The Oracle: The Missing Link
The growth of NFTs has expanded at an exponential rate in recent months, with new creators and collectors joining the ecosystem each day. In particular, CryptoPunks, a collection of ten thousand uniquely generated 8-bit styled punks on the Ethereum blockchain, stands out as one of the most recognizable and valuable NFT collections in the industry. However, until now, the NFT ecosystem has largely been siloed from the DeFi ecosystem, each existing as its own siloed market. JPEG’d is working to integrate CryptoPunks within the DeFi ecosystem.
Powering the JPEG’d Protocol with Chainlink Price Feeds
As described in a previous blog post, JPEG’d is merging the time-tested Collateral Debt Position (CDP) model with NFT collateral to enable a new DeFi primitive called Non-Fungible Debt Positions (NFDPs). Through JPEG’d, users will be able to mint a decentralized stablecoin called PUSd that is fully collateralized by their NFTs.
Like all lending and borrowing platforms, upholding the solvency of the platform requires a secure decentralized oracle solution to accurately price the NFTs used as collateral. However, due to their unique non-fungibility, the nature of NFT liquidity (or often lack thereof) is different from fungible ERC20 tokens, so additional consideration was required.
For example, using the latest price of an NFT in a collection (i.e. spot pricing), is not an adequate pricing approach. This valuation methodology can be easily manipulated and is subject to excessive reflexivity, particularly when the number of NFTs in a collection that are traded at any given period of time is low. Additionally, not all NFTs within a collection are priced equally, with some of the most sought-after CryptoPunks trading for millions of dollars while floor punks currently trade at around $330k. This creates a significant delta, which if not taken into account, can skew the valuation of the collateral.
The Oracle Design
To bridge the two ecosystems, we are proud to announce that JPEG’d is working with Chainlink to launch a custom decentralized oracle solution for pricing NFT assets, starting with CryptoPunks. This Chainlink Price Feed will be foundational to the JPEG’d platform, which serves as a new DeFi primitive that allows users to leverage their existing NFTs as collateral to obtain loans, all in a trust-minimized and permissionless manner. For the initial integration, the Chainlink Price Feed will quantify the Time-Weighted Average Price (TWAP) of both sales and floor prices to create a blended price that will be used to value floor punks. This oracle excludes wash-sales, outliers, and will be periodically written on-chain by Chainlink’s network of decentralized Node Operators.
Using a TWAP helps mitigate outlier events by taking the average of multiple sales over a predefined period of time, making manipulation significantly harder and expensive to pull off. Additionally, by only tracking the average price of the lowest-priced floor CryptoPunks (in other words everything but apes, aliens, and zombies), we can help prevent the issue of users borrowing more in funds than their NFT is actually worth. This helps to resolve the issue of variable pricing for different NFTs in a collection by using the least common denominator. More details to be provided at launch.
Chainlink Price Feeds will play a foundational role in determining the maximum size of loan positions as well as determining when liquidation events should occur. As a result, the stability of the PUSd stablecoin and the solvency of lenders will depend heavily on the Chainlink Price Feed.
Why We Selected Chainlink?
Some of the key benefits of leveraging Chainlink oracles include the use of secure node operators with a strong track record for reliability during high gas prices and extreme network congestion. Chainlink oracle networks can also compute the TWAP price off-chain in a decentralized and on-chain variable manner for greater cost efficiency while still maintaining transparency and tamper-resistance. Finally, Chainlink oracle networks provide easy-to-use on-chain monitoring tools for users to consistently track the real-time on-chain prices of NFTs.
The ultimate goal of our work with the Chainlink Labs team is to set a new industry standard in how well-established NFT collections are fairly and securely priced on-chain, thus making them a more trusted form of collateral in DeFi. The result is more utility for NFTs, enabling holders to tap into liquidity without having to give up exposure to the NFT.
Given their expertise and success in developing secure oracle solutions, we opted to collaborate with the Chainlink Labs team to create, test, and launch decentralized oracle networks that maintain on-chain price reference contracts regarding the price of NFTs, starting with CryptoPunks and expanding to more NFT collections in the future. As the industry-standard decentralized oracle network, Chainlink was the obvious choice, not only because its network has a long track record of securing high value contracts, but the underlying Chainlink architecture is highly flexible for custom implementations.
Creating a new DeFi primitive is never an easy task. However, collaborating with industry-leader Chainlink gives us great confidence that JPEG’d will meet our unique requirements and effectively create a bridge between the NFT and DeFi ecosystems.
Chainlink is the industry standard for building, accessing, and selling oracle services needed to power hybrid smart contracts on any blockchain. Chainlink oracle networks provide smart contracts with a way to reliably connect to any external API and leverage secure off-chain computations for enabling feature-rich applications. Chainlink currently secures tens of billions of dollars across DeFi, insurance, gaming, and other major industries, and offers global enterprises and leading data providers a universal gateway to all blockchains.
JPEG’d is a novel and revolutionary lending protocol that will enable NFT holders an opportunity to obtain credit on their assets while still retaining ownership of them. The protocol is completely decentralized and is governed by token holders of the native platform. JPEG’d will also form several synergistic relationships with other protocols within DeFi to increase the value generated by users. JPEG’d has developed a creative insurance mechanism that will allow depositors to repurchase their NFTs back from the DAO in the event of a liquidation.