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NFT Index Token
The $NFT Token is an NFT index that is backed by and redeemable for NFTs contained within the
MarketVault. Pricing is denominated in NFT Token based on the floor value of the collections according to the
Oracle; through arbitrage, this means that the price of $NFT is pegged to the floor values of those NFTs.
NFT Index Tokens are minted when an NFT is sold to the
MarketVault or when a loan is originated against an NFT as collateral. When the price of $NFT on the open market is higher than the redemption value, this presents an arbitrage opportunity for
Borrowers that will bring the price of $NFT back to the pegged value.
NFT Index Tokens are burned when a collector uses the
Redemption Mechanic to redeem their $NFT for a random NFT inside the
MarketVault or when loans are closed out. When the price of $NFT on the open market is lower than the redemption value, this presents an arbitrage opportunity for redeemers that will bring the price of $NFT back to the pegged value.
NFT Index Token Price
The $NFT/ETH exchange rate is calculated based on the sum of the floor value of NFTs inside the
MarketVault divided by the circulating $NFT supply. Using the open market price of $NFT for the minting and burning operations results in an unstable system. To side-step the issues created by self-referential $NFT prices, the exact mint price for $NFT is calculated using the following formula:
If the vault accumulated too much of any single NFT, it would diminish the usefulness of the index. To prevent this, a dynamic spread is implemented to target a market capitalization weighted index composition. Whenever an NFT is sold to the protocol an additional fee or incentive is added depending on whether the NFT is underweight or overweight with respect to the index.
Each time an NFT enters or leaves the system, a 15 day TWAP of the index’s target weighting by market capitalization is updated. When applying the dynamic spread, the TWAP is used to determine the degree to which a collection is underweight or overweight. The magnitude of the dynamic spread is determined by the number of units of a collection that would need to be added or subtracted from the index in order to flip it from overweight to underweight (or vice versa), i.e., flip the sign of the weighting. Penalties are applied when the collection is overweight, while bonuses are applied when the collection is underweight. If that number is one, there is no penalty or bonus. For each additional unit required to flip the sign of the weighting, a 5.75% penalty is applied; the bonus caps out at 5%. This scales to a maximum penalty of 23%.
This ensures that small divergences from the target weighting which are likely to happen in the normal course of functioning incur smaller bonuses and penalties than larger divergences.
When an NFT is sold to the MarketVault with a negative dynamic spread (indicating the index is overweight that collection) the $NFT received in excess of the oracle appraised value is stored in the Rebalance Fund. This Rebalance Fund is used to subsidize the positive dynamic spreads that users encounter when the index is underweight a collection.