Mechanics of Nibbl’s onchain asset perpetuals

Perpetuals have emerged as a transformative force in the world of onchain assets, reshaping how traders navigate the complexities of the market. This article provides a comprehensive exploration of the workings of onchain asset perpetuals, Nibbl’s architecture and how they can serve as a vital tool for portfolio hedging in a dynamic market landscape.

Exploring the Mechanics of Onchain Asset Perpetuals

1. Liquidity: Liquidity is the foundation of onchain asset perpetuals. Liquidity providers deposit assets into a shared pool, establishing the market’s supply. Traders draw from this pool to execute their transactions. Fees for opening and closing a trade, funding fees and borrowing fees all get accrued to this liquidity pool.

2. Trading Pairs: Onchain asset perpetuals involve trading pairs, similar to traditional cryptocurrency futures. Traders pair assets with cryptocurrencies like ETH or stablecoins. On Nibbl’s platform, assets like friend tech keys are exclusively paired with ETH.

3. Leverage: Leverage amplifies trading positions, offering traders the potential for more substantial gains. However, it’s important to recognize that leverage also magnifies losses. It’s akin to a financial multiplier that requires careful handling.

4. Funding Rates: Funding rates function like the interest rates on a loan for trading purposes. When anticipating a price increase (going long), traders effectively borrow from fellow traders who share this outlook, compensating them with a fee. Conversely, traders lend their assets when speculating on a price decrease (going short), earning a fee in return. These rates help maintain contract prices in line with real-world market conditions.

5. Oracle: Oracles serve as a reliable source for pricing data. Projects like NFT Perp used internal oracles for real-time price quotes for NFTs while Tribe3 used a proprietary Oracle construct that utilized the mid-price of bids and asks (of the underlying NFTs) as the base data, with a dynamic TWAP period.

6. Liquidation: When a trader leverages their position, they use collateral to borrow from the protocol for asset trading. If the position turns against them and approaches the initial collateral value, the protocol liquidates its position.

WTF is going long or short?

It is quite simple.

Long Position: When you open a long position, you’re essentially betting that the price of the asset will go up. If it does, you’ll make a profit when you close the position.

Short Position: Conversely, opening a short position means you’re predicting that the price of the asset will fall. The profit comes from the price difference.

Shift from vAMMs

The existing NFT perpetuals protocols in the market have started to move away from using the popular vAMM model. This decision is quite sensible as vAMM brings a fair share of disadvantages:
1. Lack of External Liquidity Providers: In vAMMs, there isn’t an external liquidity provider (LP) that users are trading against. Consequently, there may be instances where traders do not receive rewards for their trades due to the absence of counterparties. This lack of external market participants can impact the overall trading experience.

2. Price Dependency on vAMM: The price at which trades are initiated in vAMMs is derived from the vAMM itself. This dependence on the vAMM’s price calculation may not align with traders’ preferences, as they typically prefer to open positions based on the spot price of the underlying asset.

3. High slippage: Unlike traditional Automated Market Makers (AMMs) that rely on shared liquidity pools, vAMMs depend on individual users depositing collateral into separate smart contracts. This can result in lower liquidity compared to traditional AMMs, leading to higher slippage and potential trading inefficiencies.

To tackle the problem of vAMMs, Nibbl is introducing the Unified Liquidity AMM.

Diving deeper into Nibbl’s architecture

Unified Liquidity AMM

Unified Liquidity AMM is an Automated Market Maker (AMM) type that utilizes a shared liquidity pool for trading activities. This model consolidates liquidity from various liquidity providers into a single WETH vault, providing traders with more efficient and versatile liquidity management compared to traditional AMMs.

nWETH vault follows the ERC-4626 standard API for tokenized yield-bearing vaults. It represents shares of nWETH and acts as the counterparty for all platform trades. When traders profit, the vault pays them, and when they incur losses, those losses go to the vault. In return, the vault earns a portion of trading fees, distributed to nWETH token holders. The vault’s collateralization depends on trader profits; it remains positive as long as fees exceed losses. An epoch system captures snapshots of open trade profits, helping determine the real collateralization ratio and protect the protocol from risks.

Users will be able to deposit WETH into the pool and they will be given a representational token: nWETH
The value of the nWETH will ideally grow in time as the platform accrues fees.

nWETH = 1 + accRewardsPerToken — Math.max(0, accPnlPerTokenUsed)

accRewardsPerToken: accumulator value representing how many fees a single nWETH has accrued. This value always increases over time.

accPnlPerTokenUsed: a snapshotted accumulator value of trader PnL from all closed trades and a snapshot of open trades from the end of the previous epoch. This value changes every epoch and can move in either direction.

Trading pairs

Nibbl operates a unified liquidity pool denominated in WETH, where liquidity providers contribute funds for the trading of various assets on the platform. This liquidity is available for all on-chain assets, including NFTs and Friend tech keys, as they are all priced in ETH.

NFT Pricing

Nibbl has developed a custom oracle which aggregates prices from multiple marketplaces and uses Time Weighted Average Price (TWAP) and Volumed Weighted Average Price (VWAP) to determine the actual price of the NFT collection. The pricing on Nibbl is based directly on the spot price instead of getting affected by the price of the underlying asset positions which is the case for vAMMs.

Support for newer assets

Nibbl uses a common liquidity pool and can direct liquidity from the same to new collections. This allows Nibbl to add support for newer assets instantly as long as a reliable Oracle feed can be deployed for the same.

Liquidation

Liquidation price on Nibbl is also based on spot price unlike the price determined by vAMM in other protocols, which leads to better and more reliable liquidations.

What makes Nibbl stand out?

1. Reliable price feed: Nibbl’s price feed is directly dependent on the spot price.
2. Low slippage and fees: Nibbl’s Unified Liquidity AMM design optimises for low slippage and fees.
3. Reduced Liquidation Risk: Due to real-time price aggregated from NFT marketplaces, Nibbl minimises liquidation risks and enables traders to trade with confidence and accuracy.
4. ETH as Sole Liquidity: Nibbl exclusively uses ETH as the source of liquidity, enabling users to deposit ETH and earn yields on their holdings.
5. Trade New & Upcoming Collections: Nibbl’s unified liquidity pool allows traders to trade both established and emerging NFT collections, Friend tech keys and other onchain assets.

Trade new collections easily

Additionally, Nibbl introduces a user-friendly interface, making it accessible to both seasoned traders and newcomers. The platform operates efficiently on Layer 2 solutions, ensuring fast and cost-effective transactions.

Managing Risk with Onchain Asset Perpetuals

Onchain asset perpetuals can be a useful tool for hedging your portfolio during a bear market.

1. Short Positions: With onchain asset perpetuals, you can easily open short positions, which means you profit when the price of the asset goes down. This is particularly helpful if you have a substantial investment in a specific NFT or collection, and you want to protect its value. By shorting perpetuals related to that asset or collection, you can potentially offset losses if the value of your NFT holdings declines.
2. Diversification: Onchain asset perpetuals offer exposure to various NFT collections and assets without the need to own the actual assets.
3. Risk Management: Onchain asset perpetuals provide risk management tools like leverage and stop-loss orders. Leveraging allows you to control larger positions with less capital, while stop-loss orders automatically sell your positions if the price moves against you beyond a certain point. These features can help protect your portfolio from significant losses.
4. Liquidity: Unlike traditional NFT ownership, which can be illiquid and tie up your capital, onchain asset perpetuals offer liquidity. You can enter and exit positions quickly, allowing you to adapt to changing market conditions and protect your portfolio more effectively.

With its innovative architecture, Unified Liquidity AMM, exclusive use of ETH as liquidity, support for new and emerging collections, and reduced liquidation risk, Nibbl is paving the way for a more accessible, scalable, and secure trading experience. With a robust infrastructure that has been thoroughly tested and audited, Nibbl proves to be among the best onchain asset perpetuals DEXes out there.

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