On July 23, 2022, Scott, founder of NFT aggregation platform Genie and head of Uniswap NFT products, said on Twitter that Uniswap will implement NFT transactions by integrating sudoswap.
The background to this happening is:
- OpenSea monopolizes the NFT trading market, Looksrare, and the competitiveness of x2y2 has reached a staged bottleneck
- Immediate sale at fair value has to endure large slippage, royalties and other losses
- Capital inefficiency, the market lacks NFT liquidity solutions
At present, mainstream NFT exchanges such as OpenSea, X2Y2, and LooksRare all use the order book model to trade. Sellers place their NFTs on the trading platform in the form of orders for sale, and buyers buy according to their own choices; buyers can also buy in advance When an offer is posted for NFT, the seller can choose to accept the offer. OpenSea has accumulated a large number of users and artists because of its first-mover advantage. The vampire attack in a short period of time has taken away part of the market share but still has not shaken its dominance.
We have experienced the evolution of the economic model of homogeneous tokens such as tokens, and we will know that in the early days of the industry, except for some POS public chain native tokens, most tokens did not have a staking model. DeFi Summer has liquidity mining and lending After the market, the economic system around the token began to build. However, the value of NFT in this regard has not been released. The current trading mechanism and characteristics make it difficult for its holders to capture value other than NFT itself. The corresponding problems are low capital efficiency and poor liquidity.
As the leader of DeFi Summer, Uniswap began to enter the NFT liquidity market after acquiring Genie. Let's take a look at how this integrated sudoswap can solve the NFT liquidity problem.
First of all, we need to understand that sudoswap is roughly divided into two stages: OTC and AMM
OTC - sudoswap v1
Sudoswap was originally an over-the-counter trading platform (OTC) released by 0xmons in April 2021. It has the following characteristics:
- Built on the 0x protocol
- Customized peer-to-peer transaction form
- Support transactions of any combination of ERC20, ERC721, ERC1155 and other tokens
- No transaction fees and royalties
The point-to-point transaction form customized by sudoswap is a flexible transaction order, which supports selecting the specified counterparty address and expiration date, and then click "create swap" to generate a transaction link. When you share this link with your counterparty , the other party can enter the transaction through the link. Of course, the other party can also link their wallet to sudoswap and see the transaction on the platform.
AMM - sudoswap v69
sudoswap AMM is a gas-minimized NFT AMM solution, also known as the NFT version of Uniswap V3, which consists of many separate NFT pools. Used to facilitate the swap of NFTs (ERC721s) to tokens (ETH or ERC20) using a customizable bonding curve. Liquidity Providers (LP) can provide NFT centralized liquidity similar to the concept of Uniswap V3: deposit in unilateral buying or selling pools, or provide buyers and sellers and set spreads to charge fees. Traders can choose a pool to trade or trade across multiple pools with the help of an aggregator.
LSSVM
At first, the founder 0xmons defined this mechanism as LSSVM. The basic unit of the protocol, the NFT pool, is called LSSVM Pair, which can hold NFTs, tokens, or both. Then, the end user interacts with the LSSVM Router, the aggregator, to exchange across multiple pools to obtain optimal transaction results.
Each pool is managed by a single address, which can be divided into three categories according to the nature of the pool:
- buy-only, only provide ETH to the pool, ready to provide offers to buy NFTs with their ETH
- sell-only Only sell, only provide NFT to the pool, always ready to provide an offer to sell its NFT for ETH
- Both buy and sell, provide ETH and NFT to the pool at the same time, the pool will provide quotations for both buying and selling, and can set handling fees as income.
Quote - BondingCurve
To determine pricing, each NFT pool is associated with a specific bonding curve type and parameters set by the LP (Liquidity Provider). There are currently three options:
- Fixed Curve ConstantCurve
- Linear Curve LinearCurve
- Exponential Curve ExponentialCurve
The linear and exponential curves are controlled by a variable delta as a parameter, the delta is set by the LP that created the pool.
1/ linear curve
Linear curves perform addition operations to update prices. If the pool sells an NFT and receives ETH, the next price it quotes to sell an NFT will automatically be adjusted upwards by a delta amount of ETH. Conversely, if the pool buys an NFT and sells ETH, its next offer to buy an NFT will automatically be adjusted downward by a delta amount of ETH.
For example, the example in the figure below is:
- Select buy-only pool
- Linear Curve
- The initial price is set to 1 ETH
- delta is set to 0.1 ETH
When the pool successfully purchases an NFT with 1 ETH, the next purchase price will be decremented by delta=0.1: 0.9, 0.8, 0.7, 0.6….
2/ Exponential curve
Exponential curves operate in the same logic as linear curves, but the increment and decrement of delta will be calculated in %. For example, the following picture:
- Select sell-only pool
- Exponential Curve
- The initial price is set to 1 ETH
- delta is set to 10%
When the pool successfully sells an NFT for 1 ETH, the next selling price will increase by delta=10%: 1.1, 1.21, 1.331….
question
1/ The pool is too fragmented
This is the first problem that may arise, especially when users and liquidity are relatively small, because each LP manages at least one pool, so the same NFT series can have many different pools. It somewhat decentralizes liquidity which is already not good enough, worst case only 1 NFT per LSSVM pool, which basically relegates to an on-chain order book. Here, some NFT whales or teams may be needed to manage several large LSSVM pools and become the main early market makers. Just like Uniswap has also been exposed that the liquidity of mainstream assets such as ETH and USDT is still mostly provided by whales and professional market makers.
2/ The rarity distinction and pricing issues are still not resolved
Like most NFT liquidity solutions on the market, although sudoswap can set range pricing and flexibly set parameters for NFT, it still cannot solve the distinction and pricing of NFT with high rarity or special nature in the field of NFT artwork The problem is that the value of highly rare works of art is often unique, and usually cannot be priced mathematically.
Is it necessary for NFT to solve the liquidity problem?
At present, there have been many attempts on the issue of NFT liquidity in the market. The problem faced by most protocols is that they cannot distinguish and price the important factor of rarity. Rarity can be said to be the most prominent indicator of the non-homogeneous characteristics of NFT , This has a lot to do with the current NFT product environment. At present, the products in the NFT market are mainly works of art. Whether it is PFP avatars or generated art creations, works of art inherently pay more attention to rarity and particularity, just like The value of Mona Lisa in everyone's heart is different.
So we want to figure out whether it is necessary for NFT to solve the problem of liquidity. First, let’s split the roles and needs of the market:
1/ artwork
From the concept of collection, artwork should be priced independently on each item, and it is not suitable to be traded in a liquidity pool, and its own value is not mainly reflected in liquidity, you Have you ever seen any artist package his works and sell them wholesale? Just like every painting of Van Gogh represents a different meaning and value. Therefore, starting from this demand, artworks should exist in the form of low liquidity.
2/ General-purpose substances or props
The market in this field has not been fully explored and discovered at present. Starting from the concept of Metaverse, all items and props in Metaverse should be cast in the form of NFT. The simplest example is similar to game props. Game props require NFT non-homogeneity The characteristics of specialization, but the demand for rarity is not high. Usually, the dimensions that can be priced are relatively certain. For example, props can be distinguished by dimensions such as bronze, silver, and gold. By pricing for each dimension, items and props of each category can be priced in batches. This also reflects "non-homogeneity. " "is not exactly equal to "rarity". Its deeper characteristics are independent ownership and irreplaceability, and irreplaceability cannot be fully reflected by rarity.
3/ The current NFT artwork "hype"
It can be said that most of the current NFT art market is dominated by PFP avatars. This type of NFT is still positioned as a kind of art in essence, but its market performance is gradually approaching between 1/work of art and 2/universal material. According to statistics , The floor transaction volume and amount of the PFP market are much higher than the transaction data of high rarity. For those NFTs with high rarity, the number of transactions will decrease significantly as the rarity increases. In other words, the mentality of this "hype" is that investing in the floor price is investing in the entire series, which is moving towards the characteristics of general-purpose materials.
In the end, we came to the conclusion that NFT needs to adapt corresponding liquidity solutions according to different demand scenarios. The existing OpenSea-based trading solutions are still applicable to NFT transactions in the form of pure artworks, and the closer to general-purpose material The NFT type of NFT needs a liquidity solution similar to a liquidity pool.
The reason why the perfect solution cannot be found at present may be more of a problem with the market form. If the current NFT market is split into different scenarios according to the needs, and the type of NFT assets matches the needs solved by the protocol, it may be better. To adapt to this "acclimatization" phenomenon. As the boundaries and positioning of market products become more and more clear, the liquidity agreement of NFT will gradually be layered.