NFT Shorting Mechanism

We still largely follow the ERC20 shorting mechanism with the following enhancements:
  1. 1.
    NFT depositor shall choose from EITHER ONE of the following two options:
    Option #1: the NFT is intended to be used as collateral for borrowing of ERC20 tokens; and
    Option #2: the NFT is intended to be used as a borrowable item that a short seller can borrow and sell in the market.
    If Option #2 is chosen, the deposited NFT will be placed into a “borrowable pool” of the collection that a borrower could borrow from. Note each collection has its own borrowable pool that is not connected to any other collection’s.
  2. 2.
    When a short seller initiates the borrowing of an NFT from the collection, a randomly picked NFT from the collection’s borrowable pool will be sent to the short seller, for which he pays borrow interest for. See details of the NFT interest rate model in the NFT interest rate model page. Note the short seller can leverage borrow such position, and this will be discussed in page Leverage Borrow and Repay.
  3. 3.
    Meanwhile, if the depositor of the borrowed NFT attempts to withdraw his NFT, another randomly drawn NFT from the borrowable pool will be returned to him as the result of the withdrawal.
  4. 4.
    When the short seller wishes to close the short position, he could purchase any NFT within the collection and repay it to the (borrowable pool of the) platform and withdraw his collateral.

Standing from the depositor's perspective:

  1. 1.
    Super majority of the NFT holders are investors who are seeking investment returns rather than drawn by the characteristics of a specific NFT. Also, as majority of the NFTs have low rarity features by design, these "generic" NFTs within a collection are subject to similar price (i.e. the floor price). So as long as the entire collection's floor price is rising, and the depositor still is entitled to one of the NFT within the collection, the NFT holder/depositor maintains the same exposure to the collection's value dynamics and does not care much about which specific NFT he obtains when he withdraws.
  2. 2.
    Even if the deposited NFT is slightly better (i.e. rarer) than the one the depositor obtains when he withdraws, such loss is expected to be compensated by the continuous interest received throughout the tenor of his deposit. Such interest is paid by NFT borrowers and pooled equally among all NFTs within the borrowable pool of the collection. This is a similar dynamic between impermanent loss and receiving trading fee in the context of providing liquidity in AMM.