Capital efficient price discovery mechanisms will transform markets for nonfungibles and other illiquid assets
Today, most people following nonfungibles observe that it is a very illiquid asset class and feel it is likely to stay that way. What may not be obvious is that, in the context of blockchain’s cryptoeconomic mechanisms, “liquidity” is merely a mechanism design problem being rapidly solved. In this post, I would like to dive into how cryptoeconomics will financialize the NFT space, improve its liquidity profile, and extend this technology to other illiquid assets over time.
The financialization of the NFT asset class
Back in the early stages of the blockchain space it took months, and sometimes years, for a fungible (read: ERC20) token to achieve any significant liquidity. Issuers would compete to get listed on a centralized exchange, pay hefty fees, and jump through regulatory gauntlets. But the market applied smart contracts and cryptoeconomic mechanisms to solve the liquidity problem for fungibles. These days, through the magic of liquidity mining and the ingenuity of automated market makers, the time to liquidity for an average ERC20 token is virtually zero and DEXes are doing upwards of $2B of daily volume while serving $44B of DeFi market cap.
In contrast, the prospects of selling any individual nonfungible in the secondary market are still bleak today, even after a year when NFT GMVs have ticked up dramatically in 2020. In a previous post, I proposed that we design NFTs as “liquid intellectual property.” As the scope of NFTs encompasses more and more digital content, the liquid IP view comes with the implicit assumption that NFTs are, in their own right, a new financial asset class.
As NFTs become increasingly financial, they will require new kinds of exchanges, lending protocols, and derivatives. Thus, I claim that price discovery is the next major problem set in the NFT space. Capital efficient mechanisms for price discovery will enable participants to transact more quickly, improve liquidity through tokenization, allow nonfungibles to be collateral without order books, and create a rich set of derivatives with nonfungibles as underlying. In other words, price discovery will enable the financialization of the NFT asset class.
So how will it be implemented? Once again, as we lay out in this post, new price discovery mechanisms — in particular, appraisal games — will create key innovations that will solve the liquidity problem for NFTs and other illiquid assets.
Understanding current price discovery mechanisms
There are only a few ways that price discovery proceeds in NFTs today. First understanding these mechanisms will help us form a framework for how to think about the price discovery problem.
- The Sale Mechanism. In the sales approach, used by Rarible and most other NFT marketplaces, valuations are created from an open market public sale. As NFTs exchange hands through sales, the market notes historical prices and provenance of assets. Without an outsized market of participants, this default mechanism doesn’t have too much information about pricing and the market is very illiquid. As we shall see, sales are on the frontier of capital inefficiency: their main drawback is that for every dollar of valuation, someone must actually pay a dollar to create it.
- The Auction Mechanism. For better or worse, most marketplace sellers and buyers actually prefer auctions for obtaining and pricing NFTs. Async.art uses perpetual auctions as their native gallery, as does SuperRare. Beeple’s storied $3.5 million drop shows that auctions, while career-making, are generally exuberant. It’s worthwhile to note that auctions are well-suited toward art sales, where the intrinsic value of assets tends to be much more subjective and in the eye of the beholder. But from a capital efficiency perspective across general NFT assets, auctions are suboptimal. Most blockchain auction mechanisms in production aren’t Vickrey auctions, which would incentivize participants to bid their true value. Even if they were, they would have even worse capital efficiency than sales: they require capital to be locked up by bidders. (Some platforms have even proposed paying bidders DeFi yield on locked up bid capital to mitigate lockups.) In an auction, for every dollar of valuation, the mechanism might require multiple dollars of worth of bidding.
- The Fractionalization Mechanism. NFT fractionalization, as seen in the pioneering work of Niftex, is the first innovation toward creating capital efficiency in an NFT price discovery context. Together with other approaches like Ark, Wrapped Punks, WG0, and NFTX.org, fractionalization shards one or more nonfungibles into an ERC20 currency which can gain liquidity on a DEX or centralized exchange. Anyone can buy any amount of the currency in order to help establish the overall valuation, bringing down the cost of valuation for an individual user (but not necessarily in the mechanism as a whole). With fractionalization also come the challenges of stakeholder governance and managing a proliferation of ERC20 assets corresponding to a large universe of nonfungibles.
This discussion of existing approaches motivates the question of whether there exist approaches that dramatically improve capital efficiency for the price discovery problem. We cover some of these approaches in the next section.
Capital efficiency is what makes price discovery disruptive
Based on our discussion so far, a basic framework for evaluating price discovery mechanisms is measuring their capital efficiency. Let us define P(x) as the discovered price of a good x and C(x) as the total cost expenditure from participants required to price it. Then we can broadly define the price discovery efficiency of a mechanism as, informally, E = P/C across a particular set of assets. In this framework, sale mechanisms always have an efficiency of E = 1, auction mechanisms have E ≤ 1, and fractionalization deserves a more nuanced analysis than we should do here, with E ≥ 1. The question is whether we can do much better than fractionalization, and the answer is yes.
- Price Computation. While auctions are great for subjectively-valued goods, collectibles markets are often pricing on scarcity and well-defined properties. Some assets, like CryptoKitties and virtual real estate, might have pricing that can simply be computed. NFTBank.ai is one of the first startups to put forward accurate machine learning models for predicting the prices of collectibles based on past pricing of similar or adjacent collectibles. Virtual real estate pricing might succumb to models which take into account past sales and revenue generation possible in the neighborhood. In this context, capital efficiency goes way up because we can think of the mechanism as having a fixed cost, c, of deploying the pricing algorithms. Thus the cost will be amortized across price discoveries and efficiency E = P/c will go to infinity over time. Still, the jury may still be out on whether machine learning will work well for exuberant and subjectively-valued goods, like Beeple art.
- Expert Networks. We don’t necessarily need to build a machine learning model in order to achieve a fixed cost of price discovery. Imagine for each pricing, we pay a fixed amount of money to five experts who give us their educated opinions about a good’s fair market value. Capital efficiency improves as the goods appreciate in value. This approach can use centralized services, or incentivized networks of humans, to create appraisals. One concern with using human experts is scale — will we really have enough experts to process the entire potential volume of goods that the NFT space is likely to produce? As we shall see next, this approach is probably best formalized as on-chain oracle networks, which will naturally incentivize agents to play appraisal games and do so efficiently.
- Peer Prediction Oracles. The most exciting recent development in oracles is the implementation of peer prediction as an on-chain mechanism, pioneered by Upshot. Peer prediction is a cooperative game that incentivizes participants to honestly answer queries, without requiring data feeds or other sources of objective ground truth. Upshot proposes to apply peer prediction, coupled with an ordering algorithm, to create capital efficient price discovery for NFTs. It’s hard to do justice to peer prediction in this small space, but the mechanism by nature is agnostic between objectively priced collectibles or subjectively priced art — the oracle will report an educated consensus. Most importantly, Upshot makes several interesting improvements to capital efficiencies of today’s appraisal games. First, the mechanism’s valuation costs are amortized across a large number of goods, similar to price computation. Secondly, the protocol’s security margin can be assessed from future revenue: if some appraisers are malicious or bad at their job, then the protocol actively reduces their future cash flows by not selecting them for appraisal tasks. Punishing agents by cutting into their future cash flows instead of making them pay for security up front is a big capital efficiency improvement in cryptoeconomic protocols at large. Upshot’s peer prediction will be the first on-chain mechanism widely applicable to NFT price discovery, and NFT pricing will be the first application of Upshot’s protocol to roll out in 2021.
- Derivative-Implied Pricing. NFT loans, demonstrated by companies like NFTfi, and NFT indices, as contemplated by NFTX.org, create another vector for NFT price discovery — the pricing implied by derivatives which have nonfungible assets as their underlying. Custom derivatives, such as the right to purchase an NFT in the future or prediction market shares, can potentially create NFT pricing, while delegating the costs of liquidity aggregation to other platforms or mechanisms. It’s still early in this space, and it will be developing over the coming years as the financialization trend continues.
Implications of nonfungible liquidity
Overall, the potential for capital efficient price discovery mechansims has profound implications for the liquidity of existing NFTs and, by extension, any illiquid asset which can be formulated as an on-chain nonfungible. We are likely to see a whole ecosystem of appraisal games develop around the price discovery problem in the years to come. We have also seen that some approaches are more suitable for objectively priced goods, and some more suitable for subjectively priced goods.
Here are some practical applications of price discovery.
- A creator will be able to produce a work and an efficient market of appraisal games will offer liquidity for that work in a completely automated manner. As such, this would be an utterly disruptive mechanism for monetizing creativity, content, and digital goods.
- Oracle-based pricing will be used to valuate portfolios and collections of nonfungibles to discover new value.
- “Instant pricing” of NFTs can be used to create a lower bound at which holders can always liquidate their assets. Neolastics have proposed mechanisms along similar lines, and other price discovery might be applicable across a wider range of goods.
- Any application which uses NFTs as collateral can rely on on-chain pricing to control risk. For example, a lending protocol can set liquidation margins based on automated pricing. Or, in a more technical application, optimistic rollups can potentially use this mechanism to lower “roll-off” costs for NFTs from layer 2.
- Investors can make purchase decisions faster and more efficiently with suggested prices.
- We can create decentralized NFT indices backed by the security of appraisal games instead of trust or collateral. This can create major efficiencies for investors seeking exposure to the NFT space but hesitant to evaluate on an asset by asset basis.
I would love to hear your thoughts and feedback on this fascinating and developing space. Follow me on Twitter @jbrukh.
- [Emmons] An efficient price mechanism for NFTs
- [Brukhman] Twitter thread on #NFTLiquidity
- [Ausubel, Milgrom] The lovely but lonely Vickrey auction
- [Brukhman] All digital content is going on-chain
- [Berenzon] Constant function market makers: a zero to one innovation
- [Hubert] Niftex: The buyout clause in depth
- [Emmons] Peer prediction 101
Which crypto exchange platform is faster, coin transfer or Godex?
The coin transfer exchange works in a semi-automatic mode. The exchange takes place from morning to evening with the participation of the operator. All switching processes are carried out with the help of a support person. This way of working has its advantages.
A lot of people these days use automatic exchanges because it’s quick and easy. However, a semi-automatic service offers the possibility of a safe change.
This option is particularly recommended for beginners who do not yet know how to correctly fill in the fields in trades, how to find out the amount of the commission and when to complete the operation.
Most important steps in currency exchange
The change works in 3 steps:
Step 1: Select a currency pair to swap in the cryptocurrency converter. Check the box that you agree to the tariff, service fees, and fees for the cryptocurrency network.
• Step 2: Fill out the exchange form and check the entered data, as in most cases cryptocurrency transactions cannot be canceled.
• Step 3: Send the amount specified in the application to the address provided by the exchange operator and receive the cryptocurrency on your wallet within 5-30 minutes.
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The swap board has over 1,760 reviews, most of which are positive. If you have already changed the currency on this service, you can leave your feedback and add to the collection of comments on this exchange service.
The Godex crypto exchange is an excellent example of a website that allows you to exchange one type of cryptocurrency for another online. Dynamic price changes, complete absence of transaction limits (the transaction time can increase with large amounts), a clear user interface – everything is done here to ensure that investors feel comfortable. There is also a dedicated affiliate loyalty program so you can get a quick entry into the cryptocurrency market. It is time to look into the subject of such an investment.
You should understand right away that it is impossible to completely eliminate the risks involved in buying a cryptocurrency. Even most stable coins can lead to a complete loss of the money invested; even if the likelihood of such a course of events is extremely low. Only after you have considered all the advantages and disadvantages of each model, familiarized yourself with the market indicators over a period of time and analyzed the opinions of experts, should you make an informed decision.
When you are ready to buy cryptocurrency, you should do so strictly in accordance with certain rules. Investments need to be planned and made wisely. Creating a wallet with an address is necessary and does not take much time. You can buy the cryptocurrency you are interested in after registering with a specialized exchange – just select a popular currency to buy. After buying, many advise transferring the coins to offline storage to eliminate the possibility of hacking and theft of investments. By investing in one with a view to market capitalization, the risks of a currency can be significantly reduced. The three cryptocurrencies that currently meet these requirements are:
Godex.io currently serves thousands of customers with over 10,000 transactions daily. So if you are looking to swap one coin for another, you should try Godex.io and enjoy fast transactions at good exchange rates.
Maker Hits a New All-Time High Close to the $5,000 Mark
Maker is the first Ethereum-based smart contract system to launch an automated cryptocurrency lending platform.
Maker provides the first decentralized basic stable currency Dai (which can be compared and analyzed as the U.S. dollar on Ethereum) and a derivative financial system, promoting the prosperity of decentralized finance (DeFi).
Dai is issued through a full mortgage guarantee of digital assets. Since its launch in 2017, Dai has always remained anchored to the U.S. dollar with a 1:1 ratio.
On April 19, members of the MakerDAO community began to vote on MIP45, a proposal aimed at upgrading the liquidation system of the Maker protocol and maintaining the stability of Dai pegged to the U.S. dollar.
If approved, the liquidation 2.0 system will provide higher security, predictability, and decentralization, and provide community members with more opportunities to participate in collateral auctions through Auction Keeper software and a more conventional interface. This will promote the participation of the Maker community and the entire DeFi department.
According to data from DeFi Pulse, Maker, the largest DeFi agreement with system collateral of $965 million, dominates 16.44% of the entire DeFi market.
The holders of the Maker (MKR) tokens of the project have received a 64.23% price increase reward in the past week. According to CoinMarketCap, Maker with a market cap of $4,817,105,553, ranks as the 30th largest cryptocurrency.
The token has grown nearly eight-fold since the beginning of this year, rising from $587 to $4,652, It hit a record high of $4,995 today, breaking the $4,500 marks in one clean swoop.
Maker (MKR) Price Analysis
Source: MKR/USD 4-hour via TradingView
Judging from the 4-hour candlestick chart, MKR has successfully broken through its previous high of $4,118, and the rapidly expanding trading volume has resulted in $4,118 being flipped from a resistance to a support level.
The transaction price of MKR/USD is higher than the Exponential Moving Average (EMA) ribbon. Both the upward moving average and the bullish MACD index indicate that the bulls are currently dominating the market.
However, the Relative Strength Index stepping into the overbought zone is gradually levelling off, which suggests that MKR is encountering relatively strong selling pressure after touching its all-time high of $4,995 today. The MKR’s price will therefore experience a slight retracement, and it is likely to trade sideways for a period of time around $4,400-$4,600 before resuming its upward momentum.
If MKR’s price can stabilize above $4,200, then the upward trend of Maker may open a faster upward channel. As Maker hit a new high, this will mean that the altcoin will not encounter strong selling pressure on its way up. If the entire crypto market emerges from its current slump, it is highly likely that Maker breaks through $5,500 in the short term.
Conversely, a surge in the number of sell orders will push MKR below the $4118 support level and may trigger a more severe correction to the 20-day Exponential Moving Average of $3,795.
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RIT Capital Partners acquires a stake in crypto exchange Kraken.
According to the official announcement, RIT Capital Partners invested in the crypto exchange Kraken last month. The British investment firm described Kraken as one of the largest cryptocurrency exchanges worldwide, with more than 6 million clients. Kraken has seen a surge in cryptocurrency trading volumes during the last few months. The crypto exchange is also reportedly […]
According to the official announcement, RIT Capital Partners invested in the crypto exchange Kraken last month. The British investment firm described Kraken as one of the largest cryptocurrency exchanges worldwide, with more than 6 million clients. Kraken has seen a surge in cryptocurrency trading volumes during the last few months. The crypto exchange is also reportedly planning to go public in 2022 through a direct listing.
“Kraken is currently in talks with investors about another round of fundraising.”
“Kraken is currently in talks with investors about another round of fundraising that could give it a valuation of $20bn. Talks have been held in discussions with Fidelity, Tribe Capital, and General Atlantic. Kraken CEO Jesse Powell said this is being delayed in order to evaluate how Coinbase’s IPO performs. Kraken has a strong balance sheet, and the company is not in a rush to raise capital,” the official announcement states. Kraken is not the only cryptocurrency exchange that is planning to go public for global expansion; several other crypto exchanges are eying IPO in the coming time.
Coinbase went public via a direct listing on Nasdaq last week.
The US-based crypto exchange went public last week and received a reference price of $250 for COIN shares. The shares of the crypto exchange touched an all-time high of approximately $420 on its debut but saw a correction later. COIN stock closed at $311 yesterday. As reported earlier, Coinbase CEO Brian Armstrong sold 749,999 COIN shares worth nearly $292 million last week. The US-based crypto exchange saw nearly $335 billion in trading volumes during the first three months of 2021. The crypto industry has garnered a lot of mainstream attraction in the last year or so. Coinbase getting listed on Nasdaq is being hailed as a major milestone for the crypto industry.
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