested above, in our view, perps are superior. This comes down to two points: fungibility and capital efficiency. 

On fungibility. One fractionalized CryptoPunk pool is not like another, and it’s impossible to trade more size than is currently fractionalized. 

On capital efficiency. Someone has to lock up an underlying NFT for fractionalization to work, which is an inefficient use of capital.

Side note: we’re bullish on fractionalization as well, but people want fractionalized NFTs when their underlying goal is about identity, belonging, collecting, and actual ownership vs. trading.

Let’s address two counter points before wrapping up. First, a major concern people have with NFT perpertuals is that the underlying price feeds the perps run on could be manipulated in an “oracle attack.” 

Imagine a scenario where an entity has a large amount of NFTs from a certain collection. They might take a position in perps, then flood the spot market with their holdings, which in turn manipulates the price of the perp in a way that is favorable to them. This is a fair concern, and while there are a variety of design decisions that different teams will make to address this and ensure prices are fair, we encourage everyone to research the oracles used on platforms before trading on them.

The other critique people make is that NFT participants aren’t sophisticated enough to trade perps, so there’s no point in offering them. In short, we just think that’s wrong and we’re excited to see many new entrants into the category over the next 12-18 months. Today, the early mover in the industry is NFTPerp, which offers an accessible way to experiment with this new sort of trading. Check it out here. 

Disclaimer: we’re both angel investors in the platform.