This is a piece made in collaboration with FloorDAO and Euler contributors to share the unique possibilities presented to NFTs when mixed with permissionless lending and borrowing markets.
What is NFT-Fi?
The financialization of NFTs, while a relatively new thing, has already seen some impressive growth. This has taken off as of late due to large amounts of value being stored in largely illiquid assets that are inefficient stores of value when compared to something like ETH: you can borrow against it, you can lend it, you can stake it and so forth.
With an NFT, the utility used to simply be tied to the purchase price, and even this was handled via bidding — which contributes more to existing market inefficiency. Other applications involve real world utility such as tickets (death to ticketmaster fr) or joining social clubs etc.
NFT communities strive for efficiency, and so different protocols began to spring up offering creative fusions of existing DeFi building blocks compatible with established NFT projects. Once these really got moving users were lending, borrowing, paying in installments, hedging and so forth.
This brings yield to an asset that previously didn’t have any. While you may snicker at the idea, you won’t snicker at the performance: 26ETH in just one month! This is against the backdrop of November’s gigantic blowup (try and tell me you weren’t red in November). NFT-Fi is here to stay.
What is FloorDAO?
In our own words: FloorDAO is an NFT-Fi protocol that uses DeFi to generate yields from its treasury of blue chip NFTs. The DAO regularly votes on which collections to accumulate and in 2022 swept 8 NFT collections.
How do Euler and FloorDAO fit together?
As it stands, FloorDAO is earning yield on 8 different collections. This has the advantage of a) bringing yield to FloorDAO on otherwise dormant assets and b) enabling speculators to long and short different NFT floor prices. This furthers FloorDAO’s goal to deepen NFT liquidity driving further activity and helps Euler by driving more demand to the protocol.
Euler is a unique lending and borrowing protocol: any asset can be supplied and borrowed. Unlike other protocols in the space, it is open to any asset that can be put into an ERC-20 standard. No governance approval is required and the risks that this entails are by default managed by conservative smart contract code.
As it stands, Euler and FloorDAO are already interfacing with each other thanks to FloorDAO’s tokenization of 40 Milady Maker and 1.5 CryptoPunk NFTs which were then deposited. Since then, users have been longing and shorting miladies constantly.
While it’s clear that Crypto Punk NFTs (being largely considered to be held by “OGs” who have been in DeFi since the start) have seen some good lending and borrowing activity, Miladys are catching up fast in terms of activity and may even supersede them in terms of creativity. Will miladys steal the crown for the most innovative DeFi pfp? Do I even need to draw attention to the famous financial literacy of Ape holders?
How do I long and short NFTs on Euler (alternatively how do I demonstrate my financial literacy as a self-proclaimed OG)?
It’s quite straightforward to prove that OG CryptoPunk users are financially literate and degen. To begin, supply some collateral to Euler. This will depend on whether or not you are long or short on CryptoPunks.
How one might long a CryptoPunk on Euler
To view the PUNK market, see here. You are as ever subject to liquidation. This wallet was, and so is the first Milady liquidation of 2023.
This can be achieved in the following way:
- Supply any collateral to Euler and then borrow a USDC stable asset (or indeed any asset that you think will appreciate less than your PUNK, such as ETH) like USDC.
- Swap the asset that you’ve borrowed and buy an equal amount of PUNK. This can be all handled inside the Euler finance app transaction builder, which uses 1inch.
- If the PUNK has appreciated in value say 1.5x, you can repay the USDC loan which you earlier took to finance the PUNK swap.
The increased PUNK price means you earn profit. You keep the difference, though this is only if the value of PUNK increases. Be mindful that if PUNK decreases the value of your USDC borrow will not — you have lost money here. Note also you’ll be paying some interest on the loan.
How one might short a CryptoPunk on Euler
It could be essentially the same, but in reverse.
- Supply any asset, but this time borrow PUNK against it.
- Sell the PUNK for an asset you believe will appreciate in value against the PUNK,
- Once the PUNK decreases in value enough for you to be satisfied, close the short by buying back the same amount of PUNK. You keep the difference once more.
In doing so, you might prove to your rival NFT community you know your way around a trade.
As ever, none of this constitutes financial advice and only you or your financial advisor can tailor your market activities to your risk profile. Consider how that conversation might go.
The Future?
NFT financialization is here to stay. While there’s yield to be earned and floors to be raised, FloorDAO will continue to do this. Without spilling too many juicy details, FloorDAO is looking to completely rebuild their protocol and introduce veFLOOR which will give holders the ability to direct liquidity and treasury yield to their preferred collections. Euler, on the other hand, is currently working on Baby Eulers (or YouLer) where anyone can spin up a lending and borrowing pool as and when they please. Combine the two and what do you get?
