Perpetual Contract NFT as Collateral for DeFi Composability

Ethereum and its standardized token interface have formed decentralized finance (DeFi), an open financial system based on blockchain smart contracts. The DeFi ecosystem has become richer with the introduction of DeFi composability projects, such as Lido finance and Curve finance. DeFi composability...

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Bibliographic Details
Published in:arXiv.org 2022-08
Main Authors: Kim, HyoungSung, Kim, Hyun-Sik, Yong-Suk, Park
Format: Article
Language:English
Subjects:
Collateral
Contracts
Cryptography
Derivatives
Digital currencies
Finance
Futures
Profitability
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Summary:Ethereum and its standardized token interface have formed decentralized finance (DeFi), an open financial system based on blockchain smart contracts. The DeFi ecosystem has become richer with the introduction of DeFi composability projects, such as Lido finance and Curve finance. DeFi composability denotes the concatenation of DeFi services in which each DeFi service locks assets as collateral and gives another asset as liquidity of locked assets to providers. Providers use the tokens given for other concatenated DeFi services, such as lending, decentralized exchanges (DEXs), and derivatives. The DeFi ecosystem uses ERC-20 tokens which can represent the value of an asset. ERC-721 non-fungible tokens (NFTs) are not widely adopted in DeFi, since they represent rights to an asset and are not considered appropriate for valuation. In this paper, we propose a new concept, perpetual contract NFT, which exploits perpetual future contracts in the cryptocurrency derivatives market. Unlike futures contracts in a traditional derivatives market, in the cryptocurrency derivatives market, most futures contracts are perpetual. In addition, the value of futures contract is backed by collateral. Therefore, if we mint the rights to perpetual contracts as NFT, we can use the perpetual contract NFT as collateral for DeFi composability. To validate our proposal and its profitability, we experiment with the position NFT of Uniswap v3. Through validation, we show that our concept works in real-world scenarios.
ISSN:2331-8422
DOI:10.48550/arxiv.2208.06472