How much is the fish on the OpenSea?
Another month has passed and our George vision from the previous medium article is now connected to the NFT pricing! Before diving into inner details, lets’ take a step back and outline what it means to price assets from practical AI / ML perspectives.
If I want to sell an asset of any financial value, my final price will depend on three aspects — how much it’s worth, how likely am I to sell it for the price I’m asking, and how quickly I want it to be sold. The absolute lowest amount that I’ll accept as the worthiness of the item is the amount I’ve paid myself. Otherwise, it would mean that I have acquired an overpriced asset and I’ve made a poor financial decision — something that I’m highly unlikely to agree upon! Therefore setting worthiness equal to the asking price will be the least unfavorable solution to the seller. The time it will take to find a buyer is highly unpredictable — if it’s the desired item or belongs to a group of desired items it’ll be a swift one. We have two pillars to tackle — the measure of how desirable it is and the asking price.
It brings us to the next step — how much is the fish on the OpenSea? To answer this, George computes three measures — the latest clearing price of the asset, intrinsic price with upper and lower ranges, and liquidity tracker measure (below for Mutant Ape Yacht Club #6). All measures are updated daily and if missing — ping me on our Discord!
Let’s start with the last one — the liquidity tracker. The last yellow line shows us that if I were to list this item for the price I’ve paid when I have made my purchase I’d be able to get my money back with almost certainty! Not terribly insightful for speculative purposes but exceptionally valuable for collateralization. If we see our liquidity tracker at lower values for example 82% it’d mean to ensure a 100% probability of liquidation in case of a default on the loan the asking price would have to drop below the latest intrinsic value! Mutant Ape Yacht Club #6 is a superior item with exceptional liquidity. The liquidity tracker itself aggregates multiple sources of information: starting from other sales within this collection to cross-collection relevant sales and encapsulating broad market sentiment.
The latest clearing price will give us the amount we are likely to obtain and only based on the asset dynamics. In this instance, 84631 euros as of April 1 but it seems like the intrinsic value is lagging. If we account for recent trading of other NFTs in the Mutant Ape Yacht Club collection and outside of it, George is tracking the 100% probability clearing price at only 77671 euros (intrinsic value) with around 2% uncertainty around it. Even booming corners of the Defi space are not immune to prevailing weakness in the space.
At the moment, George is tracking prices in euros and it might look unusual for a Defi project to use a fiat denomination. From the overall price risk perspective, we live in a world where homo economicus (that’s how theoretical economists call people) consume goods and services with prevailing means of exchange and given it’d take a magnitude of extra effort to be able to pay for our groceries with L1s. George will stick to euros for now (USD would be more fitting and it’s in a pipeline). Therefore, the price risk is an aggregate of individual asset risk, overall collection risk, and token-to-fiat exchange risk.
So George generates four figures per asset per collection daily — how it is useful for collateralization? Let’s continue with the Mutant Ape Yacht Club #6 asset with the assumption that its owner is looking for short-term financing for the upcoming 90 days. We assume that we cannot forecast future value developments and with this assumption, we simulate potential future price paths in the plot below. The left side shows price paths with think lines indicating a highly likely deviation range while dashed ones show the most extreme cases. The right-hand side gives us the likelihood of the end price being at a certain level below or above the starting value of 77671.
We have two financing options, the purple line for 74k and the light blue line for up to 70k. George tells us that the likelihood of the end value being below the loan value (something equivalent to default) on the higher amount is around 8.29% while for the light blue case on 0.19%. It’s a highly liquid asset (liquidity tracker was at 100%) but some frictions and delays must be assumed. Therefore, George tells us to request at least a 1.4% return on the blue case but a whopping 17.6% on the purple cases just to be sure not to lose money on average. At the same time, the lowest required return decreases substantially if shorten the loan to only 60 days and increases if we increase it up to 180 days. Even in the most conservative amount (blue case) George allows us to provide collateralization of up to 90% of the underlying value!
To summarize, George is tracking a handful of NFT collections every day in his universe and we are working on expanding it further. It allows us to have more educated borrowing/lending decisions as opposed to the usual rules of thumb (40% of the value for Z% yield per X months and be gone with it). You might be wondering then why isn’t this the final piece and there is one more planned? Well, George is powered by a set of pricing engines decomposing and aggregating all the information back to the price level that we talked about before and the next step of evolution for him is to go out of the current universe. Effectively, an interface on our platform to obtain an indicative intrinsic price with uncertainty and liquidity for any NFT you desire!