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AMA Highlights: NFTX

By Daniel Dal Bello, Director.
May 17, 2021–13 min read.

On Friday 14th of May, we welcomed Alex Gausman of NFTX into the Hillrise Group Telegram chat for an AMA.

NFTX is a platform bringing fungibility and composability to NFT collectibles through the creation of funds, returning ERC-20 index tokens. These are then freely tradable on a DEX (mainly SushiSwap).

The NFTX UI is currently built and maintained by the DAO, and it will soon be open-sourced just like the platform’s permissionless contracts.

NFTX token holders can use tokens for liquidity mining and governance rights. In the future, a fee switch could potentially be activated for direct value accrual to token holders.

We first got to know Alex and his idea for NFTX last year and have been eager to have him for an AMA with us to ask him all about his solutions for creating liquidity in the NFT space.

In this post, we have compiled key questions and answers from the event

Daniel Dal Bello
Hey Alex, great to have you here today. Could you start us off with some background on yourself and an intro to NFTX?

Alex Gausman
I got into crypto around 2017 and found my way to Eth-centric/DeFi Twitter around 2019. Finished my CS degree early last year (which took me forever) and then basically went full-time researching/trading during COVID when I moved back home. I decided I wanted to take time to try to build some stuff.

I bought my first CryptoPunk probably around a year ago. Thought they were kind of cool but I didn’t love them at first. But I felt like [there was] a lot of room for NFT growth and over time the punk art style and traits grew on me. I basically decided it would be cool to have a fungible (fractional) ERC-20 token which was backed by the cheapest CryptoPunks (1 PunkToken <=> 1 random CryptoPunk) and as I worked on that I saw potential to apply to other collections and make a more holistic project out of it.

So I’d say I started building NFTX around September, and then launched at the end of December, and [it has] been pretty crazy since then!

Daniel Dal Bello
We wanted to start with something less serious, which was asking about your favourite NFT or NFT collections… I think it’s Punks unless I misunderstand you?

We would love to hear if it’s purely from an artistic perspective.

Alex Gausman
Ok for sure! So personally I felt like there was a lot of potential for digital collectibles. I loved collecting Pokémon cards as a kid (for the brief period it was cool). In some ways, I feel like no “game” gives the same experience as collecting, and in many ways, I think collecting is like a meta-game of sorts.

So I felt like there was a lot of potential for the space to grow and I felt like there was a parallel between Punks and Bitcoin, with punks being the first NFT on Ethereum to gain traction and Bitcoin being the first cryptocurrency to gain traction, and how as the cryptocurrency space grows, money tends to flow back into bitcoin. So I felt like there was a good chance that as the NFT space grew there would be money flowing back into punks.

That was basically my rational thesis, but I also found as I started believing in them more as an investment I spent more time browsing, until the point I would be in bed each night just scrolling through. And I think that’s a good sign — like when something doesn’t seem immediately appealing but grows on you slowly.

Rowan Zwiers
NFTX has been described as a real nothing-to-something innovation, as it solves this fractionalization problem which was becoming an issue with the growing NFT market.

What do you think about that first statement?

Alex Gausman
Our main purpose has definitely evolved from our original vision which had to do with making non-fungible assets fungible and being able to combine them into higher-level “index funds”.

Basically, we will continue to play this role, but we have observed that the funds which got the most traction were ones like the MASK fund, and the way people actually were using was as a means of instant NFT liquidity. So people would “sell into” the fund at the going rate by minting, and then “buy random items” when the going rate was low.

So that was an unexpected benefit. And we have also observed an unexpected disappointment, which is in general people don’t seem to have *that* much interest in trading these index funds we’ve created, or using them as a means for getting exposure to NFTs.

Like I thought people would love the GLYPH token, but turns out people that like Autoglyphs are people with enough money to buy a full one, but that the GLYPH vault is still getting used by people to mint and redeem.

So we are now viewing vaults more as a means to a larger use case which is basically turnover for inventory providers. And in our version 2 coming soon, it will be possible to “target redeem” specific items for an added fee instead of getting a random one.

As an example, I believe the PUNK-BASIC token is trading around 14.8 ETH today, and there are about 97 CryptoPunks in that vault, and we are planning on having a 10% target redeem fee, which means in our version 2 it will be possible for anyone to buy any one of the specific 97 CryptoPunks for about 14.8*1.1=16.3 ETH, which is actually super competitive. Earlier today the cheapest Punk on Larva Labs was about 14.9 ETH, but there was only one more that was under 16.3 ETH and the rest were all priced higher.

Then we will split those turnover fees between our DAO and the inventory providers. But it’s cool because our original use case will still exist. People will be able to hold tokens like GLYPH for Glyphs exposure just like before.

Raymond Reijnders
When taking something like Hashmasks as an example, you’ve brought fungibility to a suite of NFTs, which are supposed to be non-fungible in nature.

In a way, this cheapens their value proposition as the market is basically saying that a whole group of them are essentially the same, with even value.

When extended to the rest of the NFT market, it might bring into question their value.

What do you think of this sentiment?

Alex Gausman
Right now our model works best for floor assets which tend to be the largest quantity of like-priced assets in a collection.

I would say two things, I guess.

  1. Is that we definitely see it as our mission to nail the use case for floor NFTs and then finding ways to scale it to work with more complex priced NFTs.
  2. But secondly, should NFTX v2 become popular, we could potentially see a temporary shift to floor assets becoming much more liquid and traders focusing more on them than the higher-level less liquid items.

So, it’s a constraint currently for us, and hard to predict the market effects, but we’re definitely planning on increasing ways to take in more complex priced assets. It’s a really hard problem to solve. No doubt markets fixate on floor prices regardless to a certain degree I think.

Daniel Dal Bello
Although the current version of the NFTX protocol does not allow for specific redemptions, we’ve read that this is a feature that will be made available in Version 2 — making it possible for people attached to their specific NFTs to participate without risk of losing to another (random) NFT.

What is the technical difficulty to be solved leading to this function and why was this not being implemented from the start?

Alex Gausman
So I think I was very focused on this idea of fungible <=> non-fungible and basically just getting NFT collections like Punks more exposure (i.e. coins like DOGE are easy for people to ape into and NFTs are more difficult), so to me it wasn’t about the individual items in the collection so much as just creating fungible NFT-backed ERC-20s that could be composed into more complex index tokens.

But the reasonable thing to do would have been to just add in the target redeem stuff a couple of months back when we realized we wanted it of course and that would have been like a 1-week thing.

However, all smart contracts max out at 24kb (which really is not very much, like around 3,000 lines or so), and we were near that maximum so it was almost impossible to squeeze in new logic.

This is why we decided I would rewrite the contracts with a more modularized structure (break stuff up).

Fortunately, we have 0xKiwi leading Solidity development now. I only started in the summer and am by no means an expert so it’s really nice having an actual badass developer on the team doing most of the heavy lifting and it’s great for gas efficiency and all that too (or at least it will be after we deploy v2).

Rowan Zwiers
As we’ve been discussing so far minted NFTX Vault tokens, acquired upon depositing of NFTs, are redeemable for a random NFT within that vault. Great for speculating, earning, and farming — but not so when it comes with the loss of specific NFT ownership. Making the system only interesting for those who are indifferent to the specific NFT that they hold.

How much of the current NFT interest do you estimate to be only speculative?

Alex Gausman
Yeah, this is very true. Our goal with version 2 is to align incentives better and we expect most people that are liquidity providers will do it because of the fees they are able to earn. Basically how it will work with something like Autoglyphs is there will be the glyph vault, which is tokenized as GLYPH tokens (just like it is now), and there will be a SushiSwap pool GLYPH/NFTX which people can use to buy and sell GLYPH, and by providing liquidity (LP’ing) into that pool you will get an SLP (Sushi Liquidity Provider) token, and then we will have an interface for people to stake these SLP tokens for which they will receive nGLYPH and that will make them eligible to earn fees from the target redeems.

Margins are very, very high in the NFT space compared to the fungible space. For example, I wouldn’t be surprised if someone like PranksyNFT averages 50%+ profit between his buys and sells, which is just insane to what we see for market makers in the fungible token space in terms of spreads they are straddling. Definitely nothing wrong with it, but it goes to show how there is a lot of money to be made because of the higher barrier of entry.

So like, for instance, if we have a vault with 100 Punks and there is a 10% target redeem fee (spread) and there are 2 buys each day, then that adds up pretty quickly.

It’s hard to get into the exact numbers here. But there’s definitely room for algorithmic market makers that people can pool assets into (and this is basically the use case we are looking to fill now). The hardest part about nailing this use case is pricing I think.

It’s easy to make work for floor items but gets very hard to include non-floor items because the algorithm has to know how many vault tokens it’s worth.

For example, if it’s 2x as good as a floor item it should be worth 2 vault tokens, but that gets difficult to figure out using programming alone.

Raymond Reijnders
You’ve previously had some collections added to Ruler Protocol (Masks, Punks), allowing users to collateralize them to borrow DAI. This is extremely exciting as it’s truly creating additional functionality for NFTs by meshing it with DeFi legos.

To take this to the next level, we would have to find a way to allow loan-collateralization of more unique NFTs that are not part of collections (with a “rarity range”).

How would we begin doing that, and would it be feasible anytime soon?

Alex Gausman
Definitely! I agree it’s exciting to see other projects building on top and using vault tokens as a means of pricing NFT collateral (for example, if the MASK token is trading for 0.5 ETH and all Hashmasks are eligible in the vault, then any mask can be liquidated instantly for 0.5 ETH, and that allows it to get used as collateral versus having to list on a P2P marketplace and wait for an unknown price).

In version 2 we are going to allow vault creators to deploy an “eligibility module” which basically can be used to determine which items are allowed in the vault. We have already made a couple to choose from, like unique eligibilities which allow the creator to set specific lists of token-IDs that are allowed, there is also a range eligibility module that works well for large ranges (like Art Blocks), and others.

But in particular, it will also be possible for custom eligibility modules to get deployed which interface with NFT traits on-chain (for collections that have this feature).

For instance, there could be an eligibility module that allowed CryptoKitties of a specific trait and generation because those things can be looked up on-chain. And then that saves gas because you don’t have to make a huge list of all the specific token-IDs that fit that requirement.

Rowan Zwiers
How do you as a founder value community participation, especially within the developer community?

We would also be curious to know, from your perspective, how do you build a sustainable community around your project?

Alex Gausman
That’s definitely something I’m still learning as I go I’ll admit. I think one of the reasons NFTX got a lot of traction early on was that I made it clear that it was a community-directed project. But it’s also true that over time we have become more centralized in the actual day-to-day work (while still remaining entirely decentralized in terms of treasury management and protocol upgrades and that stuff).

When I first launched there were so many people messaging and wanting to help and there was no way I could respond to them all. Then Chop told me about how a group of guys were spending free time working on a “gallery site” so people could view items in the NFTX funds visually. That was a few months back and now those guys have all gone part-time in their actual careers and are being paid out of the treasury to work on the NFTX frontend product.

I do think every organization falls somewhere on the spectrum between empowering builders <==> being competitive and defending against forks.

And usually, the right place is somewhere in the middle.

I feel very strongly about remaining permissionless and always encouraging people to build on top of us (e.g. I had some projects shut me down when I was trying to build and that really sucks), but I also think many DAOs suffer from over-democratization of lower-level tasks.

Rowan Zwiers
I’m really loving the insights shared on how these things develop. Given NFTX is built by a DAO and works with open contributions, could you give us a practical run down as to how the whole ‘team’ operates?

Alex Gausman
Honestly, it’s all worked out super well, and I think there’s a lot of luck involved with the right people coming on board at the right times. Early DAOs are a petri dish and have a lot of variables. But as far as how things basically work now.

Any large treasury management stuff is handled on-chain and usually voted on first using snapshot since it’s cheaper to vote there, but the final change happens on Aragon where people can pay more to vote against if they want (snapshot more for signaling). Any contract upgrades also happen through Aragon and there is a 24 hour voting period and if there is less than 80% of voting tokens in favor (relative to ones voting against) then it doesn’t pass. That’s more high-level governance though.

From day-to-day and week-to-week, basically Chop manages operations and communication. Scott Lewis is mostly in charge of high-level system/mechanism design. Kiwi is heading protocol development (which I also help him with). And then 0xNick is our product manager that works with a small group to handle frontend products including Quag (frontend develpoment), JB (design), and Javery (DevOps). And then also people like Finesseboi that help with community and Owen (0xmons developer) that is often joining in on Solidity discussions.

Chop, Scott, Nick and I meet three mornings a week to discuss high-level strategy and that stuff.

And then the whole team does a stand-up 4 days a week which is usually frontend product-based.

Kiwi’s sleep schedule is always changing (lol) so he and I mostly converse via Discord.

Daniel Dal Bello
Your weekly roundups give us a good idea of how quickly the ecosystem is progressing. It’s exciting to see the innovation you’re bringing to the NFT space!

Could you tell us more about the new features coming up that you’re excited about? What are you most looking forward to in the coming weeks and months?

Alex Gausman
So our code arena just finished up which is basically like a community audit and we got over 100 feedback tickets, many really good ones (some not so great). V2 will mostly be about a fresh start (since we won’t be at that 24kb limit) and then we can keep adding newer features for 2.x, but the main feature addition for 2.0 will be the 10% default “target redeem” fees and also the ability for LP’s to stake their SLP tokens and earn income from the target redeem.

Even more work is going into the frontend web-app though. We are going more in the direction of a marketplace vibe with the ability for people to browse vaults where every item is priced the same (in ETH) based on the going rates of the underlying tokens.

It’s been great watching the web-app evolve. 0xNick and crew are doing an amazing job. And I’m mostly looking forward to the steady improvements each week.

It’s been tough because we’ve basically been telling people to hold off on using v1 — don’t get me wrong, v1 is still usable and will continue to be usable. But many vaults will need to get migrated, so at this point, it makes more sense in most cases for people to just wait for v2.

And it’s never a great feeling telling eager users they have to wait and come back later. But it was necessary I think given I built the original MVP myself and we need a better codebase to start fresh on. Honestly, I’m most excited for the Meebits vault.

I’m like 99% confident we’ll break through triple-digit Meebits only instantly and it will be the cheapest place for people to buy from a pretty large inventory.

Hillrise Group supports ambitious Web3 startups with early-stage venture capital and fundamental research.

NFTX is a live platform for creating liquid markets for illiquid Non-Fungible Tokens.

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