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Redemption Mechanic

The
🖼️
NFT Index Token is fully backed by NFTs in the
🔓
MarketVault; it can be burned in exchange for the NFTs contained within. This allows for two-way arbitrage of the peg since $NFT can also be minted by a
👨‍💼
Seller depositing NFTs into the MarketVault.

Redemptions

Each collection contained within the vault has an associated floor price which is frequently updated by the Oracle mechanism. To call the redeem() function, a redeemer must input a number of
🖼️
NFT Index Token equal to the highest value floor of any given NFT collection within the
🔓
MarketVault. At the end of the redemption process, the redeemer receives the difference between the value of the NFT obtained and the amount input.
If the redemption mechanism selects an atypical NFT (e.g., Alien CryptoPunk), then the protocol mints
🍀
LUQ Token instead.
The Chainlink VRF is a provably fair and reliable random number generator. It is funded via LINK tokens provided by the DAO through a subscription account. When redeem() is called, the protocol escrows the
🖼️
NFT Index Token of the redeemer and makes a call to the Chainlink VRF contract to provide randomness. This randomness is used to determine which NFT is redeemed from the vault. In a separate transaction, Chainlink VRF executes the callback function fulfill(), providing the random number and transferring a random NFT to the redeemer.

Avoiding Value Leaks

Free Optionality

Random redemption avoids the problem of providing free optionality to arbitrageurs. If participants redeeming
🖼️
NFT Index Token were allowed to select any NFT for redemption, they could preferentially select those which have increased in value while avoiding those that have decreased relative to $NFT, siphoning value from the
🔓
MarketVault.

Beta Preservation

The beta of an asset is its correlation to the overall market. The volatility of an optimal NFT index will map to the overall NFT market, i.e., (
βi=1\beta_i = 1
). By preventing individuals from preferentially removing specific NFTs, this allows the index fund to maintain a collection representative of the overall market, allowing its volatility to track the broader market. Hence, random redemption preserves the beta of the index.

Spreads

Each redemption incurs a two point five percent (2.5%) spread. That spread is split between staked
🍄
FUNG Token holders and staked
🖼️
NFT Index Token holders, with twenty percent (20%) going to staked $FUNG holders and eighty percent (80%) going to staked $NFT holders.