DISCOVER NFT BONDS AND HOW NFT ACCOUNTING IS MADE MANAGEABLE WITH AUTOMATED PRICE MATCHING.
In the rapidly evolving landscape of digital asset management, cryptocurrency accounting and web3 finance, a novel financial instrument has emerged some time ago — NFT bonds. These bonds present a unique fusion of decentralized finance (DeFi) and the non-fungible token (NFT) ecosystem. However, the intricate nature of NFT bonds can pose a challenge for NFT accounting professionals aiming to understand their inner workings.
This article aims to elucidate NFT bonds, providing web3 accountants with a clear and succinct overview of their nature, functioning, and the intricacies they encompass. Furthermore, we will explore an automated solution offered by Cryptoworth, which streamlines the intricate facets of NFT bonds, rendering them accessible and comprehensible for financial professionals.
WHAT ARE BOND NFTs?
This type of non-fungible token collection enables protocols to provide proof of staking to investors with varying token values.
These bonds facilitate the locking of tokens within a transferable non-fungible token (NFT), which then becomes tradable on a secondary market. Similarities can be drawn to the well-known US Treasury Bonds, often referred to as “T-Bills.”
In financial management, the NFT Bond assumes the pivotal role of safeguarding other fungible tokens of economic significance. Acting as a reservoir of liquidity, it operates under specific predetermined conditions. These conditions typically revolve around time, leading to the maturity in the NFT Bond. When that time arrives, previously locked tokens smoothly shift to the ongoing NFT Bond holder.
A parallel emerges between NFT Bonds and T-Bills. Just as T-Bills are initially sold to an initial buyer, NFT Bonds follow a similar trajectory. NFT Bonds exchange for an alternative currency at a value below their face worth, compensating the issuer for their inherently illiquid nature. Similar to T-Bills, NFT Bond holders can engage in secondary market transactions, ensuring a continuous flow of liquidity.
NFT Bond issuing and inner workings. Credits given to “https://medium.com/@goodblockio/an-introduction-to-t-bond-nfts-58e69b7213b6“
Liquidity Staking for Governance Engagement: A Use Case.
Velodrome, Equilibre, and Solidly protocols are utilizing NFT bonds to boost liquidity through governance power. The imperative for voting influence in pivotal protocols underscores the necessity to infuse robust liquidity into these emerging projects.
Investors opt to lock their liquidity within this type of NFT bond to capitalize on rewards extended by each protocol (referred to as the “Bribes” system in the image below). This efficient incentive strategy encourages participation and fund provision. The protocol allocates its available supply to ensure seamless progress, enabling new participants to gradually amass voting influence.
The objective is to attract seasoned DeFi users early on, fostering the formation of a dedicated team to efficaciously oversee the protocol’s operations.
WHY IS PRICING NFT BONDS DIFFICULT?
Bonds offer a distinct advantage to projects aiming to secure initial or later-round funds, as tokens can be sold but remain unusable until the maturity condition is met.
While NFT bonds introduce promising prospects, they also introduce complexity, particularly concerning pricing and valuation. Unlike conventional assets, NFT bonds lack an on-chain fair-market value, yet they can be traded on secondary markets, presenting a challenge in assigning a price.
Financial controllers and CPAs of diverse web3 projects grapple with several uncertainties:
- What should be the token’s pricing reference in the wallet? The secondary-market value or the maturity level value?
- How much yield should be attributed to these NFTs?
- What discount has each of them received from the face value price?
- How can the NFT’s value be determined at maturity, especially when locked staking varies within the same collection?
- What is the vesting period of the acquired bond? Is it a fixed term or fixed expiry?
HOW DOES NFT PEGGING SOLVE THIS?
The solution lies in NFT pegging, which addresses the challenges in the web3 accounting process by reconciling the cost of NFT bonds. This is achieved by overseeing the complete collection of these bond NFTs, allowing the token holder to link them in their sub-ledger to any ERC-20 token (be it stable or crypto). This connection to the bond-styled asset enables customization of the amount based on the issuance.
Customer Spotlight: Revolutionizing NFT Bonds Through Price Matching.
Ether.fi, a liquid staking protocol, was recently faced with a challenge of pricing these NFT bonds. Each NFT within the protocol represents a fixed amount of staked ETH on the beacon chain. This is developed through a B-NFT & T-NFT structure, whereby the former represents a soulbound NFT of 2 staked ETH, and that latter is the remaining amount in the liquidity pool of 30 ETH, totalling the 32 staked ETH requirement to spin up a validator. Amidst countless unpriced NFT bonds, the balance sheet and subledger reflected a significant gap between the funds staked on the beacon chain, along with the fiat equivalent of those staked funds.
In collaboration with Cryptoworth, a strategic solution emerged to empower web3 accountants in determining and aligning a fair market value with liquid staking bonds. By delving deep into the liquid staking landscape, Cryptoworth swiftly devised a solution. This breakthrough enabled the resolution of over 75% of balance discrepancies through automated classification rules for these ERC-1151 NFTs. Having a system that auto-detects the NFT’s, along with their value, serves as a crucial piece of tracking infrastructure for the protocol.
The result? The intricate web of liquid stake bonds was organized, tagged, and aligned with specific fair market values.
Cryptoworth’s solution allowed us to streamline and automatically value our liquid staking bonds. The team’s knowledge and ability to ship updates helped resolve accounting for these NFT’s by ensuring accurate valuations. These NFT bonds are a foundational part of our protocol and those investing into it. The design creates economic incentive mechanisms to enroll liquid stakers into services built atop the staking infrastructure, which includes both solo stakers and professional node operators. Getting the fair market value for so many NFT transactions was key to having a more accurate and efficient bookkeeping process along with tracking of financial positions.Jozef Vogel – VP of Finance and Operations – ether.fi
Streamlined Approach with Cryptoworth.
The solution has been seamlessly integrated into Cryptoworth’s platform under the “Treatment settings” tab. This enables web3 accountants to specify Bond NFTs across multiple blockchain connections. Here’s a step-by-step guide:
- Begin by classifying all bond transactions using a specialized automation rule to identify and label these NFTs as Bond NFTs.
- Once the fair market value is determined, assign it to the bond NFT collection using the NFT pegging feature.
Empowering Web3 Accountants through NFT Bond Cost Matching.
As NFT bonds gain traction and reshape the web3 financial landscape, it’s crucial for accountants and CFOs to be equipped with tools that simplify and automate their routine balance checks.
Cryptoworth‘s NFT pegging solution is a swift and effective remedy, aiding web3 accounting professionals to navigate complexity while managing NFT bonds and crypto assets. By leveraging this solution, crypto accountants can confidently embrace the world of NFTs, contributing to the ongoing evolution of the decentralized financial ecosystem.
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