Whitepaper — Honey Finance, NFT Liquidity Solutions
1. Introduction
Honey Finance is a decentralised protocol and liquidity solution, which unlocks liquidity kept in non-fungible assets to be used in DeFi. The protocol aims to tackle an inherent economic problem with NFTs (Non-Fungible Tokens), which is their opportunity cost. Acquiring an NFT worth X , presents an implicit cost (in the form of missed potential profits) relative to having invested X into any DeFi protocol for Y returns. In the long run, purchasing an NFT costs X * Y^N, for N equal to the number of years in which the NFT holder could have been receiving an APR on X. The variable Y can be visualised as the average yield of staking crypto on protocols such as AAVE or Curve. This cost not only compounds into exponential losses, but it forms a significant psychological barrier to acquiring NFTs. Honey is a means for users to gain returns on the capital invested in Non-Fungible Tokens, while allowing them to keep their claim over said NFTs.
On top of Honey Finance’s liquidity solution, Honey’s alpha program is a community led and collaborative effort to develop these financial NFTs using incentives and rewards. NFTs themselves hold an endless amount potential to be utilised in DeFi, and implementing non-fungibility in crypto is critical in order to offer the variety of services available in traditional finance. These services vary from IOUs, underwriting, mortgages, high risk loans, specialised collateral, and numerous different derivatives which are not available with DeFi’s current fungible ERC-20 standard. The limited nature of ERC-20 has lead to redundant financial services, which lack any singular competitive advantage over one another, due to their lack of customisation and uniqueness in regards to individual investors. These different use cases are what the alpha program seeks to experiment and develop.
2. NFT Liquidity Solutions
There are two different kinds of liquidity solutions on Honey, borrowing with NFT collateral, and NFT farming.
Borrowing with NFT collateral will work with a number of verified NFT collections. In order to work properly, the NFT collection must match a number of conditions: it must present a large enough trading volume, it must be verified by one of the network’s lead marketplace, it’s code must be open source, and it must be at least 7 days old to provide enough financial history. Honey’s Decentralised Autonomous Organisation (DAO) will vote on which collections will be implemented or not within the protocol. NFTs whose collections have been integrated into the protocol will have their value estimated on the basis of the collection’s floor price over the last 7 days. The anticipated initial Loan-to-Value ratio will be 50%, so if your NFT belongs to a collection whose floor price sits at 1000$, you will unlock 500$ of liquidity simply by placing the NFT in escrow.
The second liquidity solution is NFT farming. To mint our platform’s native asset $HONEY, you will need to stake NFTs into our farms. There are three kinds of farms: native farms, collection farms, and zombie farms.
Native farms: serve as the primary liquidity mining tool for our native NFTs. These farms only allow for the project’s native NFTs to be staked. Our token will be minted to those staking in the pool at a fixed rate. Additionally, all royalties from our own NFT collections will be distributed to those who stake in these farms.
Collection farms: where NFTs from various verified collections can be staked to mint liquidity for our token. If the collection’s DAO or developers agree, it will also allow you to receive their native tokens on top of your honey. The minting rate will be variable, and depend on the floor price of the NFT collection, which is calculated through our APIs and oracle.
Zombie farms: where NFTs from hard rugged collections can be staked in return for HONEY. The mint rate is lower than the other two farms, however it usually assumes the minting price of the NFT at the time of mint and/or presale. The rewards from these pools are subject to a 4 month vesting period. After 1 month, users will be allowed to withdraw HONEY rewards, and will thereafter be able to withdraw on a bi-weekly schedule.
3. Functionality
Honey’s protocol connects lenders, borrowers, and liquidators in a peer-to-contract protocol.
Lenders deposit SOL in return for an APR, which is revenue generated by borrowers. This revenue is generated when A) borrowers pay back interest on their loan or B) borrowers are liquidated. This APR received by lenders is thus variable, and depends on the utilisation ratio of the protocol and the default rate of borrowers.
utilisation ratio: total borrowed (by borrowers) divided by total deposited (by lenders). Total deposited does not include borrower deposits (NFT collateral), which is its own separate measurement.
As this utilisation ratio approaches 1 , interest rates on loaned assets go up to incentivise more lenders to increase total assets deposited. The resulting increase in defaults from rising interest rates reduces the total borrowed, and thus the utilisation ratio balances out.
Borrowers deposit NFTs, the value of which is determined by our price oracle. This oracle will estimate the value of the NFT based on the floor price of its collection. This NFT will be placed in an escrow account, and may only be withdrawn if the borrowers pays back the loan with interest.
Liquidators are market participants who secure the protocol, by purchasing NFTs
3. Purpose and use case of DeFi NFTs
To discover and pioneer the future of NFTs in DeFi, our alpha program serves as an incentivised collaborative research project, experimenting with different NFT prototypes. Effectively, NFTs allow us to create individualised derivatives on top of preexisting DeFi assets, something previously unachievable with ERC20. With endless possibilities as to the use cases of NFTs in finance, it’s imperative to put them through the test, to see which ones will flop and which ones will build the future of DeFi. Ideas that go through successful testing in our alpha program will later be implemented into the ecosystem.
NFTs can allow for increased circulation of liquidity, for example with liquidity pools. One of the biggest draw backs for staking liquidity in a pool is that investors no longer have access to staked or locked assets. However, if these assets can be mirrored through the use of NFTs. When a liquidity provider stakes X amount of ETH, they would receive an NFT which allows it’s holder to redeem X amount of ETH. Thus, liquidity providers can still trade the staked liquidity, by trading an ERC-721 token, which mirrors the value of it’s underlying ERC-20 tokens. Interest and APRs from the staked liquidity would not directly go to the liquidity provider, but to whoever owns the NFT. This allows for the commoditisation of APRs and staked liquidity on our protocol.
To take this a step further, tokenisation of this exchanged liquidity allows us to build derivatives on top of this staked capital. This can be done, as it already exists in traditional finance, through credit default insurance. Additional risk, and thus higher returns can be layered on top of the underlying asset (liquidity staked in a pool) without affecting it.
NFTs can also be used to collateralise off-chain assets in DeFi. Our platform seeks to integrate the different protocols who finance off-chain assets into on-chain liquidity, such as Centrifuge. Integrating securitisation protocols is key in order to layer NFT derivatives on top of DeFi.
4. Vision for the future
It’s obvious to us that NFTs will play an increasingly more important role in our daily lives, by simplifying ownership and transactions on the internet. Honey is positioned to be on the frontier of this bleeding edge technology, developing all of its financial use cases through its community of developers and alpha testers.
All of us believe NFTs will play an integral part in the current financial revolution empowering main street, by allowing decentralised, censorship resistant access to powerful financial instruments.
With our liquidity solution, NFTs will serve as a layer of liquidity on top of the existing DeFi protocols to offer the variety of financial services, only currently available in traditional finance. Beyond that, the decentralised nature of these non-fungible assets carries the potential to make DeFi’s offering superior to traditional finance, structuring its services in a more transparent and accessible manner.
It is our belief that any truly successful product in DeFi, is one that can be used as a building block for a system greater than itself, and it must present a utility to other protocols while allowing developers to build on top of it. We look forward to this future integration of NFTs, for which Honey is a testing grounds, and fully realise that it’s potential spans out further than the project itself, which is why we have decided to make everything open source and free to use. To learn more about our mission, and to join us in pioneering the future of DeFi, feel free to join our community on discord
-Tom Pandolfi, Director of Honey Labs
