XCarnival – Changing the NFT Collateralized Lending Market

An in-depth explanation of XCarnival’s NFT collateralized lending and how it benefits users.

NFTs Soar Onwards

The Non-Fungible Token (NFT) market continues to boom despite a shaky cryptocurrency market. Minimally affected by the fluctuations, sections of the NFT market continue to expand.

There are already 8 NFT projects worth more than 100,000 ETH each on OpeaSea alone, including CryptoPunks, BAYC, Decentraland, MAYC, Art Blocks, SandBox, Clone X, and Azuki. The market transaction volume of these alone is close to $10 billion.

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Transactions Don’t Lie

It can be seen from the transaction data that more than $40 billion worth of NFTs were traded in 2021. Although most of them are punk avatars and NFT collectibles, which is a new art form, the trading volume of NFTs has witnessed exponential increase compared to previous years.

The increase covers a variety of categories such as: cyberpunk; music; paintings and other art collections; bills, bonds and other assets in the field of asset mapping tokens; games; social; and meta-universe. NFTs have become one of the fastest and strongest tools to make the blockchain industry widely known.

However, in stark contrast to the rapid growth of NFTs and their huge volume of transactions, only a few NFT collateralized lending platforms are currently available to provide services to this market. Why is this the case?

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The Factors Behind the Facts

Based on preliminary research and analysis, Carnival proposes that the NFT market is still relatively small because of the following two main factors: liquidity and price discovery.

Liquidity

In order to use NFTs as collateral, we need to consider NFTs as a financial asset. For a financial asset that is illiquid, the illiquidity problem needs to be addressed first. Liquidity is the foundation to promote the growth of a lending market that is derived from this particular financial asset.

Lack of liquidity in the NFT market, in turn, leads to the following common phenomena.

· Most of the NFTs have a very low turnover rate and are mainly traded on a peer-to-peer basis, where sellers may wait for a long time after listing on a platform such as OpenSea, only to find there’s no buyer to close the deal.

· The few sought-after NFTs are expensive. Once they’re bought by a small number of big investors, who tend to keep the NFTs to themselves instead of selling them, ordinary NFT investors are turned away from engaging in the trading of such NFTs.

· A more common problem is the unconstrained creation of NFTs. Anyone can generate and create their own NFT on platforms such as OpenSea. There are already over 29 million NFT projects launched in OpenSea alone. While users can buy NFTs according to their preferences, the more realistic fact is that users are completely incapable of distinguishing NFTs that have real value from the tens of millions of NFTs available. Loads of NFTs wither away while they are being created, and then end up being flooded in the torrent of new NFTs.  

Price Discovery

Price discovery is the result of negotiations between sellers and buyers. In other words, price discovery for an NFT is the result of interaction between the supply side and the demand side of the NFT. This behavior, which happens millions of times a day in traditional markets and even in DeFi markets, seems to be somewhat defective when applied to the NFT market. This leads to the long-standing and pressing problem of NFT: how to price NFTs fairly.

The lack of a consensus mechanism for the value of NFTs makes it difficult for lenders and borrowers to reach a basic consensus on the value of the underlying NFT. Therefore, it’s no surprise that while a large number of NFTs can be actively traded on platforms such as OpenSea, they can’t be included in platforms that support NFT collateralized lending for lending activities.

2 Solutions

NFTs have shown a certain growth trend. Therefore, looking into the future, NFT collateralized lending is a major problem that must be solved. At present, the mainstream solutions mainly include the P2P model and the capital pool model.

Though failing to completely solve all the problems of NFT collateralized lending, the solutions are generally accepted by the market and have activated the NFT collateralized lending market to a certain extent. They have withstood the test of the market thanks to their attributes.

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The P2P Model

The P2P model is the most familiar and most used solution at present because it applies to all NFTs and reflects NFT’s unique value attributes such as scarcity.

As early as six months ago, XCarnival’s version 1.0 adopted the P2P lending approach on BNB Chain (formerly Binance Smart Chain or BSC), which successfully addressed the issue of imbalance between lenders and borrowers through the project ecosystem.

This is how the P2P model of NFT collateralized lending works: User Alice has some NFTs that are worth about $1000. She wants to pledge them for a loan to invest in other projects. In this case, she can set her NFTs on the XCarnival platform as follows:

Borrowing amount: 800USDxc; interest rate: 15% p.a.; loan term: one month

Meanwhile, user Bob wants to use some of his tokens worth $5,000 to buy his favorite NFTs and get good returns. He can go to the platform and follow the steps below: 

Put the tokens into Megabox and mint 2000USDxc. If he likes Alice’s NFT, he can bid on it, for example, for 400USDxc, and get 12% annualized interest.

After one month, Alice returns to the principal and pays the interest to redeem her NFT, and Bob gets his part of the lender’s return. If Alice does not return the principal or interest, the NFT worth $1000 goes to Bob the lender.

Pros and Cons of the P2P model

The P2P model can be a good solution to the problem of varying prices of NFT in practice, especially for NFTs with high value and that are rare since it allows separate quotes for NFTs with different attributes and degree of scarcity. However, it still has many problems such as long transaction time (NFT owners need to wait for others to place orders or give quotes, and check from time to time), inefficient use of capital, and high interest rates. For NFT owners in need of urgent cash, such uncertainty provides a relatively poor user experience.

For ordinary users, especially those who have used the P2P model for NFT collateralized lending, it is obvious that there is considerable room for improvement for the user experience offered by the P2P model. As a result, another solution has recently emerged in the market – the capital pool model.

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The Capital Pool Model

The capital pool model of NFT collateralized lending draws on DeFi’s capital pool model, where NFT owners can get a loan immediately after over-collateralizing NFTs to the pool. The whole process is similar to using AAVE/Compound. This is also a mainstream direction for exploration when it comes to combining NFTs with DeFi, and some projects have been launched to experiment with this model. As a result, we will see increasingly blurry boundaries between NFTs and DeFi.

In the capital pool model, the NFT lending process is similar to the DeFi lending process. Capital providers can put their own stablecoins or tokens including ETH into the pool to earn stable interest. The interest paid by NFT owners depends on the size of the loan and NFT supply. If the NFT owner does not pay back money or NFT prices fall to the liquidation line, the NFTs will be put onto OpeaSea and other trading platforms for auction, then capital will be returned to the capital provider.

Compared to the P2P model, the capital pool model has the following advantages.

Quick transaction process and short cycle

Clearly defined loan amount

Large loans and low participation threshold

Stable and relatively low interest rates

Users with blue chip NFTs such as Punks and BAYC, who need a loan, can immediately obtain one with a specified amount by pledging their NFTs under the capital pool model without having to wait for price discovery and worry about NFT loss due to price manipulation. This is because the cost for price manipulation may be much higher than the benefits obtained.

Example: CryptoPunks

Take CryptoPunks as an example. As shown above, the average price of Punks traded in the last 30 days is 109 ETH, and the floor price is about 68.5 ETH. Assume that only 20% of Punks are engaged in collateralization, and the 68 ETH floor price can lend 20 ETH (assuming that 30% of 68 ETH is provided for lending). If you want to make a profit by lifting the floor price, even if the big investors collude with each other, you still need to raise the price above 204 ETH to make a profit. A 20% mortgage rate requires a trading volume of 408,000 ETH, and if the mortgage rate is 30%, it requires a trading volume of more than 600,000 ETH. This is based on the premise that the intrinsic value of Punks is 68 ETH, which will not rise. Thus, the cost is much higher than the benefit.

Issues with the Capital Pool Model

The capital pool model also has certain disadvantages and does not match all NFT series. For example, for NFTs that are rare, a loan amount with a price fairer than the floor price is impossible. There are a relatively small number of NFT series that are suitable for the capital pool model and they are concentrated in blue chip NFT series such as CrytpoPunks and BYAC. For the long tail NFT series, the capital pool model is risky. NFT prices may be manipulated by big investors, which will lead to failure of sale when a NFT is liquidated, resulting in the loss of funds for the borrower. In addition, the capital pool model is quite complex. There are smart contract risks even though most of the logic behind the capital pool model is similar to AAVE.

The disadvantages of the capital pool model are as follows.

Not applicable to all NFTs, only applicable to mainstream NFT series

Risk of price manipulation for long-tail NFT assets

Smart contract risks

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Review of the 2 Models

The P2P model is theoretically applicable to all NFTs. Users list their NFTs on lending websites, and both lenders and borrowers make their choices independently. The disadvantages of this approach are that users are unable to determine whether the NFT prices deviate from the market prices, and both lenders and borrowers have to bear a high level of risk. It’s difficult to ensure the lender’s benefits if the borrower does not pay off the loan and NFT liquidation gets confusing.

The capital pool model targets the lending market of mainstream NFTs. The key to the NFT collateralized lending projects using this model lies in the ability to integrate mainstream NFT resources. Because the mainstream/blue chip NFT series is an inventory market, which can attract more mainstream/blue chip NFT series. This means that they can seize market share more quickly, attract and drive the inflow of lending funds, form a positive cycle, build up advantages, and truly attract blue chip NFTs and capital into the NFT collateralized lending market.

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Changing the NFT Collateralized Lending Market

Based on the above observations, XCarnival plans to launch its own NFT lending pool on the ETH chain after six months of running the P2P model on BSC. It will also be officially launched on the ETH chain. It is believed that such a move will give a boost to the NFT lending market.

A lot of useful information can be obtained from the information disclosed by the project side. First of all, the XCarnival lending pool is very different from the existing products on the market. XCarnival’s Pool to C (Customer) capital pool model on the ETH chain can be divided into three main parts.

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First, the funding source of the Pool. Users put ETH and stablecoins into XCarnival’s Pool and receive rewards from the project side. The project provides a new wealth management channel for stablecoin users.

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Second, the NFT holders. Users who hold NFTs can receive stablecoins directly by putting their NFT assets into the lending pool. Users can directly use the lending pool to quickly pledge their mainstream NFTs into different pools to borrow the corresponding mainstream coins such as ETH, USDT, and other notable coins. Users can borrow and repay at any time.

Third, rights and interests of both lenders and borrowers can be protected. How can the project make sure that lenders’ stablecoins will not be swept away and that borrowers will repay the loan? XCarnival ensures maximum transaction security and smooth completion through the prophecy machine mechanism.

Multiple loan pools will be built to issue NFT assets on the ETH chain. The initial product launch will be limited to common NFT assets.

The project side has not yet disclosed any information about the prophecy machine mechanism. The current solution is basically to calculate the TWAP (time-weighted average price) based on data on the chain. TWAP uses multiple time dimensions as the source of data sampling, while removing extreme values to calculate a comprehensive floor price. Multiple transactions of the same NFT within a period can only be counted once to avoid being attacked. Also, this approach can prevent price manipulation.

The Pool to C model has improved asset utilization and transaction efficiency of the lending pool in different scenarios. XCarnival is expected to truly unlock liquidity in NFTs and empower the NFT collateralized lending market.

Market Outlook

The adoption of the capital pool model to support NFT collateralized lending is still at a very early stage. Strong resource integration and product development capabilities are required in addition to a keen business mindset.

XCarnival will soon be launched on ETH. In addition to the P2P model that is already available, the Pool to C model, which will be officially launched, is probably going to be the first NFT collateralized lending platform that officially supports the capital pool model and is expected to be a game changer in the NFT collateralized lending market.

More Information About XCarnival

Communities

Twitter: 52,002 followers; Telegram: 41,294 International Telegram members, 46,108 Chinese Telegram members

Platform data

NFT mortgage: 26,746; Loan scale: $ 20,659,142; Number of addresses: 13,519

XCarnival Milestones

1. Won the championship of the BSC Hackathon competition and passed the security audit conducted by Certik and Peckshield.

2. Successfully launched XCarnival NFT together with Galaxy.

3. Launched BSC major networks that offer NFT mortgage and lending P2P models: support XCarnival, BabySwap and Pancake NFTs, and offer liquidity rewards.

4. Listed on CMC and CoinGeCko and got traffic support from CMC.

5. Listed on Gate.io and MEXC exchanges simultaneously and initiated the syrup pool incentives with Pancake.

6. Launched the Gamefi platform – XIGO: successfully completed the launch of two major Gamefi projects, Bino and Dracoo.

7. Completed the debut of Binance NFT Marketplace project: 9,000 XCarnival Combo Cards sold out in 2 seconds.

8. The lending scale on BSC exceeded $20,000,000 and the total number of loans exceeded 20,000.

XCarnival’s Investment Institutions and Partners

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This article was written by XCarnival investor WaterDrip Capital.

For more information about XCarnival, visit the following links:

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Source : bsc.news