Huobi Tech Capital, a department of Huobi Tech Technology Holdings Limited (“Huobi Tech”, stock code: 1611.HK), released a research report “Emystifying NFT Price Oracle” in July 2022. The report pointed out the importance and difficulties of NFT pricing, and analyzed the representative cases of both traditional and new routes of NFT price oracle in the current market. The report concluded that “liquidity lock” is the most noteworthy design solution of NFT price oracle, which can satisfy both price accuracy, timeliness and security.

The NFT market has seen a booming growth since 2021. However, since the market entered the downturn, the NFT market has shrunk in market capitalization, from around US$38.7 billion in January 2022 to US$22 billion currently, representing a decline of 37.1%. Daily trading volume has also fallen from US$4.5 billion to US$100 million, down 97.8%. The inherent fact reflected by the overall NFT market’s downturn is that, NFT is unusually difficult to fix a price due to its non-fungible nature, making it impossible to develop into a deeper and broader market such as lending and derivatives. To solve this problem, the NFT price oracle plays a decisive role.

In the lending field, NFT as a collateral must have a value in order to determine the LTV (ratio of loan amount to collateral value). While in the derivatives field, contracts must have an associated markup price for NFT for successful settlement or delivery. To address these issues, the market has seen the emergence of traditional route and new route of price oracles.

The report explains that the traditional route price oracle is characterized by a direct call on the market for quality NFT pricing data (e.g. floor prices of CryptoPunks and BAYC), with representative projects such as the NFT oracle developed by JPEG’d, a lending protocol in collaboration with Chainlink.

The report examines the new route price oracle, which is divided into three approaches: algorithm-driven, quote-driven, and liquidity-driven. The algorithm-driven route focuses on real-time pricing of NFT assets through machine learning (ML) and artificial intelligence (AI) algorithms based on NFT historical data, metadata, and community data, with representative of Banksea. Besides, the quote-driven route, as represented by project of PawnHouse, is designed into three quotation methods: Mortgage Loan & Tickets Circulation, Limited-Time Bidding, and the SMRA (Simultaneous Multiple Round Auction), to create a “price corridor” for NFT assets through a real and intensive quotation interval. The liquidity-driven route is to fragment or convert NFT into ERC20 assets on a 1:1 basis and subsequently trade them on AMM, as exemplified project of NFTX.

Based on the liquidity-driven approach, a project has proposed a liquidity lock-in solution: the actual value of NFT is the amount of Ethereum (ETH) locked (pledged) in the corresponding pool by the liquidity provider. When creating a pool, only the signature of the NFT assets holder is required as a proof of assets existence, and no escrow or pledge of NFT is required. Users can acquire positions in a given pool by locking ETH for a period of time. The sum of all active pool positions determines the market valuation of NFT. Unless new liquidity is added to the pool, the valuation of NFT will decrease as positions are unlocked and become inactive.

It is concluded that, the traditional route price oracles are limited to providing floor price data for top assets, whereas the scope of use are limited. As numerous uncertainties exist due to current economic situations, the NFT asset prices under the algorithm-driven approach simply do not meet the accuracy requirements. The quote-driven approach faces the problem of complex mechanism design and is still at the stage of theoretical validation. The liquidity-driven solution is susceptible to market manipulation, and security issues are difficult to resolve, and naturally exclude high-quality NFT assets. “Liquidity Locking” is the most noteworthy design solution of NFT price oracle, which can satisfy the price accuracy, timeliness and security. However, due to the need to lock a huge amount of assets, it results in low efficiency, so it must be accompanied by the necessary incentive mechanism design to release the liquidity.

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https://www.huobitech.com/uploads/file/20220812/16/3ca6ef744b37c80961d4bcf0da14457b.pdf

About Huobi Tech

Huobi Technology Holdings Limited (“Huobi Tech”, Stock Code: 1611.HK) is a leading one-stop digital asset service platform. We are committed to leading traditional finance into the world of digital assets, with professional, compliant, secure, and efficient services. Currently, the company services cover cloud-based services, data center services, SaaS, virtual asset management, trust & custody, Brokerage OTC, lending, trading platform and strategic investment.

Huobi Tech Capital is an investment department initiated and established by Huobi Tech, dedicated to capturing industry development and investment opportunities in Web3.0, DeFi, Metaverse and other related tracks. Huobi Tech Capital will focus on early-stage project investments that follow industry trends, as well as strategic mergers and acquisitions that help strengthen Huobi Tech’s own blockchain ecosystem. Recently, it has successfully deployed in GameFi and completed a project investment of the family office digital asset service platform.