Pilgrim Paper

Pilgrim: An Atomic Valuation Framework for Low Liquidity Assets

Version v0.1

Author(s): Daniel Hong (daniel.hong@testinprod.io)

Abstract. Pilgrim is an atomic valuations framework for assets with low liquidity, including but not limited to NFTs, credit, real estate, and unlisted corporate/DAO shares. We present a novel mechanism for creating liquidity for illiquid asset types by assuming virtual liquidity values set by the initial pool deployer, and generating liquidity on-the-fly as demand for liquid borrow positions (LBPs) increase (and vice versa). Bonding curves based on Uniswap and mechanisms taken from money market and synthetic asset logic are used to recursively determine pricing of illiquid assets locked as collateral, allowing anyone holding collateral position derivatives to access asset-specific features, and gain partial price exposure without liquidating the asset through money market borrows against locked LBPs. This also allows for anyone to either bet for (long) or against (short) a given illiquid asset by purchasing LBP derivatives, called rounds, that are only liquidated either when a target liquidation threshold is given and activated, or when the base LBP is liquidated. The authors believe that Pilgrim will not only enable dynamic composability of illiquid assets with new and existing on-chain financial primitives, but also allow for novel valuation, funding, market construction, trading and liquidity control mechanisms not possible with any other financial instrument.

I. Introduction

While illiquid and/or non-fungible assets are an essential component for modern financial infrastructure, atomically determining valuation of such assets remains a challenge. Auction and orderbook-based models are primary means of agreeing upon pricing for illiquid assets, such as real estate and art. Although this approach work well for use cases that do not require composability and automation, auctions are not desirable for novel applications that require a live, atomic price feed like those of stock markets and cryptocurrencies β€” as auctions often require days (if not weeks or months) before valuation could be finalized.

One potential solution to this problem is fractionalizing illiquid assets or bags of such assets into shares, of which then could be freely traded on the market. However, such an approach poses the following issues:

Therefore, the following features are desirable when constructing an atomic valuation system for illiquid or non-fungible assets:

II. The Pilgrim Trading Protocol

The Pilgrim dynamic AMM (dynAMM) defines a base valuation mechanism where:

Uniswap has introduced a novel mechanism to construct markets on-chain based on prediction market models, except that liquid assets are used as collateral against a prediction market curve within a pooled token pair contract. Pilgrim builds on top of this automated-market-maker mechanism to construct atomic price curves for illiquid assets as well.

Once an illiquid asset is deposited with Pilgrim, the Pilgrim Money Market internally defines a Liquid Borrow Position (LBP), which is equivalent to reverse mortgages. Traditional mortgage loans have a set loan-to-value ratio (LTV) used to borrow a fixed amount of liquid assets with an illiquid asset specified as collateral with fluctuating value, either set by supply-and-demand bids or public auctions. LBPs are the exact opposite: we allow implicit trading of a liquid mortgage borrow position with a fixed LTV, thus allowing the underlying collateral value to be determined based on the current valuation of its corresponding borrow position.

We first take the standard Uniswap bonding curve

xβ‹…y=kx \cdot y = k

with two major modifications:

As trading is executed at point of liquidity provision, maximum allowed slippage per unit decreases exponentially as liquidity is adjusted against the value of liquid assets already locked with a pool contract. Therefore, price movement is exponential against liquidity deposited β€” unlike the Uniswap curve that defines a standard supply-to-demand relationship.

This bonding curve is also unique in the sense that minted rounds effectively equate with liquidity tokens under the Uniswap model; current shares of round tokens represent relative ownership of liquidity within a particular Pilgrim pool. As Uniswap defines the initial number of liquidity tokens minted as xβ‹…y\sqrt{x \cdot y}ο»Ώ and mints liquidity proportional to existing liquidity tokens afterwards, the effective collateral value of Pilgrim round tokens may also be calculated as such.

III. metaNFTs and Pool Ownership

The Pilgrim protocol defines a staking derivative-like asset minted to the creator of a particular Pilgrim pool contract, called metaNFTs. metaNFTs represent illiquid collateral within a Pilgrim pool, while rounds represent ownership over liquid collateral, each backing market valuation of the other.

Owners of metaNFTs may:

metaNFTs also share the same metadata as its underlying NFT, such that one may consider metaNFTs as β€œupgraded” versions of the original NFT with a dynamic price feed that earns yield, and enhanced composability with third-party decentralized applications.

IV. Pool Buyouts and Liquidations

Unlike auction-based valuation protocols, Pilgrim enables atomic price feeds for illiquid assets, which inherently affect how full buyouts work.

Buying the entire underlying NFT is equivalent to liquidating an existing LBP position, which liquidates all liquid asset positions (rounds) and illiquid asset positions (metaNFTs) back to the base token paid by the liquidator.

Multiple liquidation bids may exist at a time on a bidder queue. The metaNFT owner has the right to approve one and only one bid that exists on the bidder queue for this Pilgrim pool that: (i) has a higher valuation than the current spot price set by the Pilgrim trading protocol, and (ii) has the lowest bid timestamp value. metaNFT owners do not have the right to choose from multiple bids.

V. The Pilgrim Token & Financial Coordination

The Pilgrim Token (PIL) exists to capture value from the Pilgrim protocol, amplify protocol rewards for those that have aligned incentives with the protocol, and govern the protocol in a decentralized manner.

The above characteristics create financial coordination opportunities, whereby:

This coordination mechanism may be forked and be used alongside existing PIL token incentives by third-party protocols to incentivize coordination within their own communities.

VI. Potential Applications & Conclusion

Pilgrim enables atomic valuation of any primitive that may be expressed on-chain. This allows for additional composability and programmability not yet available with any other financial instrument, including but not limited to:

Future work includes:

Revision History

v0.1: Initial release.