What are the risks involved in providing liquidity to the vaults?
Smart Contract Risk
As with all protocols that are based on Solidity smart contracts, there is an inherent Smart Contract risk. The NFTX contracts are no exception, and this is how we help mitigate the risk.
- Great Solidity Devs — the two key devs for the project are Alex, founder, and Kiwi, former ETH 2 contributor and lead dev Uwu Crew.
- Bug Bounty Programme — we offer large monetary rewards for anyone finding bugs with the contracts.
- Code Reviews — we utilise Code Area for competitive code reviews and monetary prizes to review the code before it is deployed to Mainnet.
- White hat code reviews — we invite previous bug bounty contributors to review the code early to find any issues.
- Full Audit — there is a full code audit booked in with Trail Bits in Q2 2022.
If you’re going with double sided staking and the larger share of the vault fees you are at risk of Impermanent Loss. You can learn more about this from this helpful article and video, but the short version is that there are situations where one of the assets (vault token or ETH) is volatile and you end up with less overall value than you started.
This doesn’t take into consideration the additional vault fees and trading fees that you can earn which offsets the impact and reduces the risk.
The value of the underlying assets are subject to the open market. This means that either the NFT value or ETH can go up or down in value depending on market conditions at the time. This is a risk for any investing, but we reiterate that you should never invest more than you can afford to lose.
That’s not my NFT
When you stake your NFT as inventory or liquidity staking you are putting it into the vault where anyone can buy/swap it back out. While there is always a 1:1 ratio between vault tokens and NFTs (meaning you can always claim an NFT from the vault) you will not always be able to get the same one you put in.
You could end up with the better one though, and this is why you should only ever add floor value NFTs into the vaults and not NFTs that you are emotionally attached to.
Less tokens than when you started (but more ETH)
When you stake your NFT you are adding equal amounts of tokens and ETH into the pool. If there are a lot of buys from pool the balance between token and ETH will be more ETH heavy, meaning that when you exist your position you’ll have less tokens than you started with (but more ETH).
This is countered by the fact that for every buy/sell/swap there are fees paid to the staked users, meaning that you will earn additional vault tokens that way.
The opposite can also happen where your liquidity position has more tokens and less ETH.
Let’s take a look at how the revenue streams work.