Open auctions versus AMMs
New research makes the case that NFT marketplaces would be better served by using AMMs (in which price is determined by bonding curves), in the same way that fungible tokens do, rather than the traditional way of open auctions.
Unlike with fungible tokens, where liquidity pools and dex aggregators allow for extremely efficient capital allocation and transfer, the ways in which NFTs are traded opens the door to greater price swings, less consistent liquidity, and huge premia on particular NFTs, depending on their rarity.
OpenSea, the leading NFT marketplace, pioneered the open auction model by which most NFTs are traded today. This model works particularly well for 10k NFT collections, since these reflect large communities and the user interface is fairly straightforward.
However, there are limitations to this model, particularly when it comes to the limits on the potential of interoperability. NFTX is a project that is focused on making it easier for people to invest in NFTs through fractionalisation and by managing tokens that track floor price. By tracking a lot of blue chip NFT projects based on their floor price they can create a more liquid and tradeable market for those who are interested in speculating without having to contend with the innate liquidity constraints on NFTs.
Nevertheless, there are also limits to this approach. Volatility on NFT collections in their floor price and the resulting high degrees of slippage means that NFTX tokens aren’t brilliant tracking floor price efficiently, and can’t handle large amounts of liquidity. This was one of the reasons that PieDAO chose to remove NFTX’s tokens from their Metaverse and NFT Index, PLAY.
A new model for NFT marketplaces
SudoSwap is working on a new model for this, that is focused on concentrating liquidity in NFTs, and it appears to be working – despite many confusing the Sudoswap website with a phishing website.
The planned offering from Sudoswap is similar to the updates in Uniswap V3, in that the liquidity provision process is far more customisable: liquidity providers can choose a custom range within which they agree to provide liquidity for the pool. This means that if someone is erroneously trading an NFT significantly below floor price there is no harm caused to the LPs as the risk of impermanent loss is mitigated.
Moreover, Sudoswap allows for liquidity providers to adjust the fees on buys and sells. This is significant because it means that providing liquidity in such a way is not prone to dramatically decreasing returns since the royalty fees on NFT collections can be further mitigated.
The hope is that this will mean that NFT prices can be traded more quickly, with less slippage and at a price that is closer to the fair market value.
Migrating to Sudo
All of this comes after the news that Uniswap itself will be implementing Sudo as part of their NFT offering. Some think that the collaboration could be problematic for Opensea, who have already been facing rising levels of competition thanks to companies like LooksRare. Competition from Sudo introduces a new element into the NFT markets, in that they are innovating an entirely different form of speculating on them. Nobody can be certain the extent to which this will venture will be fruitful, and it will depend largely on the community, UI and UX as well as the underlying technology.
At the moment, Sudo is encouraging their community, and the NFT community at large, to migrate NFTs to the Sudo platform.
Intriguingly, there is currently not token for the Sudo project, which has led further speculation that those who do migrate their NFTs to the platform will be eligible for an airdrop.
Published By : B2C