Perpetual Contract NFT as Collateral for DeFi Composability

• Published in: IEEE access Vol. 10; pp. 126802 - 126814
• Main Authors: Kim, Hyoungsung, Kim, Hyun-Sik, Park, Yong-Suk
• Format: Journal Article
• Language: English
• Published: Piscataway IEEE 2022; The Institute of Electrical and Electronics Engineers, Inc. (IEEE)
• Subjects: Applications programs; Automated market maker (AMM); blockchain; Blockchains; Collateral; Contracts; Cryptocurrency; Cryptography; decentralized exchange (DEX); decentralized finance (DeFi); Digital currencies; Ethereum; Finance; Financial services; liquidity pool (LP); non-fungible token (NFT); Nonfungible tokens; Profitability; Profits; Smart contracts; uniswap
• ISSN: 2169-3536; 2169-3536
• DOI: 10.1109/ACCESS.2022.3225884

Decentralized Finance (DeFi) is an emerging financial service model based on blockchain technology. DeFi composability denotes the ability for different DeFi services to interact with one another resulting in new forms of financial services. The DeFi ecosystem is largely based on ERC-20 tokens that can represent the value of an asset. Collateralized assets in DeFi composability are locked and additional profit cannot be generated. In this paper, we propose a method to generate profit from locked assets by using ERC-721 Non-Fungible Tokens (NFTs) and perpetual contracts. NFT represents the rights to a certain asset. A perpetual contract is a futures contract that does not have an expiration date. We propose perpetual contract NFT, a new form of NFT that can be used as collateral, which exploits perpetual futures contracts in the cryptocurrency derivatives market. Collateral needs to be provided to back the value of a perpetual contract. If the perpetual contract is minted as NFT, the resulting NFT represents the rights to the perpetual contract and its collateral. Therefore, the perpetual contact NFT itself can be used as collateral for DeFi composability. A proof-of-concept smart contract and a web application for perpetual contract NFT are provided to demonstrate its functionality. To validate the profitability of the perpetual contract NFT using a real-world scenario, we experiment with the position NFT of Uniswap v3 decentralized exchange. The position NFT is a form of perpetual contract NFT. Specifically, we present validation with three types of pools: stablecoins, stablecoin/wrapped tokens pair, and wrapped tokens.