Credefi Employs NFT Technology to Create an Advanced Derivative Instrument Into the Crypto Space

Up until now we have shown and disclosed how we are going to disrupt the current financial services offered to SMEs and the DeFi solutions offered to crypto liquidity providers, by creating a platform which is going to be secure for them and easily accessible. Credefi brings to the space the necessary stable and predictable APYs which can hedge from the crypto volatility. Today we are introducing our own unique approach to NFTs and traditional financial instruments which were used and accessible only to financial experts before. Welcome to The NDS (NFT Default Swap).

We have created a derivative instrument designed to even further secure your investments in our platform and create a secondary market for your asset backed lending. It is designed for all participants in our platform who wish to hedge their lending activity against credit defaults, hence allowing them to take riskier positions in both our portfolios or on an individual basis. How this is going to work is described below in detail:

Every unit of liquidity supplied on the Credefi DeFi platform is represented by an ERC-20 token, minted via the ERC-1155 standard. Those tokens are bundled depending on the type of investment done.

Example 1 (of how pool tokens work):

Bob invests 1000 USDT in Credefi Portfolio 1

Allice invests 2000 USDT in Credefi Portfolio 1

Bob would get 200 P1LP tokens which represent his holdings in the pool and Alice would get 400 P1LP tokens which represent her holdings in the pool (the exact number of tokens is not important, only their proportion). Those tokens represent that Bob owns 200/(200+400) = 33.3% of the liquidity in the pool and Alice owns 400/(200+400) = 66.6% of the liqudity in the pool.

1 year later, the borrowers have paid 500 USDT as interest to the pool. The interest is paid out to each pool participant individually and not capitalized into the pool.

With P2P deals this would work similarly, however there would be only one holder of all D1LP (Deal1 LP) tokens initially. This user can still opt to sell part of those tokens, thus selling part of his principal and interest holdings.

How does this tie with NFTs?

Credefi will have multiple pools and thousands of deals. So eventually there would be dozens of PxLP tokens and thousands of DxLP tokens. Each of those tokens has a current value, based on the funding provided.

XxLP token holders will have the option to bundle (one or multiple) tokens for various amounts in a NFT Default Swap (NDS). After the user selects the bundle of tokens, the user can choose the strike date of the NDS. Based on the chosen date and bundle of tokens the Credefi platform will define a future discounted price of the NDS (always lower than the current price). After that the user has the option to sell the NDS (in full or fractions of it) on a secondary market. Such secondary markets can be chosen entirely by the issuer of the NDS (e.g. OpenSea)

Plans for an in-house NDS marketplace on the Credefi platform are also in the making.

Once the strike date is reached, if the value of the NDS underlying tokens is less than the future discounted price, the NDS holders get the underlying tokens in proportion to their NDS holdings. If the price is above the future discounted price, the original holder gets his tokens back.

NDS example:

Bob has the following LP tokens:

• P1LP — 10 tokens
• P5LP — 5 tokens
• D456LP — 200 tokens
• D678LP — 100 tokens

He decides he needs some liquidity and wants to diversify his risk, so he decides to mint an NDS.He goes to the Credefi platform and selects:

• The number of tokens he wants to commit. For example:
• P1LP — 10 tokens
• P5LP — 0 tokens
• D456LP — 100 tokens
• D678LP — 100 tokens
• The strike date — after 3 months

The Credefi platform determines that the current value of the tokens he wants to commit is 10 000 USDT and based on the risk profile of the tokens and the strike date determines that the fair future discounted value of those tokens is 8 000 USDT (the discounted value might be lower or higher than the token price, the XxLP tokens represent only the principal in the loan, since the interest is paid to the lender separately).

Bob thus mints a NDS with:

• Strike date after 3 months
• Discounted future price of 8 000 USDT

Bob then decides to fractionalize the NFT into 1000 pieces and sells 700 of those prices on the NDS secondary market for 5000 USDT, thus receiving the liquidity he needs.

Once the strike date is reached, the Credefi platform re-evaluates the value of the token bundle (explained below).

• If the current value of the Underlying NDS tokens is > 8000.
• The NDS is expired
• Bob gets all of his underlying tokens back
• Other holders of Bob’s NDS get nothing
• If the current value of Underlying NDS tokens is < 8000.
• NDS fraction holders become the owners of the underlying tokens
• Since Bob decided to keep 300 of the NDS fractions for himself, he can get back:
• P1LP — 10 * 0.3 = 3 tokens
• P5LP — 0 tokens
• D456LP — 100 * 0.3 = 30 tokens
• D678LP — 100 * 0.3 = 30 tokens
• Bob still has his other tokens which were not part of the NDS

Bottom line: let’s examine what happens in both of the above situations:

If the current value of the Underlying NDS tokens is > 8000.

• Bob gets back his tokens, which are worth 10 000 (presumably)
• Bob got 5 000 USD from the sale of the NDS
• Bob got his normal interest rate for the period.
• If we assume that the NDS duration was 6 months, then Bob realised an APY of (1 + 4000/10000)² — 1 = 125% APY, BEFORE standard interest and CREDI rewards

If the current value of the Underlying NDS tokens < 8000.

• Bob still has 30% of his tokens. If we assume that the NDS is worth around 6 000 USD, then the value of those tokens is 1 800 USD
• Bob got 5 000 USD from the sale of the NDS
• Bob got his normal interest rate for the period.
• Bob effectively hedged his position and reduced his loss from 4 000 USD to 3 200 USD, or a 20% reduction.

NDS underlying token value re-evaluation. Each NDS represents a bundle of XxLP tokens. In return each XxLP token represents a fraction of a bundle of loans or just a fraction of an individual P2P loan. Let’s look at an example:

The P1LP token represents:

• Loan 1 for 1 000 000 USD
• Loan 2 for 2 500 000 USD
• Loan 3 for 1 500 000 USD

So the collective value of all P1LP tokens is collateral worth 5 M USD. Let’s say a user owns 0.2% of all P1LP tokens, or an amount equal to 10 000 USD equivalence.

If Bob decides to issue an NDS all of his P1LP tokens alone, the nominal value of the NDS would be 10 000 USD, however Credefi would issue it at a discounted price of around 8 000 USD (20% discount, numbers are just exemplary, actual numbers might differ).

Now when the strike date of the NDS is reached Credefi re-evaluates the value of the NDS. This begs the question, how can the value of the NDS be lower than not only the original price,but also lower than the discount price. Let’s look at an example:

Loan 2 (shown above) defaulted while the NDS was open. Credefi managed to recover 500 000 from the collateral, but the remaining 2 000 000 of the loan principal were unrecoverable. This means that the over value of P1LP was reduced from 5 MM USD to 3 000 00 USD, or a decrease of 40%.

By extension this also means that the value of Bob’s tokens were also reduced by 40%, so 10 000 * (100%-40%) = 6 000 USD, or the current value of the underlying tokens in the NDS are lower than the strike price defined. So in general by using the NDS a person has limited their risk exposure to a default in their underlying loans and hence has recuperated part of the funds up-front.

This however means that the rights to the collaterals and the future recuperation of the funds are transferred to the person who has bought the NDS.

So why would somebody buy the NDS?

They would for two reasons. Firstly, they bet that the market conditions would worsen by the time of the strike date and hence the NDS and the underlying assets behind it would be transferred to them meaning that all proceeds from the recuperation of the funds from the defaulted loans would be theirs. Second, since all loans are backed by collateral which is taken at a discounted price and then the NDS is issued once again at a discount to the par value of the principal, they have the chance to acquire the rights to the assets at a very discounted price. To put this into perspective, if you have loans for 10 000 USD in principle which are backed by collateral in real estate with a value of 12 000 USD, and you buy the NDS for the price of 8000 USD if the loans default, the NDS transfers the rights to the 12 000 USD in collateral value to you. So at the end of the deal on the strike date you will make a 40% profit out of this derivative instrument.

Derivatives are not everybody’s cup of tea and are sometimes a very risky endeavour. Unlike the well-known and recognised trading instruments found on popular exchanges around the globe, such opportunities as Credefi’s NDS, are only accessible in the institutional banking and trading sector.

Credefi revolutionises the trading game by combining the power of blockchain and DeFi, together with the power of traditional finance masterclass trading. Having the option to harness the full potential of hedging in the crypto universe is what Credefi revolutionises with this development.

Everyone should be able to minimise investment risks and on the contrary, be able to maximise their potential profits through complex financial instruments.

Credefi is proud to be a first-mover in the industry, therefore it continues to develop products suitable for investors and traders of diverse skill sets and backgrounds.

Join us in the journey towards the DeFi revolution!

About Credefi

Credefi is a first mover in the DeFi space connecting crypto lenders and SME borrowers from the real economy. Credefi’s platform enables decentralized and secured lending to portfolios of business projects or individual companies, protecting lenders while providing them fixed APY.

The protocol resolves the key challenges that DeFi and TradFi are facing today: DeFi’s inconsistent yields that evaporate in bear markets, speculative borrowers that are fickle and cannot satisfy DeFi lending supply, as well as the difficulty for SMEs to get TradFi funding at normal interest rates.

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