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Unicly Litepaper
Version 1.0 - March 30th, 2021
Unicly - The protocol to combine, fractionalize, and trade NFTs.
Introduction
Unicly is a permissionless, community-governed protocol to combine, fractionalize, and trade NFTs. Built by NFT collectors and DeFi enthusiasts, the protocol incentivizes NFT liquidity and provides a seamless trading experience for NFT assets by bringing AMMs and yield farming into the world of NFTs.
Why fractionalize?
Buying NFTs is quite a laborious process. Fungible tokens may have thousands of buyers and sellers, but every NFT transaction depends on matching a single buyer and a single seller, which leads to low liquidity. In addition, many users are being priced out of some of the most desirable items, leading to more concentrated ownership and pent-up demand. Furthermore, it is difficult for an average investor to build a large, diverse portfolio of NFTs, which makes investing in them inherently riskier. As a result, the NFT space is experiencing accessibility issues.
Fractionalization allows more people to trade NFTs at lower price points, enabling more of us to have ownership of even the most coveted NFTs. It even allows casual investors to buy small amounts in NFT projects that they like as if they were liquid tokens.
Unicly will attract and incentivize all stakeholders in the wider blockchain ecosystem to participate in the NFT ecosystem. Just like how projects launch tokens on Uniswap, collectors and/or creators will be able to launch exciting NFT collections through Unicly, and benefit from better price discovery and more accessibility. Traders and casual investors will experience higher liquidity on a familiar AMM model. Meanwhile, yield farmers will be incentivized to earn rewards by providing liquidity.
Existing problems in NFT fractionalization
There have been a couple early efforts to fractionalize NFTs. The following are the main issues that could be identified:
- Sharding single NFTs instead of collections. The market cap for a single NFT has a ceiling. However, by fractionalizing any collection of NFTs across multiple smart contracts, we can create fractionalized tokens based on NFT pools that hold significantly more value.
- Un-fractionalization. Fractionalizing NFTs is just one part of the solution. Un-fractionalizing those NFTs and determining their rightful owners is challenging in its own right. An example of a prior solution is implementing a carry-on clause, where people can offer to buy-out an NFT. The issue with this model is that unless the shard holders have enough funds to counterbid, they are forced to sell to the bidder. Another example is random distribution of the NFTs to the shard holders. However, given that each NFT is unique, where even a difference in mint number can add or remove a digit to the valuation of an NFT, random distribution may not be ideal.
How Unicly works
The Unicly protocol improves upon the above issues through the following key attributes:
- Enabling sharding of collections containing multiple NFTs (ERC-721 and/or ERC-1155s).
- Treating every NFT within a sharded collection as a unique, irreplaceable item.
- Allowing collectors to bid for specific NFTs rather than entire collections.
- Treating all shards equally and never relying on randomization of reward distributions.
- Sharing the proceeds from NFT disposals equally between all shard holders (or uToken holders).
- Allowing shard holders to accept bids by voting with their shards as opposed to forcing them to counterbid.
- Eliminating incentives for NFT collections to depreciate through selective inventory churning.
- Rewarding contributors of the best NFT collections through whitelisting, which allows the pool to liquidity mine the UNIC governance token.
The following sections will delve deeper into how these attributes are implemented.
uTokens, Fractionalization & Un-Fractionalization
Anyone with NFTs can create their own uToken. At its core, a uToken is an ERC-20 token that represents a collection or bundle of NFTs. It allows users to deposit and lock any number of ERC-721 and/or ERC-1155 NFTs into the smart contract. For their uToken, users can customize the name, ticker symbol, total supply, description, and the percentage of the uTokens needed later in order to vote to unlock the NFTs.
Once the creator of the uToken adds liquidity for it, anyone has the ability to trade it, similar to how tokens can be distributed once liquidity is provided on Uniswap.
Bidding
Once a uToken is issued, a standalone page for the uToken page is created. It contains all the metadata (mentioned above) set by the issuer, and looks like the following:
NFT collectors and buyers can access the uToken collection’s page directly via its URL (likely shared by its uToken holders), which contains the smart contract address of the uToken, or find the collection through the Discover page, which lists all uToken collections.
After bidding on an NFT, users are not able to unbid for 3 days if they remain the highest bidder for that specific NFT. Afterwards, they can remove their bid as usual. If someone outbids the current highest bidder, the highest bidder may unbid and bid higher immediately.
The top bidder for each NFT at the time a collection reaches the unlock threshold wins those NFTs. Winners can claim their NFTs immediately.
If an NFT receives no bids at time of unlock, it will not be claimable and stay locked in the contract. Users must have a non-zero bid in order to be considered a winner.
uToken governance & Un-fractionalization
uToken holders have the ability to vote to unlock the collection. Once a certain percentage of the total uToken supply is voted in favor of unlocking, the NFTs are distributed to the top bidders, and the pooled ETH bids for the whole collection (at time of unlock) can be claimed proportionally by the collection's uToken holders.
Utility
uTokens are essentially governance tokens that give voting rights to its holders. uToken holders are incentivized to vote at an appropriate valuation for the NFT collection in order to maximize the amount of ETH that they can receive. They are also incentivized to promote the collection itself to bring more exposure to the NFTs and hopefully higher bids. Furthermore, uTokens also function like ETFs. uToken holders are guaranteed proportional value generated by the collection, since they are able to convert the uTokens into ETH (from the pool of bids that won each NFT in the collection) once the collection unlocks. The main difference is that a uToken’s value is backed by NFTs.
Flexibility
To give uToken creators more flexibility around their collections, the protocol allows them to deposit additional NFTs even after issuing the uTokens. This could be used by the uToken creator to push the value of the uToken up. This feature also opens doors to interesting governance models for individual uToken communities. For example, on top of standard models such as rewarding uToken holders with their own staking rewards system, uToken creators could reward their token holders by buying NFTs with proceeds and adding more assets to the collection, helping it appreciate in value.
Example Scenario
The following is an example scenario to walk through the protocol with some numbers.
Assume that Leia has created a uToken collection called uLEIA backed by 2 of Leia’s favorite NFTs. She bought the NFTs for 5 ETH each for a total of 10 ETH. Leia sets the total supply of uLEIA as 1,000 and sets the unlock threshold to 50%. She keeps 200 uLEIA to herself, and provides liquidity with 800 uLEIA and 8 ETH.
At this point, the initial price of uLEIA is 0.01 ETH. The market cap of uLEIA is 10 ETH. People can swap into uLEIA, but nobody but Leia will be able to sell beyond the initial price of 0.01 ETH.
Imagine Alice and Bob come along and acquire 200 uLEIA for 2 ETH (0.01 ETH/uLEIA) and 400 uLEIA for 6.67 ETH (0.0167 ETH/uLEIA) respectively, through the liquidity pool (the above are broad price estimates for simplicity’s sake).
The price of uLEIA after these swaps, according to the liquidity pool, would be 18.67 ETH / 200 uLEIA = 0.09335 ETH. The new market cap would be 0.09335 * 1000 = 93.35 ETH.
Assume that Carol comes across the uLEIA NFT collection and bids 45 ETH on each of the 2 NFTs. Given that Carol has the top bids, the collection is now valued (in terms of total bid amount) at 90 ETH.
Note: If Carol had bid a total of 100 ETH, the uLEIA-ETH pair would likely arbitrage up to make uLEIA’s market cap above 100 ETH, since uLEIA holders could vote to unlock the collection and earn a guaranteed 0.1 ETH per uLEIA (100 ETH divided amongst 1,000 total supply of uLEIA).
Let us go back to the original example scenario where Carol has bid a total of 90 ETH. If the collection gets unlocked at this point, each uLEIA can be converted into 0.09 ETH. Since the market price of uLEIA is 0.09335 ETH > 0.09 ETH on the AMM, one of Leia, Alice, or Bob may arbitrage the gap between total value bid vs. the uLEIA market cap by selling uLEIA on the AMM. However, there is a risk in selling, since someone could always outbid Carol and bid even higher on one of the NFTs, pushing the total valuation of the uLEIA collection up more. Due to price slippage, nobody will be able to capture excessive value from this arbitrage either.
Assume that Leia is happy with this price and votes to unlock the collection. At this point, the collection has 20% of the 50% of uLEIA needed to unlock the NFTs to the top bidder (Carol) and ETH to the uLEIA holders (Leia, Alice, and Bob). Alice sees that she needs to vote to unlock with just 300 uLEIA in order to reach the threshold to unlock the collection. By unlocking the collection, she is guaranteed to take the profit. Therefore, she arbitrages the pool price down to 0.09 ETH and votes with her remaining tokens to unlock the collection. The collection unlocks at 0.09 ETH / uLEIA, Carol claims the NFTs that she won, and the uLEIA token holders can redeem their portion of the ETH.
Leia, Alice, and Bob are all winners in this scenario. However, note that this is an example scenario with broad estimates on the numbers and several assumptions. Participants are not always guaranteed to win. With more participants, the game theory of uToken collections may look completely differently as well.
UnicSwap
UnicSwap is a fork of UniswapV2. Therefore, it uses ERC-20 LP (liquidity provider) tokens, which can be staked directly into UnicFarm for farming.
Just like Uniswap and Sushiswap, anybody will be able to add new pairs, provide liquidity, and swap between pairs.
Unicly’s fork of the classic AMM model will provide incentivized on-chain liquidity for NFTs (in the form of uTokens), while keeping the same swap & pool UI/UX that users are now very familiar with.
0.25% of all trading volume on UnicSwap is taken in fees and distributed to liquidity providers for the swap pair. An additional 0.05% of all trading volume on UnicSwap is collected in fees in order to automatically buy back the UNIC token regularly.
UnicFarm
LP token holders of whitelisted pools can stake their LP tokens on the Farm in order to earn UNIC. This is similar to Sushiswap's farming mechanism. In order to acquire these LP tokens, one must provide liquidity for whitelisted pools on UnicSwap.
When a whitelisted uToken collection gets unlocked, the collection is automatically removed from the whitelist and the UnicFarm.
Whitelisted pools are determined by UNIC token holders through voting.
UNIC holders can convert UNIC into xUNIC to earn more UNIC. The yield comes from the UNIC bought back on UnicSwap (through the fees).
Decentralized Governance
Unicly will be fully governed by the community. There will be a voting portal on the platform where UNIC token holders will be able to vote for proposals. The protocol will mainly need the UNIC community to vote for new uToken pairs to whitelist.
2% of the total supply of UNIC will be needed to create a new proposal. 6.25% of the total supply of UNIC will be needed for a proposal to reach quorum. Of the 6.25%, the majority must be in favor of the proposal for it to pass.
All governance will occur transparently and fully onchain. Unicly’s smart contracts will be made permissionless and community-owned (through TimeLock and GovernorAlpha contracts) following initial deployments and launch.
Tokenomics & Fair Launch
Unicly will have a true fair launch. There will be no pre-mining and no pre-sale investors. 90% of UNIC tokens will only be minted via liquidity mining and 10% will progressively be allocated to the development team as they get minted over time. On day 1, 0xLeia will start with 1 token in order to vote in the first set of whitelisted pools that will enable liquidity mining. As soon as more UNIC is minted, the community will have the power to govern the platform themselves.
UNIC token distribution
Each month, the mint rate of UNIC tokens will decrease by 5%, starting at a monthly mint amount of 50,000 UNIC. Therefore, the supply will never reach 1M UNIC.
UNIC supply over time
Last modified 3mo ago