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.

Source: NFTX

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

Source: 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.

Source: Zhuan Lan

Rewards structure

Source: Afrodroids

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

Source: Afrodroids

When you stake an NFT paired with an equal value of ETH in the NFTX vault, the contract will:

1. 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.  

2. 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.

Source: Messari

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%.

1. Inventory provider: Adds NFTs into the pool to provide more choices for buyers, helping stimulate more pool activity.

2. 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.

Resource: NFTX - What is a staker

Things to consider before staking on NFTX (Risks of staking NFT)

Only stake floor-priced NFTs. When you stake your NFT, it is transferred to a staking contract. The value of that deposited NFT equals 1 V-token. For example, if you deposit 1 Crypto Punk NFT, you get 1 PUNK in return. This means that if you deposit a rare and relatively more expensive NFT into that vault, its price will be as good as any other cheaper NFT in that pool. So, stick to staking NFTs that are floor priced in the collection.

Gas fees can offset profits. For liquidity stakers, the process of staking requires several backend processes:

1. NFT is moved from user's wallet to the pool

2. Contract mints a vToken from staked NFT

3. vToken is paired with ETH to create an LP token

4. Final LP token is staked.

Due to so these multiple operations in one transaction, gas fees will be higher than a typical transaction. So, you will have to decide if the transaction fees are worth the profits generated from your stake.

Liquidity providers could incur impermanent loss. Impermanent loss is incurred when the price of your token at withdrawal is worth less than the price of your token during the deposit. The impermanent loss can be recovered in events where trading volume is very high, which makes it worth it to still provide liquidity into the NFTX vaults. One way to minimize your risks is by choosing NFT projects that have a high TVL and a high percentage of NFT staked in the pool. While this does not remove the risk altogether, these factors indicate that many people have trust in the staking project and expect higher trading volume in the pool.

A different take on NFT Staking: The Idols NFT

NFT staking as a service is still fairly new. Projects continue to develop innovative NFT staking models to offer unique value to users. One such example is The Idols NFT project.

Source: The Idols

How 'The Idols' NFT project works

Most NFT projects that provide DeFi services center their main offerings around the NFT itself and use DeFi components to accessorize the benefits of holding the NFT. In this project, both the DeFi and NFT components are intermingled in a refreshingly balanced mix.

The Idols NFT project was created to support the Ethereum network, hence its tagline - Guardians of Ethereum. The Idols are a collection of 9999 Ethereum NFTs that serve as a proof of membership to the Idols community and treasury. Every Idols NFT owned gives holders a proportion of ownership in the Idols treasury, which means that the treasury is 100% controlled by its NFT holders.

Source: The Idols NFT

Upon the NFT mints, 100% of proceeds are converted to Lido's stETH and locked in the Idols treasury. All the rewards yielded from the staked ETH is redistributed to the NFT holders. Since the stETH is locked in the treasury, no one will have access to them, meaning that the stETH rewards will earn and distribute yields forever to NFT holders.

Resource: How staking Ethereum generates rewards

As the Idols project gains more traction, users are also incentivized to buy and stake the project's $VIRTUE tokens, which gives token holders access to 7.5% commissions on all sales of The Idols NFTs in the secondary market. The project creates this perpetual cycle of growth and increasing the value of the NFTs.

Source: The Idols

NFT staking: NFTX VS The Idols

NFT staking falls in the newer, more innovative frontier of crypto. Whether it be liquidity pools or tokenomics design, projects are creating unique ways to plug and play with NFTs and DeFi. As the exciting world of cryptocurrencies evolve, there are millions of ways builders can introduce NFT staking to users.

But always remember, while there is much you can experiment with in the world of DeFi and NFTs, ensure you know the risks behind every project you delve into!

Did you Know?

Omni lets you manage your NFTs and stake tokens in countless L1s and L2s all in one place. Use this Web 3 Super app to display and soon, share your NFTs and stake in 20+ networks within 3 taps. Store your NFTs on Omni and connect to NFTX using WalletConnect to get started with NFT staking!

Download Omni to start staking and investing in NFTs!