HIP 5 - Sheet Heads Collateral


This improvement proposal aims to integrate the “SHEETp” token into the Hifi Protocol as collateral. The intent is to grant holders of Sheet Heads NFT the ability to borrow against their NFTs using the Hifi Protocol’s DeFi infrastructure with a conservative collateral ceiling and an admin-managed price feed.

The SHEETp Token is an ERC-20 representation of an ERC-721 Sheet Head NFT. Borrowers will be originating a loan using their $SHEETp as collateral. Capital for the loans will be sourced from the Hifi Lending Protocol.


Hifi Labs created Pooled NFT to address the challenges NFT communities face, and the Hifi community has been patiently waiting to unlock borrowing against their NFTs. To act as a safe testing ground for onboarding projects while highlighting the benefits of the Hifi Ecosystem, the team needed a flagship NFT project that they had complete control over. That is where Sheet Heads comes in. The Sheet Heads mint remained open for nearly two months. This period has allowed for price discovery of SHEETp to occur and was the last key input needed to integrate the SHEETp token into the Hifi Protocol as collateral.

Potential Risks

Sheet Heads is a digital collectible that can be highly volatile and has relatively low liquidity, meaning it could be a source of bad debt on our protocol. A scenario wherein an attacker manipulates an increase in the price being fed to Hifi’s Lending protocol could result in bad debt. To mitigate against this scenario, our core team has implemented several safeguards.

Safe Guards

  1. Durable Liquidity
  2. Admin-managed Price Ceiling
  3. Conservative Collateralization Ratio
  4. Generous Liquidation Incentive
  5. Time-Weighted Average Price Feed (TWAP)
  6. Conservative Collateral Ceiling

Durable Liquidity

Hifi Labs is committed to keeping its liquidity on chain, primarily concentrated in a full range SHEETp/USDC market. This liquidity powers the SHEETp TWAP feed from a Uniswap V3 pool.

Admin-managed Price Ceiling

Hifi Labs has implemented a custom price feed that requires manual interaction to allow the price feed to increase above a set threshold. The initial price ceiling will be set to ~150% of the current price of SHEETp. At the time of writing SHEETp is valued at ~$33 which would put the price ceiling at $50. Suppose the price of SHEETp were to increase suddenly. In that case, this manual control requires that the Labs team explicitly acknowledge the market conditions before any increase in borrowing power is extended to SHEETp token holders.

Conservative Collateral Ratio

The collateral ratio will be configured to 333%. This means SHEETp holders must post ~$3 for every $1 they borrow. This is another way of saying SHEETp will have a 30% loan-to-value requirement.

Generous Liquidation Incentive

The liquidation incentive is set to 50%. When borrowers fall behind in maintaining the required collateralization ratio, liquidators will have a generous buffer and incentive to liquidate positions. In practice, this means a liquidator can profit up to 50% of the value of the liquidated position.

Time-Weighted Average Price Feed (TWAP)

Using Uniswap v3 TWAP as our price feed helps guard against inorganic price action. The TWAP is initially configured for a 12-hour time span. This means that an attacker trying to manipulate the price of SHEETp would incur the expense of both moving and defending the price for every block for 12 hours to be successful. It is unlikely that this would be profitable for an attacker.

Conservative Collateral Ceiling

The amount of SHEETp that is allowed to be deposited as collateral is limited to 4000 SHEETp tokens. Again, this helps limit the scope of the possible impact that SHEETp can have on the lending protocol if something were to go wrong.

With all these parameters and safeguards in place, it is the opinion of Hifi Labs that we are in a position to reasonably mitigate the risks of bad debt for the Hifi protocol.


The main value proposition of this proposal will be a demonstration of protocol capabilities and limitations that will apply to future collateral types while observing the impact collateralizing digital collectibles may have on a collection. Onboarding Sheet Heads as collateral onto Hifi’s Lending protocol to unlock borrowing provides the collection with additional liquidity for collectors.


Upon majority approval, Hifi DAO will take the necessary technical steps to integrate SHEETp Token into the Hifi Protocol with the set collateral ceiling and TWAP.

If the majority vote disapproves, no further action will be taken regarding this proposal.

This proposal is now live on Tally: HIP 5.

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Sounds good to me.

Just think it wouldve been so much better for PooledNFT to have been part of hifi.finance in the first place. Or was this a move to distribute liability should things go south?

Either way, this is definitely a move in the right direction.

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Well written & structured proposal.

My immediate thoughts relate to the conservative nature of it, in particular the collateral ratio. I fully respect and agree with the notion to protect the protocol, however I feel the balance between protection and usability may not be there but concede that I may not fully understand the bad debt component and will take on trust this is the best course of action for the initial starting point and the intent is for the long term where adjustments can be made via the passage of time?

This proposal bridges NFTs + DeFi like never before; bringing SHEETp tokens into the Hifi Protocol; safeguards are smart — the admin-managed price ceilings, conservative collateral ratios, they show real well thought out edge case scenarios. Not just just opening doors for Sheet Heads, laying down the groundwork for the whole NFT community. Using that Time-Weighted Average Price Feed is like setting up a guard dog against any funny business. The democratic DAO vote too; really bringing everyone into the fold. Hats off, this proposal’s a game changer.

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I think the protection vs usability argument is valid but I would prioritize protection. Once there is more price stability we can consider increasing risk and changing the ratio.

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Jaydubb, you’re spot-on about the conservative approach maybe not hitting that perfect balance between protection and usability. It’s tricky, you know? You gotta be cautious when you’re in new waters. But here’s the thing: the 12-hour TWAP makes it really hard for anyone to manipulate the system without burnin’ through a ton of cash on gas fees. It’s like a safety net against bad debt. So yeah, the system might be cautious now, but it’s flexible. As we learn and adapt, adjustments can be made. That’s what’s great about an evolving ecosystem, it’s got room to grow and fine-tune.

Alright, imagine the 12-hour TWAP like a movie that’s 12 hours long, right? Every frame in that movie represents the price of the SHEETp token at a specific moment. Now, instead of just looking at a single frame to get the price, the system averages out the entire movie to find a stable price. So, if some joker tries to mess with the price, they’d have to keep it up for the whole 12 hours, kinda like editing every frame of that movie. Not only would that take a ton of time, but it’d cost a bundle in gas fees. Makes it a losing game for anyone trying to game the system.

yeah, totally agree. once we’ve sat sail, we can adjust the sails.

I suggest exploring an additional feature to strike a balance between conservative collateral requirements and an administratively managed price ceiling. While I’m not well-versed in smart contract coding and can’t understand the complexity of this integration, the concept is to introduce a dynamic mechanism.

For example, if the NFT’s price surges from $30 to $300, the system could lower the collateral requirement from 30% to 20%. Concurrently, the administratively set price ceiling could be adjusted with a 14-day lag.

This suggestion comes from observing platforms like AAVE in 2021 and 2022. As credit accessibility expanded, users aggressively borrowed against their holdings, eventually triggering significant liquidations.

Best, CuriousSheetHead

The question that no one is asking but literally everyone wants to know the answer to as it directly pertains to this proposal and borrowing against the NFT’s.

Does Rarity matter in the NFT’s in relation to borrowing against them?

Example: If you have 3 NFT’s.
1 NFT is a 1 of 1
1 NFT is rank 100
1 NFT is rank 1,000

Will there be any benefits/ perks when it comes to borrowing based on the “rarity” of the NFT’s you are borrowing against?

I’ll just jump in and say I agree with @HarambeNeverForget as these feel too drastic, but its in the interest of protecting the protocol with the approach to loosen based on how things turn out over the next month. Or more likely, 3 months.

You could have 2 or 3 big buys spread out over 12 hrs for example to dramatically raise the average price and if nobody notices then no sales would occur to dampen the price. But with the cap at $50, even if they twapped the 12hr price to $1000 they would still be capped to $50 due to the admin limit, so the protocol would still be safe.

Yep, some curve like this could work as a long term solution if it’s properly modeled out. I’ll make a quick table and a very simplified curve to illustrate as an example

Current price, collateral requirement
$33, 333%
$50, 310%
$75, 280%
$100, 270%
$150, 250%
$175, 245%
$200, 240%
$250, 240%
$300, 240%

In this case it tops out at 240% at $200 per sheet head. If and when Sheet Heads reach that kind of price of 0.16E per token, then we rip out the existing curve and model it again based on where we think its heading.

@PSUolive Before I answer, we need to remember how PooledNFT is setup. By default everything that enters the pool is valued the same as everything else that’s already in the pool. So if you deposit a 1 of 1 into the pool, the value of your deposit is that of a floor NFT. If you are the type of person who finds this acceptable, then the pool is the solution for you.

If you have something that you deem valuable, you would deposit it into the PooledNFT VAULT, which is a system designed to allow borrowing based upon that specific NFT. Whether its a misprint, 1 of 1, or a low rarity rank, or even something of high sentimental value, the PooledNFT VAULT is the solution for you.

To answer your question, the system in place for the HIP-5 treats everything as a floor NFT.

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I want to hear someone from the team confirm this. Because I would hate to be that person who deposits a rank 50 NFT only to later find out they are worth 2x value (Example) if used as collateral for a loan.

So clarification on this should be required before any votes are made on adding sheetheads as collateral. It should have been written into or stated in the proposal in the first place IMO to avoid this confusion.

SHEETp is what is being added as collateral. As you know, SHEETp is a fungible ERC-20, meaning that it does not map to any specific Sheet Head NFT in the pool. So borrowing against SHEETp is just that, borrowing against the value of SHEETp deposited, not borrowing against any specific NFT within the pool. All NFTs in the pool are treated the same, and all SHEETp has the same market price. When depositing into the pool, you have no guarantee that the exact NFT you deposited will be there when you come back. Instead, you only have the guarantee that there will be at least one NFT in the pool for you to withdraw for each SHEETp token you hold.

Hope that clears things up for you @PSUolive.

Thanks Doug,
So Rank/Rarity does not matter whatsoever for borrowing on the HiFi platform or SheetHeads itself.(Other than the horse NFT’s in relation to Crown Ribbon) Its simply a meme number for collectors seeking the “rarest” NFT’s.

Thats all anyone had to say on discord this entire time when people have been wondering if the rarity of their sheetheads NFT’s will play any part in the future of the sheet heads project.

Thanks for finally clearing that up

this is off topic, but if you should look at it a different way. The Sheet Head community has spoken, that rarity doesn’t matter for a sub $30 NFT. But you better bet your Olives that if Sheet Heads hit $3000, rarity will matter again.

It’s a funny thing, because there’s no oracle per se on relative value of rarity. It’s very ironically decentralized, where consensus is arrived at by the market, as you say.

I like the proposal because it’s simple to understand & that’s what I like about the whole project, taking a thing that would otherwise be complicated and making it a very simple user experience.

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It is a suggestion.
The rule is to increase the collateral ratio by 1.5% for every 10% increase in price.

  1. For a 100% price increase (Price doubles):

    • New collateral ratio: 333% + 15% = 348%.
  2. For a 200% price increase (Price triples):

    • New collateral ratio: 333% + 30% = 363%.
  3. For a 500% price increase (Price increases sixfold):

    • New collateral ratio: 333% + 75% = 408%.
  4. For a 1000% price increase (Price increases elevenfold):

    • New collateral ratio: 333% + 150% = 483%.

With the new plan, if you have an NFT worth $300, you can only borrow $62.11, not $90.09, like with the current ratio of 333%. I believe it is safer for everyone. It prevents big liquidation and helps customers from their own irrational behavior.