After seeing the parabolic rise in the price of many NFT projects, you are probably wondering to yourself, “how can I short NFTs?” Well, you are not the only one. A few protocols are currently developing derivative markets for the floor price of NFTs.
How Do You Actually Short NFTs?
Currently, there are no fully-developed products that allow you to short an NFT.
In theory, you could borrow someone’s NFT, sell it at its current price, then buy it back once (if) it drops in price, return it to the original owner and keep the difference. This method, however, would never work. No one would let you borrow their NFT without a large amount of collateral, and the person who you sold it to could charge whatever they want because they would know that you are required to buy it back.
NFT Derivative Products in Progress
Mimicry is a fork of Synthetix protocol, a derivatives liquidity protocol for derivatives trading in DeFi, built on Polygon. Mimicry utilizes Mimics, fully-collateralized derivative tokens on Polygon that leverage oracles to mirror the floor price of one or more OpenSea NFT collections. By using a similar approach to Synthetix protocol’s pooled collateral model, Mimics can be traded with infinite liquidity and zero slippage.
Anyone can use the Mimicry platform to mint new Mimics; however, investors must stake the native network token, $MIMIC, as collateral. Mimicry states in its white paper that Mimics are currently backed by an 800% collateralization ratio in order to absorb large price shocks. The collateralization ratio may be raised or lowered based upon community governance mechanisms.
MIMIC stakers incur debt when they mint Mimics, and to unlock their MIMIC, they must pay back this debt by burning Mimics. This debt is not correlated with the original minted value but instead based on the exchange rates and supply of Mimics in the system. For example, if half of the Mimics in the system were Bored Ape Yacht Club Mimics (BAYCm), and BAYC doubled in price, then the system’s total debt and each staker’s debt would increase by one quarter.
Now for a real-life example to better understand the project. Suppose you want to mint a Bored Ape Yacht Club Mimic (BAYCm). If the floor price of BAYC was $250,000, then each new BAYCm token would require $2M worth of MIMIC collateral. If you did not have that much capital, you could instead mint ~0.00000050 BAYCm tokens by collateralizing just $1 worth of MIMIC. By mirroring NFT collections and creating ERC-20 tokens, investors will be able to short projects without actually borrowing any NFTs.
NFTures is a spin-off of SynFutures, a decentralized derivatives market platform designed for any blockchain. NFTures allows investors to go long or short on individual or a basket of NFTs using leverage. Investors will use a single token to place their bets which is achieved through NFT fractionalization. To target more retail clients who know less about derivative trading, NFTures built the user interface to look similar to the Tinder dating app.
NFTures uses SynFutures’ existing synthetic automatic market maker (sAMM) model to match counterparties. SynFutures’ sAMM is a contributor to the market with an independent margin account that can create prices based on the constant product formula and its current position. This allows for constant liquidity, giving investors the ability to open futures contracts in a fully permissionless and decentralized manner.
NFTures bases its contracts on spot price oracles, data feeds run by separate entities. NFTures will use decentralized exchanges such as Uniswap and SushiSwap and NFT fractionalization protocols such as Unic.ly and Fractional for its spot price oracles.
Like Mimicry, NFTures is still under development. However, you may check out a sample of how NFTures will function on its website.