Let’s Talk About Punks

Yam Finance
Yam Finance
Published in
6 min readJun 29, 2021

Or more specifically CryptoPunk #6672.

What Makes “CryptoPunk #6672" Special

Red crazy hair and a pair of regular shades. A stylish attribute combination indeed.

What isn’t quite regular about this punk is that it has traded 9 times over its lifetime, which is unusual considering the average number of trades for a punk that’s seen the market is just above 2. Adding on the fact that thousands of punks in the collection of 10,000 have never traded hands before, something about this punk is clearly special. So let’s take our crazy redhead punk (aka Crazy Red) and his owner’s wallets on a trading journey.

As a start let’s check out Crazy Red’s pricing history, having changed hands last at a price of 30 ETH ($53k) in March ‘21.

Don’t be fooled at the ‘up only’ nature of the chart, being a punk holder isn’t always easy. Liquidity is sparse and historically offers to buy have dried up quickly in cooler market conditions.

Crazy Red’s Market Action

Let’s take a look at what happened to Crazy Red’s first owner back in 2018.

*Source: Larvalabs

Offers as high as 4 ETH ($1,170) were coming in, at what was a late stage bull market. As the bear reared its head, Crazy Red’s first owner capitaluated selling his punk at 0.15 ETH ($59) in March 2018. That’s 96% less in ETH than what was on offer 2 months prior (95% less in USD).

Red’s owner showed his hand repeatedly dropping his offer prices until accepting a bid of 0.15 ETH. Having no liquid market to sell to can result in an asset being sold for less than it’s worth. You could argue that this is what happened here.

Although NFT markets exhibit greater liquidity in 2021, liquidity risks NFTs carry still remain. There is no guarantee that the buyer offering 30 ETH for your punk today will be there tomorrow.

Here’s a closer look at Red’s market action, an example of sparse bids and low liquidity in a downtrending market.

  • 29 Jan 2018: Bid 4 ETH & Subsequent withdrawal
  • 29 Jan 2018: Offer 1 ETH
  • 4 Mar 2018: Offer 0.4 ETH
  • 30 Mar 2018: Bid 0.15 ETH

You can imagine as a punk owner seeing liquidity dry up and bids coming in consistently lower is unnerving. There is the temptation to sell to limit your losses, even though you want to hold for the long term and avoid selling the bottom.

But what if you could manage both the price and liquidity risk on your punk without selling it?

Let’s talk uPUNKS

uPUNKS is an expiring synthetic token designed to track the median price of all CryptoPunks traded in the 30 days prior to settlement. Designed to provide broad based exposure to the CryptoPunk NFT collection.

Instead of selling on the 31st of March as Red’s owner did, let’s put on a uPUNKS short position for a typical full uPUNKS contract duration (a quarter) as a hedge and compare results.

Hedging with uPUNKS

1000 uPUNKS tokens roughly references the price of 1 Punk, so to hedge Red back in 2018 we would have needed roughly 1000 tokens. Simulating the index price on 31 March 2018, we get 0.0002 ETH per uPUNKS token and 0.2 ETH per Punk as implied by the index. Minting and shorting would have resulted in a 0.2 ETH short position.

3 months later, on 30 June, uPUNKS would have expired to 0.00005 ETH, so 1000 uPUNKS would be worth 0.05 ETH. Having sold for 0.2 ETH and bought back for 0.05 ETH (0.15 ETH profit) this specific hedge would have protected against 75% of the losses of uPUNKS as an asset class!

Selling Red as the owner did resulted in 0.15 ETH, but hedging using uPUNKS results in 0.15 ETH profit from the hedge, which helps offsetting Red’s new lower value with the key fact being the owner would still have owned Crazy Red. An exceptional outcome, considering Red went on to sell for 3 ETH in September later that year. That’s 19 times more ETH than Red’s first owner received when he handed his punk over for 0.15 ETH.

Hedging isn’t the only short use case for this synth. Currently, there is no active lending market for Punks so shorting CryptoPunks is indeed a challenge, one that uPUNKS solves. A speculative seller looking to profit from falling CryptoPunk prices can gain short exposure by depositing ETH collateral, minting uPUNKS and selling to the AMM pool with the intent of buying back later at lower prices.

But what if you aren’t a punk owner or interested in going short? uPUNKS on Yam Synths is for you too!

Why Buy uPUNKS

There are three clear reasons why getting punk exposure through this index as a buyer is better than owning an individual punk.

  1. Punks aren’t cheap and if you don’t have +- 15 ETH you can’t get exposure. uPUNKS allows you to gain meaningful exposure to Cryptopunks as an asset with sums smaller than 1 ETH. Power to the minnow.
  2. uPUNKS is based on the pricing of a basket of traded punks and doesn’t expose you to the same liquidity risks as holding a single punk. A punk for sale today receiving offers of 20 ETH could change to 10 ETH tomorrow, even though 15 ETH may be a more true market price for your Punk.
  3. uPUNKS trades in a more liquid AMM environment than typically used order books. Given the handsome launch liquidity rewards, ample LP’s are likely to be ready and waiting to trade with you. As a fail safe, if the AMM pool doesn’t have enough liquidity to sell back to after you’ve bought in, you can hold uPUNKS until expiry to receive what it is worth at that timestamp through a simple settlement process.
  4. Single punk risk exist. In Tradfi these are called idiosyncratic risks. These are best explained with an example. At the time of writing the cheapest Beanie punk for sale is 220 ETH (#4506).

This is a big premium on other human punks due to the rarity of the beanie attribute. But what if this rarity premium on Beanie punks contracts in the future because the market no longer values it as highly as it once did? As uPUNKS references a broad basket of punks it leaves you with no such single punk risks.

CryptoPunk bullish buyers regardless of account size, Punk hedgers and speculative sellers. uPUNKS has something for everyone seeking exposure to this coveted NFT collection.

Now you can gain exposure to CryptoPunks on using the Yam Synths platform and uPunks!