Benefits of Hybrid DeFi

Feature image for Benefits of Hybrid DeFi

Hybrid DeFi - A Brand New Crypto Category & Meta


On January 4th, 2024, Cæsar posted his thesis about bozo HYBRID on X. In his post he coined the term Hybrid DeFi for the first time to categorize and describe bozo HYBRID. bozo was so different from everything else that had come before it that it required its own category. Hybrid DeFi solves many of the problems that had been plaguing the crypto industry for the past several decades and bozo HYBRID is the first real evidence of Hybrid DeFi working. Thanks to the benefits of Hybrid DeFi, it is very difficult for holders of bozo to imagine how anyone could ever go back to single sided NFTs or tokens. It has completely changed how crypto markets work forever. bozo HYBRID has changed DeFi for the better.

What is Hybrid DeFi?


Hybrid DeFi is the concept of uniting NFTs and tokens together under a shared tokenomics structure. It is also referred to as NFTxTOKEN or as hybrids. Hybrids help to unlock new and unique use cases that weren't possible before in crypto markets. One can hold Hybrid assets in either the NFT form, token form or a combination of the two. All without breaking the project’s supply constraints and avoiding double spends. The supply constraints are always kept in check through the use of a trustless and permissionless smart contract bridge which is also referred to as an escrow. By using the escrow, a holder can swap their NFT for a predetermined amount of the tokens (tokenomics design) and can swap back to the NFT from the same amount of tokens. For a given amount of supply that is outside of the escrow, it can only exist in NFT form or token form but never both at the same time. A hybrid's escrow is one of its most important features. A simple example would be a Hybrid DeFi project whose tokenomics allowed holders to swap from a single NFT to a single token and vice versa. Another way to conceptualize it is that 1 NFT equals 1 token or 1 token equals 1 NFT.

In the case of bozo HYBRID, there are a total of 1000 NFTs. By using the escrow each NFT can be swapped to 800,000 $bozo tokens resulting in a total token supply of 800,000,000 $bozo. Likewise, 800,000 $bozo can be swapped to a single bozo NFT.

Hybrid DeFi theoretically allows both the NFT and the tokens that are in circulation outside of the escrow to share the market capitalization together. But in practical terms, since the NFTs and tokens trade on separate markets, the market capitalizations of both NFTs & tokens often differ from one another. This leads to frequent arbitrage opportunities that can be taken advantage of. This is a unique characteristic of hybrids.

Benefits And Use Cases Of Hybrid DeFi


Hybrid projects unlock several benefits for themselves over traditional projects that have single sided tokenomics.

So what are the benefits of hybrids?

1. A New NFT Scarcity Mechanism


Holders of hybrid NFTs have the option to either sell them into the NFT market or sell it as tokens after bridging into them. Over time as more NFT holders swap to tokens and sell via token markets (distribution), the NFT becomes deflationary. This is because the required amount of tokens to swap back to the NFT becomes harder to own as they are now owned by others. Hybrids provide a natural mechanism for achieving NFT deflation, thus making them scarce. We call this mechanism NFT deflation through token distribution.

The rate of NFT deflation is especially acute for hybrids where the ratio of token holders to the NFT supply is high. In other words, hybrids that maximize token holders while possessing a very low NFT supply will see high rates of deflation. Since retail holders prefer projects with very large supplies (ex. meme coins), one can use a large token supply as a proxy for token holders. So to restate, hybrids that maximize token supply while possessing a very low NFT supply will see high rates of deflation. When the price of the token increases, the deflation is further accelerated making it even more difficult to swap back to the NFT. While a low NFT supply is optimal for higher deflationary rate, it shouldn’t be so low that it prevents an organic community from forming.

The deflationary nature of hybrid NFTs offers a brand new dynamic to a project thus allowing them to design for scarcity (ex. gaming).

In the case of bozo HYBRID, an NFT holder may swap to 800,000 $bozo and then sell those tokens on the open market. As these tokens get distributed to different wallets, the probability that the same amount of tokens can be bought back in order to swap to an NFT is very low. Purchasing the 800,000 $bozo is further made difficult as the price of the token increases thus further adding to the deflation.

2. Better Prices


Price slippage is a major issue across all token markets because of how it negatively affects prices when executing large trades. Front running by bots is another issue which large traders face preventing them from getting the best prices. These issues aren’t exclusive to markets with low liquidity. If the entry or exit size is large enough on a relative basis, it will have a significant price impact on even the most liquid markets. To get the best price possible, the recommended solution is to place private trades using an over the counter (OTC) solution. But, OTC desks require traders to place their funds in an escrow which they control, thus having to trust a middle man.

Hybrids solve issues of price slippage, front running and traditional OTC by using on-chain NFT marketplaces. Instead of traders buying or selling large amounts of tokens, they can buy or sell the hybrid NFT since these NFTs can be swapped to tokens. On-chain NFT marketplaces completely solve the slippage problem while also acting as a trustless, permissionless and decentralized OTC.

For the NFT marketplace to be an effective OTC, the amount of tokens that an NFT represents must be a significant percentage of the total token supply. For example in the case of bozo HYBRID, each NFT represents 0.1% of the token supply (800K $bozo per NFT, 800M $bozo of total supply). The benefits of eliminating slippage and front running using hybrids can only be realized if the same amount of tokens represented by an NFT were to be sold or bought in the token markets causing a meaningful impact on token prices.

3. Increased Liquidity


In the case of hybrids, arbitrage opportunities between the NFT and token markets arise often. Any trader can use the low cost escrow to swap between both asset types as often as they'd like to take advantage of these opportunities. As the prices across both markets grow, the arbitrage opportunities also continue to grow larger. For example a 1% arbitrage for an asset that costs $1000 would net the trader $10. But the same 1% opportunity for an asset that costs $1M would net them $10,000. These larger arbitrage opportunities will attract greater liquidity to perform the arbitrage and keep prices in check across the two markets. This growth in liquidity across both markets is what we refer to as cross market arbitrage liquidity injection. The two separate markets through which liquidity can enter is what we refer to as the two-way liquidity portals.

In the case of the bozo HYBRID, arbitrage opportunities arise to keep 800,000 $bozo the same as 1 NFT. We expect it to be one of the most liquid assets in the world, especially as the NFT climbs into the six figure price range and beyond. The deflationary effects on the NFT due to the natural token distribution could additionally add a premium effect. Due to the frequent arbitrage opportunities across the bozo markets, we expect the asset to pull in liquidity from both NFT markets and token exchanges (CEXs & DEXs).

4. Greater Accessibility To NFTs For All


A common problem that a majority of NFT collectors face is the inaccessibility to the top NFT collections that are coveted and highly traded. NFTs like MadLads, Bored Apes or Punks are so expensive that the average person is priced out, sometimes early on in the NFT's life cycle. This leads to individuals having to watch from the sidelines with zero exposure to the NFT.

Hybrids have a solution to this problem which is through token based NFT fractionalization. Thanks to the tokenomics of hybrids, instead of having to buy an entire NFT, a collector can buy the tokens and gain exposure to the NFT’s performance. The hybrid’s tokenomics design ensures increased accessibility to the NFT through tokens but without any of the dilution.

In the case of bozo HYBRID, only 1000 bozo NFTs exist, but holders of $bozo have direct exposure to the NFT’s performance. Owning 200,000 $bozo is equal to owning 25% of a bozo NFT. This ensures that all bozo have equal accessibility and that no bozo gets left behind.

5. Manage NFT Downside Risk


Before hybrids, the only way to manage downside risk of an NFT was to sell it in its entirety. But now thanks to hybrids, holders of the NFT can hedge a portion of the NFT’s downside risk without having to sell it entirely. After bridging from the NFT into tokens, holders can use those tokens as collateral on the futures market and go 1x short with the collateral effectively hedging via synthetic USD. Holders of NFTs can now hedge any percentage of their NFT on a liquid market without having to sell the entire NFT.