Seed Liquidity Pools for NFT DeFi

NFT = non-fungible token, FT = fungible token

Overview

Fungify is a Plutus-native NFT-FT pooling protocol, a key component required to expand NFT capabilities. NFT-FT pools enable people to do the following:

• Have access to immediate liquidity for your NFTs
• Earn yield on NFTs
• Use NFTs as collateral for loans
• Invest in indexes of NFT projects
• Swap NFTs of the same type effortlessly
• Become fractional holders of NFT projects

NFT-FT pools are a foundational primitive that allow NFTs to be used in DeFi applications - akin to SundaeSwap FT-FT pools being a foundational component for all applications requiring fungible token exchanging. Some example DeFi applications that NFT-FT pools enable are NFT indexes tracking a breadth of NFT projects, loans with NFT collateral, NFT margin trading, and NFT prediction markets - not to mention many other non-DeFi related use cases.

NFT liquidity pools are available on Ethereum, but the use-cases are limited due to current gas costs. We think there is a ton of exploration still to be done in creating novel products that utilize NFTs in DeFi, and Cardano is perfectly suited for this. Up until this point, Cardano's main utility has been minting and trading NFTs, so they are widespread among active wallets. NFT DeFi applications could excel in this environment as users are eager to experiment with creative utilities and yield generating activities for their assets. This large base of ready early adopters could rapidly accelerate the use of DeFi on Cardano in its early stages.

How do NFT-FT pools work?

A NFT-FT pool works by locking a NFT into a pool, specific to that NFT's project, in exchange for fungible pTokens. pTokens represent a claim to one of the NFTs in the pool, and can be redeemed for a NFT contained in the same pool.

pTokens can be traded on any open market, such as SundaeSwap, where the price will be discovered through arbitrageurs. The price reflects the "floor" of the project. NFT holders can convert their NFTs to pTokens through the pool and sell them at this price for immediate liquidity. The liquid market allows NFTs to be used as collateral for loans. Liquidity providers for market making pairs can earn yield on their pTokens. People can buy fractions of NFTs represented by pTokens to track a project like an index fund. Assets of the same type can be easily swapped for another, a common use case in the metaverse, where certain quests require certain items.

Fungify V1

Fungify V1, with core functionality for swapping NFTs/FTs from a pool and a farming script for LPs to earn yield, is currently going through intensive internal testing and final touches are being made. We plan to release Fungify V1 this January.

To follow our progress on V1, hop into our Discord: https://discord.com/invite/4f36hKZBBd

To learn more, check out our docs: https://sicks0sicks.gitbook.io/fungify/

Roadmap

Similar NFT liquidity protocols on Ethereum, such as NFTX, have found that at least 10 NFTs are recommended in order for NFT-FT pools to be successful and incentives to align for liquidity providers.

This proposal is for building upon the Fungify V1 foundation to provide initial liquidity for 5 pools. Funding will be used as the Ada pair when providing liquidity to AMMs. Seeded projects will enjoy all the benefits of the Fungify V1 protocol.

In the next 0-3 Months

• Code audit
• Fungify V1 launch
• NFT liquidity pools set up for 5+ projects

Auditability

Fungify V1 will go through an official code audit. Progress for this proposal can be measured through the yield generated for liquidity providers - yield is a direct correlation to the sustainability of pools.

Risks/Open Questions

• Is 10 NFTs enough to maintain the expected behavior of liquidity pools?
• Will impermanent loss be offset enough by yield farming/airdrops?
• How do we prevent incentive models from failing in the event of sudden drops in liquidity?

Funding breakdown

Subsidize 5 liquidity pools = $9999