Let's talk about 8 new AMM protocols that provide liquidity for NFTs

Source: BlockBeats

The emergence of DeFi has initiated a revolution in the democratization of digital finance. Among them, the ability to freely create liquidity pools through AMM has greatly increased the liquidity of ERC-20 Tokens and unlocked value discovery for some long-tail Tokens, leading to a rich variety of on-chain activities such as trading, lending, and leveraging.

On the other hand, with the popularity of NFTs over the past two years, financial infrastructure based on NFTs has also emerged. In particular, the advent of Sudoswap has pushed the development of NFT Fi to a new milestone. Unlike off-chain order books, anyone can add or remove liquidity on-chain through SudoAMM, enabling truly decentralized NFT trading for liquidity pools holding ERC-20/NFT pairs.

However, the airdrop rules of Sudoswap have sparked considerable controversy within the community. Many users expressed disappointment with the airdrop, believing that Sudoswap did not show respect for the community or value liquidity providers, thus creating an urgent need for an NFT AMM that can replace Sudoswap, or even provide liquidity in a manner superior to traditional NFT trading markets (such as OpenSea, X2Y2).

Next, this article will introduce some new NFT AMMs that have emerged in the market, as well as suitable liquidity provision methods for different types of NFTs for readers' reference.

TL;DR

1) An NFT collection is primarily viewed as floor price and nearby NFTs (thus approximated as interchangeable) and rare NFTs;

2) The ways to provide liquidity for floor NFTs mainly include: NFT AMM and some NFT liquidity protocols;

3) The ways to provide liquidity for rare NFTs mainly include: auctions and NFT fragmentation protocols;

4) Both floor and rare NFTs in a collection can increase liquidity through lending and leasing.

NFT AMM

NFT AMM is a decentralized alternative to centralized NFT markets with off-chain order books like OpenSea, X2Y2, or Magic Eden, primarily utilizing liquidity pools to achieve frictionless and low-cost trading.

Due to the low accessibility of NFTs, there is often little liquidity even for blue-chip NFTs in current centralized markets. However, through NFT AMM, anyone can add liquidity on-chain and earn a certain trading fee.

SudoAMM is an NFT AMM protocol created by Sudoswap, consisting of many individual NFT liquidity pools, each managed by an LP who can control the pricing function curve, initial fees, incremental thresholds, and trading fee ratios.

Unlike the constant product algorithm curves of traditional AMMs, SudoAMM employs a joint pricing curve (allowing for the selection of any curve) to construct liquidity pools that facilitate NFT trading, mainly including linear curves (Linear Curve) and exponential curves (Exponential Curve). Recently, Sudoswap added another pricing curve called Concentrated XYK Curve, which allows users to control the depth and slippage of their liquidity pools by setting concentration parameters, thereby controlling the price range of the liquidity pool.

Granular

Granular aims to create a low gas NFT AMM that better assesses NFT value, having won third place in the NFT financialization hackathon initiated by 1kx network and Macro DAO.

Granular believes that NFTs in existing NFT AMM markets (like Sudoswap) are generally viewed as interchangeable, with prices being roughly the same and usually near the floor price. However, this brings some issues; intuitively, the value of NFTs in a collection is not the same, which can lead to the severe undervaluation of rare NFTs.

Therefore, in Granular, each NFT collection is set to have a "main pool." Whether trading or being an LP, users need to go to the same main pool, where listed NFTs will have different prices.

In reality, each "main pool" consists of multiple "sub-pools," divided according to the NFT collection's "desirability score." Lower-scoring sub-pools mainly contain underlying NFT assets, while higher-scoring sub-pools contain quality assets.

Moreover, each sub-pool has its own joint curve, and the number of sub-pools and the number of NFTs in each sub-pool vary by NFT collection; the higher the liquidity of the NFT collection, the more sub-pools there are.

SeaCows

SeaCows is an AI-driven hybrid NFT AMM protocol that supports any Web3 project in building its own decentralized NFT AMM market to provide instant NFT liquidity and increase trading. Compared to Sudoswap, SeaCows adds an AI-driven price oracle to comprehensively assess NFT value.

SeaCows believes that NFTs are different from ERC-20 Tokens, and commonly used joint curve pricing strategies do not take into account their uniqueness and non-fungibility. Therefore, an AI-based price assessment mechanism is needed to combine on-chain and off-chain data for specific liquidity pools to provide fair real-time quotes for NFTs.

In terms of specific working mechanisms, SeaCows' AI price oracle collects and aggregates metadata and related transaction history of an NFT collection, then cleans and processes this scraped data to train an algorithm for assessing NFT value. Next, the NFT collection is divided into 5 groups based on its rarity and utility.

When creating liquidity pools on-chain, different pricing parameters (i.e., initial price, pricing function, incremental thresholds, and fees) are set for each group, which can be adjusted by LPs. Once set, pools with different levels will be created.

Additionally, the core development team of SeaCows consists of NFT degens and gamers, so SeaCows is collaborating with GameFi projects to test its feasibility and practicality, helping the latter test and integrate point-to-pool NFT AMM gaming markets to increase in-game trading and strengthen the gaming economy. At the same time, players can also earn trading fees by becoming liquidity providers.

Currently, the Alpha test version of SeaCows has been launched, and the Beta version will be available by the end of September.

PikoSwap

Pikoswap is an on-chain NFT AMM where users can freely and flexibly trade NFTs and create their own NFT liquidity pools to earn trading fees.

Pikoswap also believes that NFTs in liquidity pools are collections of similar quality and price, suitable for a certain price range, but without special distinctions. To achieve pricing for NFTs in each pool, Pikoswap also adopts a joint curve pricing strategy: Linear Curve and Exponential Curve.

Additionally, Pikoswap sets 0 royalties and charges a 0.5% fee. Currently, the Pikoswap test version is about to be launched, and a platform Token (PIKO) will be introduced later.

From the disclosed information, the official Twitter was only launched this month, and the mechanism design of Pikoswap AMM is highly similar to Sudoswap, which can temporarily be seen as a copycat project of the latter.

Herculeswap

Herculeswap is also an NFT market with AMM, allowing NFT creators to publish their NFT series and add liquidity pools to them. At the same time, users can also create their own NFT liquidity pools to earn trading fees.

However, Herculeswap believes that the existing problems in the NFT AMM market are the volatility of LPs and the lack of initial funding for liquidity pools. Therefore, to protect investors and support true creators, NFT creators need to set a certain percentage of mint revenue to be locked in the liquidity pool to provide initial liquidity; if the project fails to mint, the mint fees will be refunded to investors.

Currently, the Herculeswap official website has not yet launched, and the official Twitter was launched in August this year.

Goat Swap

Goat Swap is an NFT AMM on Solana, founded by one of the co-founders of the Solana on-chain trading aggregator Jupiter Aggregator.

Through GOAT Swap, users can create liquidity pools to buy, sell, and trade NFTs. The most common liquidity pool in GOAT Swap is the NFT<>SOL pool, where any user holding the corresponding NFT in the liquidity pool can exchange it for SOL.

Currently, the Beta version of Goat Swap mainnet has been launched, and the platform charges a 1% trading fee. In terms of user experience, GOAT Swap is also a copycat project of Sudoswap, where users can set their own NFT prices and trading fee ratios when creating liquidity pools. However, GOAT Swap has not disclosed specific NFT pricing strategy curves.

Elixir

Elixir is another NFT AMM on Solana, primarily providing the purchase, sale, and trading of NFTs near the floor price of collectibles. Elixir aims to allocate market ownership to legitimate value creators, with the platform being jointly managed and owned by creators, collectors, and the community.

At the same time, Elixir offers lending, staking, and derivatives features for Nectar holders, with 777 Nectar being distributed for free. However, the official Discord is currently closed, and specific acquisition rules are yet to be known.

Additionally, when creators publish NFT series on Elixir, they also need to set a certain percentage of mint revenue to be locked in the liquidity pool to provide initial liquidity, and users creating liquidity pools must comply with the fee structure determined by Elixir.

hadeswap

hadeswap is also an NFT AMM on Solana, where users can create liquidity pools to buy, sell, and trade NFTs, currently supported by the recent popular Solana NFT project ABC (abracadabra).

ArraySwap

ArraySwap is an NFT AMM on BSC that has not yet officially launched.

NFT Liquidity Protocols

In addition to NFT AMMs, NFTs near the floor price in a collection can also be deposited into some liquidity protocols' vaults or liquidity pools to mint interchangeable ERC-20 Tokens, which can then be added to DEXs to indirectly obtain liquidity.

Moreover, liquidity pools can also be created for NFTs of the same price level, not limited to those near the floor. As long as there is sufficient supply, NFTs within a price level can also be considered interchangeable.

Thus, the emergence of liquidity protocols eliminates the need to find buyers for specific NFTs, instead opening a buyer pool to those who want to purchase any "same group of NFTs," providing faster liquidity times than ordinary market sales. NFT-LP protocols like NFTX and NFT20 are built on liquidity pools of similar "NFT asset groups."

NFTX

NFTX is a market and liquidity protocol aimed at facilitating NFT trading, allowing NFT collectors to deposit entire NFTs into a specific vault of NFTX to mint interchangeable ERC-20 vTokens.

These vTokens represent the value of the deposited NFTs, and each NFT in a vault comes from the same collection. At any time, the NFT collector can use these vTokens to randomly purchase an NFT asset from the vault or pay an additional fee to redeem a specific NFT from the same vault.

One feature supporting the NFTX model is that vTokens can establish ERC-20 corresponding liquidity pools on Uniswap and Sushiswap, such as the ETH - PUNK LP for the CryptoPunks series, allowing users to gain instant liquidity for NFTs using highly liquid vTokens.

Retail investors wanting to invest in CryptoPunks can also do so by purchasing PUNK. Additionally, collectors can stake their vTokens in liquidity pools, earning fee revenue whenever someone buys or sells an NFT.

NFT20 (MUSE DAO)

NFT20 is a decentralized NFT trading platform that allows individuals to trade, sell, and exchange NFTs. Similar to NFTX, NFT20 allows NFT holders to add their NFTs (like BAYC) to a liquidity pool, in return for which they receive 100 interchangeable ERC-20 Tokens from the specific liquidity pool.

These ERC-20 Tokens can be traded on DEXs like Uniswap or deposited as liquidity, as well as used to purchase other NFTs in the collection from the corresponding liquidity pool. Additionally, some NFT20 liquidity pools offer liquidity mining incentives, allowing users to earn NFT20's native Token (MUSE).

Notably, if an NFT holder believes their NFT is priced too high, they can choose to create a Dutch auction on the NFT20 asset page to achieve a higher ERC-20 Token price when selling the NFT.

In summary, after weighing the pros and cons, NFTX and NFT20 have played a certain demonstrative role in the design of liquidity mechanisms. However, the uniqueness and diversity of NFTs still pose challenges in finding liquidity.

For some rare NFTs, which often hold higher value, financialization protocols targeting floor NFTs can unlock more liquidity, but there remains much untapped value in finding liquidity solutions for rare NFTs.

Auctions

Auctions are a relatively good way to provide liquidity for rare NFTs, often bringing substantial returns to creators (e.g., rare NFTs like BAYC and CryptoPunk at Christie's and Sotheby's auctions), with the highly publicized bidding wars playing a significant role in pushing NFTs to market.

However, as a means of price discovery, the capital utilization efficiency of auctions is very low, even lower than direct trading in centralized markets, as it requires bidders to lock up funds, and the capital lock-up among multiple bidders often exceeds the final sale price of the asset.

Additionally, auctions typically require pre-negotiation with potential buyers or extensive marketing efforts to draw attention to the sale, which can take a considerable amount of time.

NFT Fragmentation Protocols

NFT fragmentation protocols are another way to deepen liquidity for rare NFTs, involving "splitting" NFTs into multiple parts and then converting them into interchangeable Tokens to obtain liquidity on DEXs.

This allows users to gain partial ownership of highly sought-after rare NFTs without incurring high costs, while increasing access to rare NFTs and building new communities.

Unicly

Unicly is a permissionless fragmentation protocol for combining, splitting, and trading NFTs. Users can create a Vault by locking an NFT collection (which can consist of NFTs from different series) in Unicly's smart contract and mint ERC-20 uTokens, which can then be added to Unicswap (a fork of Uniswap V2) for pricing and liquidity.

When the proportion of uToken holders reaches a certain threshold, they can vote to unlock the Vault, with this ratio set by the Vault creator at the start. Once unlocked, the NFTs in the Vault can be bid on by the highest bidder, and uToken holders can receive a portion of the ETH paid by the bidders.

Additionally, Unicly has released a governance Token (UNIC), and holders can earn xUNIC by locking UNIC, while xUNIC holders can receive 0.05% of the Unicly protocol's revenue. This revenue comes from the 0.3% trading fee charged to users for trading uTokens on Unicswap, with the remaining 0.25% going to the liquidity providers of uTokens.

Fractional (Tessera)

Fractional is another decentralized NFT fragmentation protocol that allows users to lock NFTs in Fractional's Vault to mint a certain number of ERC-20 Tokens, with the specific names, symbols, and floor prices of these Tokens set by the creators.

The creators then need to distribute these Tokens, and end users can purchase them directly on Uniswap. Token holders can vote to update the floor price for the NFT auction, and after sufficient voting and negotiation on the price, bidding for the NFT can begin. After the auction ends, holders can profit by exchanging their Tokens for ETH.

The difference between Fractional and liquidity protocols like NFTX and NFT20 is that once an NFT is deposited into Fractional's Vault, it will be auctioned without any revenue-generating mechanism, while NFTs stored on NFTX and NFT20 are locked in revenue-generating pools.

Overall, however, the method of providing liquidity through NFT fragmentation protocols still has certain limitations. It makes people more willing to trade parts of rare NFTs, increasing the difficulty of market-making based on the complete characteristics of rare NFTs, while introducing complexities in ownership and governance.

Moreover, fragmentation also reduces the composability of assets, making parts of rare NFTs often of little use outside the system.

Lending and Leasing

Lending and leasing are important economic activities in the financial sector, and for NFTs, whether floor or rare, both methods can further unlock liquidity and increase capital utilization efficiency.

NFT Lending

NFT lending platforms allow users to borrow liquidity assets by collateralizing their NFTs, improving the capital utilization efficiency of NFTs. In NFT lending protocols, there are mainly two mechanisms to facilitate NFT collateralized lending: peer-to-peer lending and pool-to-pool lending.

1) Peer-to-Peer Lending

In peer-to-peer lending protocols (such as NFTFi, TrustNFT, etc.), borrowers and lenders agree on loan terms (duration, loan-to-value ratio, and APR) in a peer-to-peer manner. The matching process is manual, requiring both parties to reach an agreement on the terms, and borrowers must approve loan offers, so obtaining liquidity may take a long time.

However, loan terms can be customized for each user without relying on price oracles, but require expertise for valuation.

2) Pool-to-Pool Lending

In contrast to peer-to-peer lending, pool-to-pool lending can provide instant liquidity. This NFT lending protocol (such as BendDAO, Drops, etc.) is responsible for the matching process and relies on price oracles to automate loan terms.

Therefore, for these protocols to function, oracle infrastructure and stable floor prices become crucial, which is why most protocols only accept blue-chip assets as collateral.

NFT Leasing

NFT leasing protocols allow users to rent out their NFTs in exchange for stable fees or future income, such as some gold farming guilds lending in-game NFT assets to new players in exchange for Tokens they earn in the game. This provides an additional source of liquidity for users who do not want to part with their assets but wish to earn income from idle NFTs.

Thus, NFT leasing is further divided into general NFT leasing protocols (such as reNFT, Rentable, etc.) and leasing platforms for vertical fields, such as some GameFi built-in asset leasing platforms and some metaverse virtual land leasing platforms.

However, due to the current lack of utility for NFTs in the market, the demand for renting mainstream NFT assets is generally low. Recently, the general NFT leasing protocol Rentable officially announced its closure, and the founder mentioned in summarizing lessons learned that "NFTs are different from ERC-20; a vertical NFT leasing custom solution should be established."

Conclusion

The emergence of NFTs as non-fungible Tokens has led to their inherent lack of liquidity compared to ERC-20 Tokens. The lack of liquidity brings two challenges: insufficient price discovery and low capital utilization, both of which further hinder NFTs from unlocking greater potential.

Therefore, this article explores some methods for providing liquidity for NFTs, focusing on NFT AMMs similar to Sudoswap. However, the development and experimentation of NFT financialization have only just begun, and the foundation for reliable NFT valuation models still needs to be established. As NFTs expand into broader economies and gain more applications, this will further help to determine the value of these assets more reasonably based on their usage.