Exploring NFT-native solutions: Infrastructure and opportunities for NFT MEV
The structure of the NFT market is very different from that of the FT market, and NFT MEV is also different.Written by: Alana Levin, Variant
Compiled by: Deep Tide TechFlow
TL;DR
The structure of the NFT market is significantly different from that of the FT market. In the NFT market, capital formation events (minting) occur more frequently, secondary trading volume is lower, there are challenges in bid liquidity, and there are many off-chain order books.
Due to these differences, NFT MEV is also distinct. In particular, there are fewer arbitrage opportunities, while more MEV is extracted during the minting process. We also identify several unique forms of MEV in the NFT market: scanning floor prices and relisting on bid walls (artificially creating high trading volume for arbitrage), trait sniping, and extraction from inactive listings.
Viewing the DeFi market as a more mature market and using it as a proxy for where NFTs might advance helps clarify the gaps that exist today and the areas of infrastructure that can address these challenges. These opportunities include MEV-aware minting solutions, more open pricing data, dynamic on-chain order books, experimenting with new auction styles, and providing additional communication channels for traders.
Currently, the flow of value around NFTs typically occurs at the time of initial minting, when trading or lending on the secondary market. Both forms of value flow may involve MEV, which refers to the economically inefficient costs extracted from users during on-chain transactions. How these MEV are handled may affect the business models and beneficiaries of market activity—from traders to markets, wallets, and creators.
However, MEV seems to be a little-known topic in the NFT space. I believe this is because the structure of the NFT market is quite different from that of DeFi. Importantly, these fundamental differences—including more primary activity, smaller token supply, and less secondary liquidity—affect the flow of value.
This article will attempt to elucidate some emerging MEV opportunities in the NFT market, how the constantly changing market dynamics affect these opportunities, and the infrastructure that can be considered to address these factors.
Current State of the NFT Market
Understanding the current structure of the NFT market is a useful foundation for identifying how MEV manifests within the market. The process begins with users minting NFTs, which I refer to as capital formation events, analogous to the airdrop or release of fungible tokens (by creating new assets on-chain). However, there are at least three aspects in which the differences between fungible and non-fungible markets manifest:
In non-fungible markets, capital formation events occur more frequently. This is because minting a new NFT in a non-fungible market is often seen as creating a new piece of art or collectible, both of which possess uniqueness and scarcity. As a result, creators and collectors tend to create and acquire as many NFT works as possible.
For non-fungible markets, the order of minting may be important, as minting serial numbers can represent a form of financial value, such as rarity attributes or identity symbols.
The supply of non-fungible collectibles is typically much smaller. A collection may mint only 10,000 NFTs, while fungible tokens often launch with a supply of 1 billion or more. This can impact liquidity in the secondary market.
When users decide they no longer want to hold their NFTs, they can sell them on markets (such as OpenSea, Blur, and many markets supported by Reservoir). These orders are typically listed on off-chain order books, where they wait until the order is fulfilled or canceled. For these off-chain order books, there are several touchpoints for actual on-chain activity: the first listing of an order (i.e., setting the listing approval), canceling an order, and fulfilling an order. Changing the listing price requires a signature from the seller but does not incur additional gas fees. There are also some order books that operate directly on-chain, such as Zora and Sudoswap.
In addition to primary markets and secondary trading, it is worth noting that there is an emerging NFT utility market. On-chain utility may involve staking NFTs for rewards, delegating participation in upcoming airdrops, destroying (burning) NFTs when used as game assets, and so on. However, to put "emerging" in the proper context: in February, trading volume in primary and secondary markets approached $2 billion, while borrowing volume in the NFT lending market was only a few hundred million dollars. Other utility markets beyond lending are even less mature. Therefore, minting and trading will remain the focus of this article.
What is NFT MEV?
I define MEV as any form of inefficiency within the market that causes transaction initiators (users, wallets, applications) to leak value to those below in the stack (searchers, block builders, validators). This is a broad definition, but being broad is helpful when considering different value capture and/or value redistribution opportunities. Common forms of MEV include arbitrage, sandwich attacks, and liquidations.
Arbitrage
Arbitrage and sandwiching typically require high trading volume and deep liquidity, as price differences are often small, and arbitrageurs want to enter and exit their positions quickly. The NFT market usually does not have these conditions. Additionally, there are liquidity challenges in the market: typically, there are no prepared buyers on the other side of each listing. This means that even if someone discovers an arbitrage opportunity, exiting (i.e., relisting and selling) may be risky.
Some NFT-native forms of arbitrage, along with the associated risks, are as follows:
Scanning and relisting floor prices for higher prices. Many traders claim to profit by exploiting bid walls that may be above the floor price. In this case, traders are almost artificially creating the high trading volume needed for arbitrage. The main risks involved in this type of arbitrage include high capital costs and inventory requirements.
Finding coincidences that have not yet been viewed as similar demand. For example, someone lists their CryptoPunk with red/blue glasses for 1 ETH, while others bid 2 ETH for any CryptoPunk with red/blue glasses. A searcher can intervene, calling Seaport's MATCH function to fulfill both orders and receive the difference as a tip (reward). This seems to me to be a low-risk arbitrage opportunity, although it is less frequent. Here, non-execution is the main risk faced by the searcher.
Trait sniping is a unique form of arbitrage within the NFT's "non-fungible" components. If someone sees an NFT with a specific trait trading at price X but knows that other NFTs with the same trait trade at price X+Y, they can buy and relist at a higher value. If the searcher pays a large amount of gas to ensure their bid is prioritized, MEV is realized. In this case, the searcher faces exit risk: there may not be a bid waiting on the other side of their listing. Therefore, the searcher must bear the risk of holding inventory for an unknown duration and accept the risk of long-term price fluctuations for the trait.
Sandwich Attacks
Currently, there seems to be little sandwiching in the NFT market. Part of the reason is that most NFTs do not dynamically reprice when available supply changes.
In fungible markets, large orders impact the market. For NFTs, buying 10% of the floor price NFTs does not directly change the pricing of other floor price NFTs.
NFTs are typically priced individually rather than aggregated. Notably, some dynamic pricing infrastructures (like the NFT automated market maker "Uniswap for NFTs" Sudoswap) are emerging. Sudoswap addresses the liquidity issue of NFTs by ensuring that there are at least some bids for pooled NFTs. The trade-off is that dynamic, automated pricing also expands the area for sandwich attacks.
Liquidation MEV
Another common form of MEV in lending markets is known as "liquidation MEV"—searchers profit by being the first to discover and capture liquidation fees. An increasing number of lending transactions are being built on-chain (for example, directly residing liquidation engines on protocols like Seaport), with a continuously declining price auction mechanism that triggers liquidations when prices cross the reserve collateral price. I imagine there will be a group of searchers dedicated to manipulating floor prices/specific NFT collateral prices so they can preemptively or control when NFTs are liquidated.
Other Types of NFTs
May include:
Congestion during minting. Popular mints can lead users to pay millions of dollars in gas fees: this is value created by the NFT project but ultimately extracted by validators.
Using bots during minting. Searchers can discover the first mint transaction in the mempool, check the token supply to be minted, and pre-bid on part or all of the remaining mint.
Accidentally leaving untraded orders (often referred to as inactive listings). Because canceling orders incurs fees, users sometimes simply transfer NFTs to a new wallet to end the order. The tricky part is that this technically retains the original order—if that person transfers the NFT back to the original wallet, the order will reappear. By then, the floor price may have risen above the original listing, allowing savvy third parties to seize undervalued NFTs. MEV arises because searchers may bribe validators with high gas fees to ensure their bids on that listing are prioritized.
Arbitrage related to NFT leasing. We see a trend of decoupling NFT rights/utilities from the assets themselves. In other words, an Airbnb for NFTs is emerging: owning the asset (house) but allowing others to pay fees to temporarily use/enjoy the benefits typically enjoyed by the owner. This fluid delegation is particularly useful for arbitrage related to airdrops—acquiring rights to a large number of NFTs (rather than attempting to buy the NFTs themselves) in anticipation of an airdrop requires less capital, limits sharp increases in floor prices, and provides opportunities to capture significant portions of airdrop supply. If we start to see higher qualification requirements for airdrops (as we have already seen in fungible markets), then those holding these NFTs may have asymmetric information about the potential scale of their claimable airdrop.
Finally, there may be more forms of NFT MEV that I have not mentioned, including spoofing, inefficiencies related to burn and redemption functions, and pre-bidding for minting (just to name a few). This list is intended to be creative and inspiring, hoping to spark ideas/projects related to reducing or capturing NFT MEV opportunities.
Opportunities for Infrastructure
Based on the current state of the market and the specific areas where MEV exists, the following may provide interesting opportunities to build NFT-native infrastructure.
MEV-aware minting solutions. In particular, auctions built for NFTs can help projects capture more of the value they are creating: allowing users to bid for mint access and order can provide a way to help projects price differentiate while alleviating high gas prices. If the orders themselves occur off-chain or are pre-minted, projects can spread the minting process over several days or choose times with less on-chain activity.
Enhanced pricing infrastructure. This could take various forms—better data showing how traits are priced (for example, helping searchers identify trait sniping opportunities), dynamic pricing mechanisms (like Sudoswap) that help aggregate rather than individually price NFTs, continuous auctions to improve price discovery, or other forms.
Building infrastructure to reduce exit (liquidity) risk. I generally believe that NFT pricing is difficult, leading to fewer willing bidders. Bargaining mechanisms could be one way to help. If a user lists their NFT for 2 ETH, and a buyer bids 1 ETH, there may be some intermediate price. Having negotiation channels can increase overall liquidity while advancing a better understanding of how to price NFTs. In fact, there may be significant overlap between this category and the aforementioned (pricing infrastructure).
Increasingly efficient fulfillment protocols and tools. As orders become more complex (for example, sellers start listing multiple NFTs in a given order), more active traders and/or market makers entering the space can improve the trading experience by finding effective ways to match or fill orders. Seaport and Reservoir are great examples of complementary infrastructure in this category: both help share liquidity between markets, enabling more effective discovery and matching in environments with differing preferences. Relatedly, the surface area for identifying demand coincidences will continue to grow, providing opportunities to build preference-aware matching solutions specifically targeting partial fills for order networks. I also envision better ways to cater to different types of traders: professional traders may want near-instant transfers, but more retail-oriented consumers may be willing to accept bids that are technically completed/transferred several hours later when gas costs are lower.
Conclusion
Looking ahead, I firmly believe we will see more developments around NFTs. The current situation is that most NFTs are heterogeneous, making them difficult to serve as substitutes. Shared traits or floor price tokens are closer to substitutes, but consumer preferences may still differ.
In contrast, NFTs as venue passes for golf tournaments—where heterogeneity may exist due to certain traits (like dates) causing preference differences—are, overall, approximate substitutes, as consumers will distinguish tickets on a given day (assuming all tickets provide equal access to the event).
As the spectrum evolves, NFTs are beginning to represent a variety of items from on-chain art to tickets, affiliate links, IP licenses, property deeds, and more, I think we will see more MEV emerge.
Overall, it feels like we are still in the early stages of NFTs.
I enjoy thinking about NFTs because I believe they are an excellent way to bring exogenous capital into the crypto ecosystem, and I think the design space is wide open. But in any early-stage market, there will always be some inefficiencies.
I hope exploring how MEV exists throughout the market—and what opportunities this exploration provides for building a more enjoyable user experience—will help pave the way for broader adoption.
