Zima Red ep 97: Alex Gausman
Creating The Decentralized NFT Liquidity Protocol & Exchange With NFTX
Primer: The NFT space is illiquid. Alex Gausman has created NFTX, a protocol that turns non-fungible tokens into fungible tokens, to address this need. Get into the nitty gritty of NFT liquidity with Alex in this episode of the Zima Red podcast.
Background
Has always been into computer since he was a child
Studied computer science at UBC. Took 8/9 years to complete his degree
Near the end of his program, he took 1.5 years off to build a reading app teaching kids how to read
Initial Attraction To Crypto
In 2014, he had a roommate in UBC that was interested in Bitcoin and Bitcoin mining. Did not get into the crypto scene then
In 2017, he started to read more about Ethereum when ICOs were starting to take off
Became part of the 2017 cohort
Never thought that he was able to build smart contracts, but he eventually did it
What Made Him Consider Building Something For the NFT Space?
In the early summer of 2020, he realized that the NFT space is taking off
Saw CryptoPunks broke the 1 ETH price floor
Have always liked the collectibles space
Came to realize that there is a NFT Twitter that is existing in its own little world
“I bought my first punk for around like 200 bucks and then like sold it like two days later for like 300 bucks. I was like, hey, mom, like I just flipped like this digital collectible for 100 bucks. Like, I thought that was pretty cool.”
- Alex Gausman
Last summer, he and a couple of friends started a project called Pirate DAO, which focused on digital jewellery. The idea was to create NFTs that were backed by ETH and other fungible tokens
Thought of jewellery as part art and part money
They realized that another project called Charged Particles are doing something similar to them and are ahead of them
Was discouraged but flipped the idea around. Came up with NFTX where cryptocurrencies are backed by NFTs
“And basically I flipped that idea. So the idea for Pirate DAO was that you had NFTs that are backed by cryptocurrency. And then the idea for NFTX is basically that you have cryptocurrencies that are backed by NFTs.”
- Alex Gausman
NFTX
Origins
Thought of making a token that was backed by CryptoPunks
Expanded that idea onto other NFTs
The crux is to turn a non-fungible token into a fungible token
Features
Every Punk token is eligible to be redeemed for one CryptoPunk from their vault
Have fungible tokens for Punks, BAYCs, Autoglyphs
Realized people were using their vaults to dump NFTs or to buy NFTs instead of getting exposure to NFTs using their index funds
Pivoted and used these index tokens to provide liquidity and to power their marketplace
The demand for index tokens was less than they expected. Thinks that demand for index tokens would increase in the future
How It Works
In DeFi, there is a concept called the Automated Market Maker (AMM), where liquidity providers (LPs) deposit two different assets in equal value
Anybody can trade between those two assets, paying a fee to the LPs
The only constraint is that the 2 assets need to be fungible
NFTX creates a fungible representation of these NFTs that allows them to get pooled with another asset
Marketplace Activity
Seeing better usage with cheaper NFTs
Vaults with more items in them tend to do better
As items get more expensive (e.g. CryptoPunks, Bored Apes, etc.), there tend to be fewer items in the vault
Newer projects are approaching them and putting a large number of items into NFTX. In some cases, they have more volume than OpenSea for certain NFTs
What Are The Incentives For Projects To Put In A Good Amount Of Their Supply In A Vault?
Their items will be paired with Ether
It makes NFTs a better store of value if people know that they can buy or sell instantly without causing a big price change
Better UX for users to be able to sell immediately instead of selling and waiting for a prospective buyer
Over the past few months, they recognized the need of a decentralized NFT marketplace
Increasing The Liquidity Of The Assets
NFTX provides both buy-side and sell-side liquidity
Some of their vaults have gotten too illiquid (e.g. Autoglyphs vault has 6 autoglyphs in it)
A full Autoglyph token would cost 600 ether and is too illiquid. If he made a purchase, he would push the price up too much
What he did was to go to OpenSea, buy the cheapest autoglyph, and swap it for the one he wanted from the NFTX vault
Using this method, he paid 5% above the cheapest autoglyph on OpenSea as opposed to 600 ETH (100% above the price)
Behind the scenes, if someone wants to buy an autoglyph from the vault, they will take the lower price of either SushiSwap or buying from OpenSea
This allows vaults with a few items to still earn fees and have turnover in the assets
His Dream Scenario For Improving Sell-Side Liquidity
They started with 100 CryptoPunks and 20 Autoglyphs
Currently left with 5-6 Autoglyphs
Suffered impermanent losses as prices has gone up
In an ideal world, they would have DAOs or the projects themselves to provide liquidity
Working on a function called smart orders where users can complete complex trades (e.g. if Autoglyph floor is worth less than two times the Punk floor, sell CryptoPunk and buy Autoglyph)
Creating A Decentralized Marketplace
Some vaults (e.g. Autoglyph vault) are struggling
Two ways to improve it:
Make it more profitable for people to supply liquidity
Get more foot traffic to their website
Thought that they could start aggregating inventory from OpenSea, Rarible, and Larva Labs. This would increase the frequency of people shopping at NFTX
The idea developed into building a decentralized marketplace
NFTX Token
The governance token for NFTX
It manages the Aragon DAO, which controls the project’s treasury
Any changes to the auxiliary contracts/actions on the Treasury are made through the DAO
Currently, NFTX does not earn any revenue as a platform. In the future, holders could vote to have fees accrue to them
How Will He Encourage People To Vote?
Thinks that voter apathy isn’t so bad
Thinks it is more important for people to be able to veto things
In practice, most investors do not want to veto things
Currently, their voting period is set to 24 hours. Will be increasing it to 72 hours in the coming months. Would want to increase the voting period further to make the protocol safer
Process Of Building NFTX
Has been rewarding and stressful
When it blew up in January, he became a mini celebrity for a few weeks and was approached by VCs and CEOs. Fortunate to receive a lot of advice from them
Some of their early investors wanted them to turn on the fees and to become profitable. Realized that a few of his team members were thinking of quitting because they thought they had joined a team that was more ethos-driven than profit-driven
Ultimately, he decided to be ethos-driven
Tough to build out on the open
“And you can't just like shut those suggestions down, right, because you're an open organization, you're a DAO. But at the same time, most people that are bringing suggestions, they just haven't put the same level of thought and time that a lot of people on the team have, so they don't see the full context behind certain decisions that we're making.”
- Alex Gausman
What Does The Future Of NFTX Look Like?
Doesn’t plan their roadmap very far. Only does it for the next 3 - 6 months because things in the space changes so fast
Currently at 50 million TVL. For the NFT scene, this is pretty good
Trying to get their volume up
Thoughts On The Current NFT Market
Made a lot of bad trades this year
Sold a lot of good assets before the recent bull run
Insanely bullish on Ether. Think it’s going to 50k/100k this decade
Thinks that the CryptoPunks floor will be in the millions this decade
Tough to value these assets in both Ether and USD and to time them
Which Sectors Is He Most Excited About?
Really like collectibles and music
Would love to see more audio NFTs and actual music NFTs. Want to collect music albums as NFTs
One thing that concerns him is that every audio NFT platforms are using shared contracts — instead of the artist deploying their own ERC-721, they add their item to the larger smart contract list
Single Favourite NFT
Love Autoglyphs, his rare pepes
Have a Cool Cat that he really liked. Paid 18 ETH for it
Has a Gorilla suit with a Hazmat mask on
Most Controversial Thought On NFTs
Not a big fan of royalties
Thinks of it as taxing people
There are other ways to help artists and creators to monetize without going through the royalties route such as earning profits from providing liquidity
If He Could Improve Something In The Space
People in the NFT space to start appreciating liquidity more
Who Does He Look Up To And Why?
Vitalik — a total nerd that has great social skills and social nuance. Doesn’t have a big ego as well
NFT Ecosystem In 3 Years
Doesn’t think that NFTs are all good
A lot of it focuses on social signalling and there might be side effects to this
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