How does NFTCall V1 work?
Last updated
Last updated
NFTCall V1 is an NFT options trading platform that allows traders to buy and sell NFT options on-chain against specified NFTs. The protocol has two key user groups, options buyers and sellers.
Options buyer (NFT investors): Buy call options from options sellers. They pay a premium in advance for the right to buy NFTs at a specified floor price and expiration date. If the market price goes higher than the specified price, they will make a profit.
Options seller (NFT holders): Sell call options to buyers. This is equivalent to selling NFTs with a specified floor price and expiry date restrictions on the marketplace while having a chance to earn income from the premium before the NFTs get sold under the specified conditions.
NFTCall currently only offers call options with physical settlement. Cash settlement and put options are under development.
Different NFT collections correspond to different options markets. Similar to the peer-to-peer trading model of NFT marketplaces, options sellers first need to list their NFTs on the options market in exchange for a wrapper NFT (nToken), then options buyers can choose an available NFT on the market to open an option with a specified price (strike price) and expiration date.
NFTCall V1 uses NFT floor prices as strike price reference, and when opening a call option, there are only a few notches of prices that can be used as strike price. And the gap between the strike price and the floor price is allowed to be set to 0%, +10%, +20%, +30%, +50%, and +100%.
The same goes for the expiration date, it can be set to 3 days, 7 days, 14 days, and 28 days later.
The options market creates an option pool with the reference of the floor price and current date, and the options are automatically priced by the protocol based on the Black-Scholes model. This makes NFT option trading easier and more efficient compared to pure model P2P NFT options that require buyers and sellers to jointly price them.
When a buyer opens a call option, they need to pay a small premium to the options seller. The option premium is higher for NFT collections with higher floor price volatility in the recent past. And it is also related to the strike price and expiration date. Please see how NFTCall V1 prices an option.
Once the transaction is submitted, NFTCall will mint an option contract (callToken) for the buyer with specified conditions (strike price and expiration date) and lock the underlying NFT.
NFTCall's options contracts combine features of American and European options. Options holders cannot exercise the option during the first half of the period before the expiration date. But during the second half of the period, they can exercise at any time before the option expires.
Before the expiration date, options holders can choose whether to exercise the option at the strike price. If they don't, the options contract becomes worthless and unlocks the underlying NFT. If they choose to exercise, the holder needs to pay the option seller ETH equivalent to the strike price, and the trade completes with the transfer of the underlying NFT from the seller to the buyer.
The NFTCall protocol only charges 10% of the option premium as a protocol fee, which means that when an option trade is made, the option seller receives the other 90% of the option premium. There are no transaction fees other than the gas cost.
