With the sunsetting of nftperp’s private beta (V1), and in anticipation of our upcoming V2, we wanted to share a recap of V1, why we decided to sunset private beta, and what we have in store for V2.

V1 Recap

Our private beta (V1), Protocol-as-LP vAMM’s design, launched on November 25th, 2022 and quickly became the best place to trade NFT perps on-chain. During our 7 months private beta run, nftperp generated 281,855.42Ξ in trading volume ($530M) across 2,576 of wallets and cultivated an amazing Discord community of over 9,000 members… (come say hi!). While Protocol-as-LP vAMMs are great for getting initial users, they simply do not scale, as past protocols have illustrated. Understanding this, we were working to launch V2 (a Hybrid protocol featuring Fusion AMM with a decentralized limit order book design) before V1 private reached its limitations.

Sunsetting V1

Between June 15, 2023, and July 6, 2023, many NFT bluechips collections dropped heavily. Azuki dropped 60%, while Bored Apes and Mutant Apes dropped 32%. nftperp was one of the only NFT-Fi platforms allowing NFTs to be shorted with significant size. Thus traders on our platform were heavily short. This is shown in the table below:

Traders were predominantly short (Azuki & Apes Short OI >99%), which resulted in considerable unrealized PnL. The amount of uPnL is visualized in Figure 1 below:

Unlike a Central Limit Order Book (CLOB) model, which necessitates an equal number of long and short positions, a vAMM model realizes profit against the margin of open trades. In typical scenarios, long and short positions pay funding rates to each other. However, volatile market conditions (as expressed in Table 1) created an extreme imbalance of the long-short skew driving an unbundling of unrealized profit.

Recognizing the limitations of our system, we made a concerted effort to ensure that the combined balance of the ClearingHouse and Insurance Fund exceeded the total unrealized PnL and margin of traders. However, the situation broke down before we could roll out the new economic structure in the form of nftperp v2. While the unbundling of unrealized profit was the most significant cause of the breakdown, a few other issues contributed.

1. Before May 29, a position would be liquidated based on Mark Price unless the mark index deviation was greater than 10%. On May 29, at block 95709527, we updated the liquidation logic to include mark and index prices. This had unintended consequences. Over the next few days, the volatility caused a bad debt accumulation of 46 ETH. This upgrade was meant to be more favorable to traders. Unfortunately, it was too favorable and led to underwater positions not being liquidatable.
2. On July 3, at block 107402794, we removed the Mark Price. When we did that, it created a liquidation cluster in Milady. We ended up refunding those liquidations leading to a depletion of 49 ETH from the insurance fund.

The above issues, combined with the shortfall from a sudden increase in unrealized profit, signaled a potential looming issue with further market volatility. To prevent any escalation, the team decided to pause the v1 contracts. This preventative measure wasn’t just a response to the present challenges, but also an assertive action to ward off the risk of a disorderly mass exit, where the last traders holding positions would be left with disproportionately skewed profits. Following this decision, we successfully returned all users’ funds and immediately began dedicating our efforts to preparing the protocol for the upcoming V2 launch, focusing on delivering improved user experience, stability, and performance.

Since the pause, all user funds have been returned without capital loss.

Events:

1. July 6th, 2023: V1 Private Beta contracts were paused and closed at block number 108596965. An announcement was released.
2. July 7th, 2023: All user margin is returned to wallets (wETH on Arbitrum)
3. July 7th-present: Team effort is fully focused on rolling out V2’s testnet iteration and ensuring any issues with V1 do not carry over.

Addressing Positive uPnL

First of all, we would like to thank all of the community members who have stuck with us through the closure of the private beta and V1 contracts. Although NO user funds have been lost, we’ve received a ton of support from the community and are beyond grateful for you sticking with us. We are excited for V2!

That said, after a number of internal meetings, discussions with community members and consulting with our advisors and investors — we’d like to address our plan to compensate positive uPnL traders.
On July 19th, we outlined a few options on how to best approach this:

• Option 1: Full compensation through $vNFTP at a discounted price of $0.053 — which is 50% off from the average Odeshi emission $vNFTP valuation (total Odeshi emission / total fees paid). This would equate to roughly up to 1% of nftperp total supply if all users opted in for option 1.
• Option 2: 50% of positive uPnL will be compensated to traders (in WETH) through v2 insurance fund inflow of taker basis points and liquidation penalties. To ensure the insurance fund will have a positive growth rate, we propose to only utilize 10% of the inflow until the compensation program option 2 reaches completion. (note: we are currently consulting with our legal team to ensure this won’t be considered a legal liability for the protocol and is deemed as a pure compensation program vs rev share).

Upon consultation with community members who are holding $vNFTP and supporting us since day 1, we think it is best to adjust the Option 1 $vNFTP price to $0.063 to prevent large dilution. We understand that some people may disagree with this approach, and while unfortunate, our goal is to maintain the trust of the community, while keeping our users satisfied. In the coming weeks, the dev team will set up a few smart contracts for traders to opt into this option. On behalf of the nftperp team, we would like to thank all the traders that have supported us during the private beta and nftperp’s v1 protocol. We believe the nftperp v2, our next iteration of the protocol solves all the bottlenecks and challenges we faced in v1.

A sneak peek into V2

The most significant cause behind the V1 issues was the lack of counterparties. Every position needs a counterparty for the uPnL to translate into PnL. Guaranteeing this in vAMMs requires tons of incentive structures to connect elegantly. Even then, the complexity of the incentive structures might cause a hole to pass through to pop up later. Thus, we are moving away from the Protocol-as-LP vAMM entirely and reiterating nftperp V2 into a hybrid protocol featuring Fusion AMM with external LP and decentralized limit order books. Limit order books enable balance by design, less slippage, greater ease of price discovery, and guarantee counterparties for all positions. To stay with our ethos for decentralization, we have made innovations to create a fully on-chain limit order book that scales.

To guarantee liquidity, we have rolled out an AMM and on-chain matching engine that auto-splits market orders into the AMM and the limit order book. To make the limit order book liquid, we have made Vaults which LPs can top up with to provide liquidity on the limit order book without active management. We will also roll out an industry standard incentive structure for market makers on this order book.

What’s next?

We have an exciting week ahead with two AMA sessions lined up. The first, a public AMA via Twitter Spaces, will occur on Wednesday, August 2nd at 11AM EST, join here https://twitter.com/i/spaces/1gqxvyQpdPzJB. The second will be a community-focused AMA within our Discord, scheduled for Thursday, August 3rd at 12PM EST, join here https://discord.gg/nftperp?event=1135636168160051284. We plan to discuss the reasons behind sunsetting V1, detail the uPnL compensation process, and provide insights into what the future holds for V2. We look forward to speaking with everyone soon!

Stay tuned!