Introducing NFT Lockers — Part 1
Solvent is a proof of concept and a fundamental layer for creating an AMM-based liquidity platform for NFT assets. By simply converting the NFTs to fungible index tokens, Solvent has been used for trading over USD 10 million worth of NFTs and their index tokens.
With NFT lockers, users can get instant liquidity for their NFTs without depositing them in the open pool. Users can lock their NFT for some duration and get liquidity in droplets instantly as a debt. Users can claim their NFT back by repaying the same number of droplets minted and an interest fee.
If the user fails to repay the droplet's debt and the interest fee within the duration, the locked NFT is liquidated and moved to the open pool, recovering the interest and the difference in droplet supply. The user/bot running the liquidation also gets 20% of the difference in droplets minted as a liquidation reward.
Let’s understand NFT Lockers with some examples.
Scenario 1
As seen in the below image, Alice is looking for some instant liquidity for her SMB NFT. She needs the liquidity urgently and doesn’t want to sell her NFT or wait for her P2P loan to get funded.
Using NFT lockers, Alice notices that she can get 80 $SMBD for her SMB #123 if she chooses to lock it for 168 hours (7 days). She also notices that the maximum interest she will have to pay to get back the NFT is 2 $SMBD tokens. It’s fair instant liquidity for Alice, so she locks her NFT and takes a debt in terms of droplets against the NFT locked. Exactly 168 hours after Alice locks the NFT, Alice’s position will be eligible for liquidation. So Alice unlocks her NFT just a few moments before 168 hours (the duration Alice chose). She pays roughly two droplets as an interest along with the principal debt of 80 $SMBD and gets her SMB #123 back.
Scenario 2
In another example scenario, Bob owns a Degen Ape NFT. Hypothetically, the floor price of the collection has been quite volatile for some days, and hence Bob would like to hedge against the risk where the floor price drops significantly in the coming days. Bob can use NFT lockers by Solvent to mint some droplets and sell them for USDC to secure his position. If the floor price of the collection drops indeed, as Bob predicted, his decision to use lockers was fruitful as he sold for a higher floor price. He can either let the liquidation happen to his NFT deliberately or get his NFT back by purchasing droplets at a lower spot price to pay off the droplet's debt + interest and save the rest as a profit.
In the above image, it’s seen that Bob does not unlock his NFT, and Charles ends up liquidating his locked NFT for 20% of the difference in droplets as a liquidation reward.
Key features of NFT lockers:
→ If the user locks an NFT for 64 hours but unlocks it in 32 hours, the user only pays half the interest as initially decided. In short, users only pay for how long their NFT is locked.
→ The interest rate gets fixed when the NFT is locked, and it does not increase/decrease in any market conditions.
→ The liquidation of the locked NFT is only based on duration and is independent of the spot price of the droplet.
→ The number of droplets that the user receives as instant liquidity for locking an NFT is a slightly complicated formula that we will cover in the next blog.
NFT lockers are the first step for Solvent in moving toward the direction of protocol-owned liquidity. The interest fee that Solvent collects through NFT lockers will be a part of the Solvent’s treasury and will be used for liquidity mining on the pools for the index tokens (droplets). Additional info on the structure of Solvent including protocol-owned liquidity will be announced in the future.
A side effect of launching NFT lockers is the migration of existing droplets from the current smart contract to a newer contract. The newer smart contract is optimized over the current one and is designed to make additional integrations related to protocol-owned liquidity easier. We will announce further details on the migration but we assure you that it will be done in an as secure, and frictionless way as possible.
The Solvent team is super excited to announce NFT lockers to the community, and it is already available for everyone to try out on the devnet!
Solvent devnet platform with NFT lockers: devnet.solvent.xyz
Refer to the guide here for more info on how to test NFT Lockers on Solvent.
Let us know what you liked about this new feature on our Discord, and feel free to ask us any questions! In the next blog, we will cover the formula for minting droplets and the mechanism behind NFT lockers.
Discord: discord.gg/solvent
Twitter: twitter.com/solventprotocol
Email: contact@solventprotocol.com
