The definitive guide to NFT staking
Mainstream media likes to misconstrue NFTs as the bad apple of crypto – monkey JPEGs for the bored and rich. But with the growing utility of NFTs for a broad range of industries and their use for earning more yield, NFTs are really the dark horse of Web 3.
NFTs are in a unique position. On top of their artistic value and utility, they can take advantage of Decentralized Finance (DeFi) services because these tokens are plugged into the blockchain. Many NFT marketplaces recognize this and provide DeFi services for NFT collectors. Let's explore how NFT staking has supercharged the value of NFTs in DeFi.
More about NFT staking
Collectors stake their NFT on the NFT project’s website or on NFT staking platforms like NFTX and Paras. When you stake your NFT, it gets locked up in the platform’s staking contract and yields you rewards.
If you already hold an NFT that you can stake, and you plan on holding it long term, staking the NFT could be the next step for you to get more out of holding the asset. Staking NFTs can also give you access to new benefits like getting whitelisted for airdrops in the future or gaining access to a gated community.
NFT Staking platforms
Project-agnostic NFT staking platforms allow collectors to stake NFTs in various networks and collections, including large projects like BAYC, Cyberkongz and Doodle. One of the top platforms for NFT staking is NFTX, which allows stakers to earn protocol fees from their vault.
Staking NFT through NFTX
NFTX provides better price discovery for the cheapest NFTs of each staked collection because it uses liquidity pools to generate true floor prices. Liquidity pools are better at imposing supply and demand interactions, causing price to be decided by market activities instead of arbitrary price-setting by sellers on marketplaces like Opensea. This also means that users can instantly sell their NFTs to get in and out of the asset.
How does staking work on NFTX
NFTX's infrastructure uses multiple processes in the backend to create yield. Similar to an AMM, liquidity stakers start by staking their NFT, paired with an equal value of ETH into the NFT vault. NFTX uses this pairing to create a liquid token through Sushi Swap. When traders come into the NFTX vault to sell, buy or swap their NFT, the fee they pay for their activity in the pool is distributed to the liquidity providers.
Rewards structure
Traders pay a 5% fee every time they conduct a transaction in the pool. This fee distribution to liquidity providers is based on the percentage of liquidity they own in the pool. The more liquidity you provide, the more proportion of the fee you get as reward. At the same time, the liquidity providers also get a 0.3% protocol fee from Sushi Swap for the pool activity.
NFTX Vault: How staked NFTs provide liquidity
When you stake an NFT paired with an equal value of ETH in the NFTX vault, the contract will:
- Mint a vToken, which represents a claim of one of the NFTs in the vault.
1 vToken = 1 random NFT in the vault.
For example, if you add a Tiny dinosaur NFT worth 1 ETH into the vault, you need to pair the deposit with another 1 ETH token to provide liquidity. In return, you will get a vToken, TINY, that represents your claim on 1 NFT in the pool. - Generate a Sushi Liquidity Pool (SLP) token by combining the minted vToken and ETH on Sushi Swap. This SLP is then staked on NFTX to create an xTOKENwETH, which is stored in the provider's wallet.
If the liquidity provider wants to exit the pool altogether, they can sell their vTokens on SushiSwap. Alternatively, instead of staking their Sushi LP token, they can also choose to redeem their vToken for an NFT in the NFTX vault.
Staking Options in NFTX: Inventory staking VS Liquidity staking
NFTX opens up its staking service to any NFT collection in the Ethereum and Arbitrum network. The platform originally only allowed users to participate as liquidity stakers and distributed 100% of the liquid pool fees to liquidity providers. However, like any other liquidity pool, liquidity providers fall in the risk of incurring impermanent loss.
In January 2022, NFTX introduced inventory staking, which allows providers to deposit only their NFT, without any paired ETH. This provides value to the pool because it opens up more choices to buyers who want to buy or swap an NFT in the vault, thus stimulating more activity. As a reward for the value, inventory stakers are now given 20% of the liquidity pool fees while liquidity providers are given the other 80%.
- Inventory provider: Adds NFTs into the pool to provide more choices for buyers, helping stimulate more pool activity.
- Liquidity provider: Creates a larger liquidity pool, which lowers price impact when someone buys or sells NFTs on the platform. Learn more about why larger liquidity pools create more stable prices.
If a vault only has liquidity providers, the 20% fees will be directed to the NFTX DAO and handed out when there is at least one inventory staker.
| Features | Inventory Staking | Liquidity Staking |
|---|---|---|
| Percentage of fees distributed to stakers | 20% | 80% |
| Requires ETH | No | Yes |
| Fees earned are automatically rolled into your existing position | Yes | No |
| Risk of impermanent loss | No | Yes |
| Earn Sushi Fees (0.25%) | No | Yes |