For Investors: The first NFT Fonds

Updated: Oct 25, 2021


With the recent growth of the NFT space the question arises whether the tokens make for a good investment. Similar to the stock market, investing into a single asset often brings greater risks. NFTs are also a highly illiquid asset that can take days or weeks to sell.

As the market is only a couple of years old, information on NFT’s is also limited making it harder to find a valuable asset to invest into.

This problem is now being addressed with the invention of NFT Fond Indexes.


An NFT Fond is a single token representing multiple unique NFT assets. By spreading the risk of the investment among multiple NFT’s, these fond tokens can be a great choice for investors that don't want to miss out on the NFT hype while keeping their investments low-risk investments.



NFTX: Creator of the first NFT Fond

The platform NFTX is the first platform where NFT Fonds can be created. Users deposit their NFT into so-called “vaults” bundling them into a fond index that can for example represent a NFT project. The goals of the platform is to:

  • give investors access to more liquid markets for NFTs

  • simplify the tracking of prices of certain categories of NFTs by bundling assets from a category in a single token.


The tokens run on the ethereum network, making it easy to interact with most other NFT projects. Currently the most popular token is a fond representing a collection of 133 of the 10,000 CryptoPunks.

The tokens can then for example be traded on token trading platforms such as UniSwap.



How does an NFT Fond Index work?

An NFT Fond can be composed of potentially any NFT asset, for example CryptoPunks or CryptoKitties. Users can create so-called “vaults” that can be used to mint fungible ERC-20 tokens for any NFT. A vault consists of an NFT asset address, a vault name and a vault symbol.

In the first step the user creates a new vault by giving it an asset address, a name and a token symbol. After creating the vault the owner can modify settings before finally publishing it.

Settings include:

  • Allowing users to send a mint request in order to mint their own NFTs to the vault.

  • Blacklist or whitelist certain NFT IDs (or a range of IDs) that can be minted to the vault (this makes sure only certain projects or ranges can be submitted)

In the last step the ERC-20 token is minted to the ethereum blockchain so that both the name and the symbol will now appear everywhere the token is listed, for example CoinGecko or UniSwap.

If the setting was enabled, the vault owner (aka. the fond manager) can now decide which NFTs can be added to the Fond Index.



Adding NFTs to the Fond

Any user that mints an NFT to a NFTX fault receives a liquid ERC-20 token called vToken. This vToken gives the user a 1:1 claim on a random NFT within the vault. The keyword random is very important here as it creates an important dynamic for these vaults.


Floor vaults

Imagine this arbitrary example: Somebody created a vault for the CryptoKitties project and you happen to own one of the rarest Kitties. While the average CryptoKitty in the vault is priced at around $100, your Kitty is worth $100,000. If you would now mint your Kitty to the vault, you get a vToken that you can trade for a random Kitty, meaning you will likely make a huge loss. Vice versa if you mint a Kitty that is worth $100 or less, you would make a profit (on average).


It doesn't make a difference if you submit a high or low value NFT, you still get the same vToken.


This principle leads to the so-called Floor vaults. Because people will likely not submit high valued assets to the vault, the index price for most of these fond represent a floor value of that project.


General vaults

To counter this NFTX introduced targeted redeems for a fee of usually 5%, allowing for users to choose a specific NFT from the vault after redeeming the vToken. Vaults that enabled this setting don’t quite represent the floor price but a more average price of the whole project, depending on the redeeming fee.



The biggest Fond Index

The biggest vault right now is called “CryptoPunks” with the symbol $PUNK - an index that represents the famous first NFT project CryptoPunk (at least part of it). Bundling many Punks in a single token makes it easier for other users to track the project as a whole.


The development of the $PUNK token price.
The development of the $PUNK token price.

As you can see the initial price of around $40,000 slightly decreased first until it started skyrocketing from the 21th of july, reaching an all time high of over $150,000 on the 6th of august.

Although the $PUNK token certainly is an interesting indicator to track the CryptoPunk project, it certainly does not represent the project as a whole. Rather the price only tracks the percentage of CryptoPunks that have been minted to the NFTX vault, which can be misleading in some cases.

Still the project has some great potential - after all it's still a more accurate representation than tracking the price of one individual CrypoPunk.



Where to you invest in NFT Fonds

The NFTX vaults are minted as ERC20 tokens and can therefore be traded on Automated Market Makers (AMMs) such as:

All public vaults, their token prices and settings can be seen in the NFTX App on their website. If you are interested in investing in these NFT Fonds, want to mint your NFT to a vault or create your own, check out their website here.



Conclusion

In my opinion NFTX gives investors a great way to spread their risk with minimal effort. The project provides an alternative to the time consuming process of researching single NFT projects and can therefore also be a great option for investors who are inexperienced or new to the NFT space. Making NFTs not only a more accessible but also more liquid asset - a valuable trait for a lot of investors.



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