Nibbl’s Buyout Game
In one of my previous article, I have covered existing buyout mechanisms for NFT -backed editions— https://medium.com/nibbl/exploring-the-buyout-mechanism-in-nft-fractionalization-ab6722b50d19
TL:DR;
In editionization, one locks an NFT in a smart contract and creates IONs that represent ownership in that NFT. There could be a scenario where there wasn’t enough interest that got generated around the NFT and the original owner now wants to buyout the whole NFT OR there is a large collector who is willing to buy the whole NFT and provide exit to current edition owners at a good valuation. We need a good buyout/reconstitution mechanism for such use-cases.
Voting based and price/valuation based buyout mechanism are the two directions that one can choose when designing a buyout system. We chose to go with latter as it makes the process very simple and doesn’t involve complicated governance or active participation from current holders.
Nibbl’s buyout mechanism
Properties:
1) Buyout timer — If original NFT curator wants the NFT to remain editionized and doesn’t want buyout to happen till a particular time he can set a time until which buyout can’t be triggered by anyone.
2) Price (Valuation) based buyout — No need of paying gas fees for voting to decide on buyout parameters, the buyout is based on valuation which is calculated directly from the bonding curve.
3) Anyone can trigger buyout — Buyouts can always be triggered if someone is able to put money at current buyout valuation of the IONs, and timer is active.
4) Community can reject buyout — not an all or nothing buyout, community has option to reject buyout bid within 4 days of the buyout getting triggered. In case the buyout gets rejected, the NFT continues to remain editionized.
Buyout Game
Stage 1:
Shark triggers a buyout to buy the locked NFT by depositing money at the buyout valuation of the IONs. Buyout valuation is calculated as:
Buyout Valuation = Valuation - LiquidityValuation (can be referred as market cap) = Current Price x Supply
Liquidity = Total liquidity in the bonding curves of the IONs.
Eg: For the conditions below, buyout valuation is computed as:
Price = 1ETH, Supply = 100; Valuation = 100, Liquidity= 30
Buyout Valuation = 100-30 = 70We expect buyout valuation to be similar to ‘real valuation’ of the NFT in the outside market. The liquidity in the bonding curve is owned by everyone and is redeemable the in case of a successful buyout, as a result the buyout initiator doesn’t need to deposit money for the same.
Stage 2(a)
Fish come together
Members of the NFT-backed editions’ community or even someone from outside who feel that the NFT is undervalued and the buyout shouldn’t happen, they can put in money in the system to increase the valuation.
Stage 2(b)
Crabs come together
Members of the NFT-backed editions’ community who feel that the buyout should succeed, don’t need to do anything if there is no buying pressure which is increasing the valuation.
If there is buying pressure then the crabs can sell their IONs to decrease the valuation. If the buyout does succeed then they would have made more money by selling as they sold at a higher valuation than the buyout valuation (in case of buyout success, IONs are redeemed at buyout valuation).
Stage 3(a)
Buyout rejected, Fish Win
If there is sufficient buying pressure after the buyout is triggered and the valuation increases by more than 15% above the buyout bid valuation before the buyout expires (4 days after buyout was triggered), the buyout is rejected. The NFT remains editionized and people are able to continue to trade the editions.
Stage 3(b)
Buyout accepted, Crabs Win
If the valuation doesn’t increase by more than 15% before the buyout timer runs out, then the buyout succeeds. The trading in the bonding curve stops and the holders are able to redeem their IONs at the valuation the buyout was triggered at. The whale who triggered the buyout is able to unlock the NFT(s) from the contract.
This is how the buyout mechanism mechanism on Nibbl works, in the next section we’ll be covering some technical details on the same.
Let’s walkthrough some of the other features of Nibbl’s architecture:
- Bonding Curve Price — We wanted to build a buyout system that is based on price instead of voting. In order to do so, we need to get the on chain price of the ION. In traditional AMMs, the accuracy of the token price even when calculated via TWAP is dependent on how much liquidity exists in the market. Our buyout system is a rejection system, where the original person’s bid gets cancelled if the TWAP price increases by a certain percentage above the price at which the bid was placed.
A malicious user can potentially increase the price manifold in less liquid markets thereby affecting TWAP and making it very easy to reject buyouts. TWAP manipulation has been observed in various oracle manipulation attacks like this.
In the bonding curve, in order to increase the TWAP price by manifold, a malicious user would need to provide a large amount of liquidity as the price increases based on how much money has been put into the system and what is the current valuation of the bonding curve. For the same amount of money, the TWAP would increase by a considerably less amount in the bonding curve system as compared to a low liquid AMM market. Therefore, a price based buyout system dependent on valuation from the bonding curve is better than the one based on getting valuation from AMMs. - TWAV — Nibbl uses a TWAV (time weighted average valuation) for the IONs in the buyout game. This is done to prevent the scenario where someone buys a lot of IONs-> rejects buyout ->dumps the IONs instantly.
Using TWAV instead of instant valuation ensures that no one can game the system. - Trading Fees-There are 3 types of fees when trading on Nibbl, these also serve as a deterrent to someone trying to game the buyout process by introducing extra cost for the same.
i) Admin Fees (0.25% )— This fee goes to the Nibbl treasury address.
ii) Curator fees (0.75–1.5%) — Curator fees accrue to the original NFT curator and functions like royalties in NFTs. The curator can redeem the fees accrued at any time to an address of his liking. Curator fees are directly proportional to the initial secondary reserve ratio — this was done to incentivize liquidity addition by the original owner.
iii) Curve Fees (0–0.75%) — Since the reserve ratio of the secondary curve is lower than that of the primary curve, some of the trading fees are used to increase the reserve ratio of the secondary curve until it becomes equal to the primary curve. Curve fees is calculated as (1.5-Curator fees)%.
