JPEG’d is Building the First NFT-Backed Stablecoin

Written by – @rossboothr
NFT trading volume surpassed $20 billion last year — a 21,000% increase from 2021.
With several blue-chip projects now worth five to six figures, NFT holders are looking for outlets to borrow against them for liquid capital. Historically, NFT lending platforms have been peer-to-peer, with a counterparty manually underwriting loans.
JPEG’d is a growing automated lending platform for non-fungible assets. They’re focused on a tokenized peer-to-peer system that allows CryptoPunks, EtherRocks, BAYC, MAYC to be used as collateral to mint the protocol’s stablecoin, PUSd.

How it Works

The process is straightforward — borrowers can deposit their NFTs as collateral on the JPEG’d DApp and mint the PUSd stablecoin.
These are known as “non-fungible debt positions” (NFDPs).
Instead of a manual counterparty underwriting the loans, the protocol takes a customizable set of parameters and underwrites the loan through a smart contract. These parameters include collection type, maximum loan-to-value (LTV) ratio, interest rates, etc. There’s also a 2% annual interest rate for borrowing PUSd.

The Process:

  1. A user deposits their CryptoPunk into the JPEG’d vault.
  2. The protocol queries the CryptoPunk floor price.
  3. JPEG’d enables minting of PUSd up to 33% of the floor price.

If the loan-to-value ratio reaches 33%, the user is at risk of liquidation on their NFT. You’re able to boost the LTV by purchasing a JPEG card NFT (with the cigarette attachment).

This boost allows you to borrow an additional 7%, making the total credit limit 40% before liquidation.
Is PUSd safe?
The stablecoin market has been turbulent in recent weeks.
PUSd is collateralized by blue-chip NFT deposits. Stablecoins only mints when sufficient NFT collateral has been provided, and LTV is capped at 39%.
Around $6M PUSd resides in a Curve pool paired with $7.1M 3Crv. 3Crv is a combination of USDC, USDT, and DAI.
In March, the JPEG’d protocol passed a proposal to purchase up to $15 million worth of CVX to direct additional liquidity to the PUSd-3Crv pool.
LPs on Convex for the PUSd-3CRV pool earn JPEG, CVX, and CRV. The pool’s current APR is around 20%, with 24% projected.

PUSd’s Curve Pool Strategy

In recent weeks, PUSd had a different approach to playing the Curve Wars.
Most Curve pools aim for a high “A” parameter to keep a pool pegged in the case of extreme imbalances. The JPEG team had the reverse idea. They lowered the “A” parameter to intentionally debalance and depeg PUSd to the upside.
The wild idea worked.
Currently, PUSd trades right at $1.00, but it’s been as high as $1.07. This meant a 7% arbitrage opportunity for anyone who obtained PUSd through a deposited NFT.
JPEG’d strategically bootstrapped PUSd demand and liquidity it two ways:

  1. Accumulating CVX to boost pool rewards and incentivize 3Crv depositors
  2. Depegging PUSd to the upside to incentivize blue-chip NFT holders to mint the stablecoin and capitalize on the arbitrage opportunity

More 3Crv deposits means higher PUSd prices, which leads to increased interest in the stable.
There are only two ways to consistently obtain PUSD at $1.00:

  • NFT owners staking their blue-chip assets
  • DAO members minting PUSd from USDC 1:1

Most of the PUSd in circulation comes from NFT depositors.

Auto-compounding Vault

JPEG’d implemented an auto-compounding vault for PUSd known as The Citadel.
The vault automatically harvests their Curve pool rewards and allows LPs to save on gas fees. JPEG’d charges a 20% performance fee on profits, with 10% going to their DAO and the other 10% supporting the Strategists.

The future of PUSd and JPEG’d

JPEG’d aims to support the collateralization of additional NFT projects. Currently, only CryptoPunks, EtherRocks, BAYC, and MAYC can be deposited.
Increasing the adoption and stability of PUSd is top-of-mind for JPEG’d, and safely scaling their acceptance of non-fungible assets is a key milestone in that effort.
JPEG’d, and many others, see the potential of building a robust NFT lending market. People holding high value NFTs want the option to borrow against their assets for yield opportunities, real-world spending, etc.

In the current market conditions, it’s tough to predict if they’ll survive and attain significant adoption. I’ll be watching closely!

If you want more DeFi investment strategies, follow me on Twitter @rossboothr