Price and Value
Warren Buffet famously said, “Price is what you pay, value is what you get.” When developing a new type of borrowing and lending platform one of the most complex aspects is understanding how to weigh both price and value.
With fungible tokens such as Bitcoin and Ethereum assessing their value is relatively simple and straightforward. A protocol can take live data from a variety of market makers and adjust collateral values based on price and liquidity. However, when it comes to non-fungible tokens (NFTs) this gets much harder to assess.
Fungibility means something is interchangeable, so if something is non-fungible, it is by definition, unique. From a technical perspective, this is exactly what an NFT is. By nature, each one is unique and original, even if the artwork associated with it seems identical to another NFT.
For example, a mass-produced book can be seen as fungible because you can take a copy from the shelf, change it for another copy and it’s indistinguishable. However, if a copy of the book is signed for you by the author, it becomes non-fungible. Every NFT is non-fungible, so their values are unique.
The individuality of each NFT poses particular problems not only in terms of assessing their initial valuations, but also their liquidity. You only have to look at the variety of offers on OpenSea to understand that even within one collection there are different levels of demand for different NFTs.
It is this variability that makes peer-to-peer and floor price models unsustainable in the long term. While these are the main options available, they will of course achieve short-term traction. However, for long-term success, we need a model that takes into account many different data points to assess the price and value of each NFT.
For these reasons, we’re integrating Paribus with a machine learning, artificial intelligence approach. The value of this approach is that it is both scalable and adaptable.
Simon, our CTO explains, “On the valuation side we decided not to invest our time and money into building an entire valuation algorithm using AI. Instead, we relied on existing companies that have spent millions and months and years perfecting their appraisal algorithms.”
Adding, “We have put together an algorithm internally that consumes valuations from all plugged-in sources and weighs data across multiple points to achieve a fair value. With valuations adjusted the secondary challenge and perhaps the most crucial point was liquidity and liquidation mechanisms.”
Liquidity is an issue that affects lenders across the board. Their liabilities can have a much lower value than expected if they are liquidated quickly, as we recently saw with FTX being unable to sell many of its tokens without crashing the market. This is even more difficult with NFTs due to their unique nature and individual characteristics.
As Deniz, our CEO explains, “The main point in designing a protocol like Paribus is answering the question of what happens if all collaterals drop in value by 80% overnight and the system needs to liquidate quickly? Our thoughts were that we will take the underlying collateral NFT, deposit that into one of the pools available, such as NFTX, and have instant access to the required liquidity to close the loan.”
Wilson, our COO adds, “There are limitations to how much liquidity is available even on these high-profile protocols, so we had to think of a fair LTV percentage to make sure the system is always in positive cashflow. Having room to maneuver the market swings and enough time to sell the NFT before the price crashes further is crucial.”
Next week we’ll take a deeper dive into the issues surrounding liquidity and pricing and how we’ve structured Paribus to be able to adapt and thrive in this complex environment. As we look ahead to 2023 we have not only the mainnet launch of our MVP to be excited about but also the testing of our NFT module. We’d like to thank everyone who’s been with us throughout our journey so far and wish you all a happy holiday and a prosperous New Year.