Chips
Non-fungible tokens (NFTs) have become one of the largest use cases of blockchains. From funding artists to buying digital land, there are vast applications for the sector. However, NFT markets have historically had some problems with their inherent market structure. Since each NFT is unique, many marketplaces have been designed such that only one account may own a givenNFT at any one time. As a result, the price of an NFT is discovered via auction, and since auctions can be infrequent, price discovery is inherently difficult. Furthermore, some NFTs have high prices which make them inaccessible to individuals trading small amounts of money in crypto.
Waterfall solves these problems by creating a financial derivative on top of NFTs in a novel way that has deterministic prices. This allows for both easier price discovery and more access to retail traders.
How does Waterfall work?
Waterfall is an NFT marketplace where NFTs are split into “chips,” ERC 1155 tokens that represent some prediction on an NFT's future valuation, and the number of such chips is first selected by the NFT’s seller. The protocol requires that every chip is listed at all times, so anyone can buy a chip by matching the price to submit a future price prediction. Then, the price of the NFT is the sum of all chips' listings - someone can acquire the entire NFT at the price at any time.
Chip traders predict the price of a listed NFT when purchasing chips to aid in price discovery. Since every chip must be listed at all times, they specify a predict price (prediction of the future value by some date), and an expiration date (date the prediction lasts until) when purchasing. The protocol will then immediately relist the purchased chips at the predict price until the expiration date.
If a chip has not sold by its expiration date, a Dutch auction is started where the price decreases linearly until someone buys the chip, over a length of time given by the NFT’s seller.
Notice that for this mechanism to be valid, the prices of both the chips and the NFT must be at some price buyers are willing to match. But someone might predict unreasonably high prices for their chips, which essentially freezes the chips until the expiration date. Therefore, a percentage fee is imposed when listing chips to discourage unreasonably high prices.
Closing Thoughts
Waterfall recently raised a $4 million seed round led by Electric Capital and Pantera. The protocol has also completed its private testnet release to select users and will be opening up to more users in 2023. We’re proud to partner with the Waterfall team as they create new NFT financialization mechanisms to decrease the barrier to entry for NFT ownership and drive the digital industry forward.
Paul Veradittakit
DISCLAIMER
Pantera Capital Puerto Rico Management, LP and its affiliates (“Pantera”) makes investments in crypto assets and in blockchain-related companies. Pantera and/or its affiliates or personnel may be an investor in, or have relationships or other business arrangements related to, certain instruments, companies and/or projects discussed herein. This document does not contain any advertisement for Pantera’s investment advisory services, or any other services or products, whether provided by Pantera or otherwise. The information and opinions presented in this document are solely those of Paul Veradittakit; they do not represent, and should not be interpreted as representative of, the views of Pantera or any other individual working for Pantera, and do not represent investment, legal, tax, financial, or any other form of, advice or recommendations. Neither Pantera nor Mr. Veradittakit is acting, or purports to act, as an investment adviser or in a fiduciary capacity with respect to any recipient of this paper. Information contained in this document is believed to be reliable, but no representation is made regarding such information’s fairness, correctness, accuracy, reasonableness or completeness. There is no obligation to update this document or to otherwise notify a reader if any matter stated statement or information contained here changes or subsequently is shown to be inaccurate. Nothing contained herein constitutes any representation or warranty as to future performance of any financial instrument or company. Forward-looking statements should not be relied upon, and performance or outcomes may differ materially from what is contemplated herein. Opinions included here incorporate subjective judgments or may be based on incomplete information. This document does not constitute or contain an offer to sell or a solicitation to buy any securities or a recommendation to enter into any transaction, and no reliance should be placed on this document in making investment decisions.
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REGULATION
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IN THE TWEETS
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LETS MEET UP
Los Angeles, Dec 21 - Dec 30
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Walks and coffee meetings in San Francisco throughout the year!
ABOUT ME
Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.
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