Liquidity is a term in the securities market. Liquidity refers to the efficiency with which an asset can be converted into ready cash without affecting its market price. The most liquid asset is cash itself.
Now let’s try to understand NFTs from a liquidity perspective:
NFTs are blockchain assets in the form of non-fungible tokens, NFTs typically represent products, artwork, music, or any other Crypto identity that the creator has decided to put on the blockchain. Their unit of exchange is the token.
Therefore, as a buyer or investor, a person buying an NFT differs from a traditional retail investor in the following sense. Instead of buying shares that represent a percentage of ownership in an off-chain company, they buy tokens that represent a percentage of ownership of an on-chain product, artwork, game, or music.
But NFTs are not just tokens. They have elements of community and culture intertwined. It is the community that creates value or scarcity for NFTs (or any asset). At the same time, the concept of ownership is a cultural statement and a driver of wealth accumulation.
Past transaction data is an important factor in measuring the value of an NFT, but a well-rounded buyer will consider many other factors, such as liquidity compared to other similar products, known as relative liquidity. the reason is simple. A higher number of transactions represents higher liquidity to a certain extent.
Lack of liquidity is probably the biggest concern for most investors, so much so that some investors see NFTs as a riskier investment than most altcoins. Also, as the history of NFTs shows, very few collectibles and works can stand the test of time, and unfortunately, most works lose their value within a few months.
Have you ever wanted to buy NFTs, but gave up because they lack the high yield or liquidity in DeFi?
So far, the NFT market has relied heavily on matching buyers and sellers on centralized marketplaces like OpenSea, with sellers heavily pressing floor prices for instant sales, and buyers paying a premium on the spread, which makes Neither side is overly profitable.
Fees for this trading activity flow back to the controllers behind the exchange, rather than to the users who provide highly valuable liquidity and trading volume.
What is FloorDAO
The world’s first decentralized NFT market maker:
At the beginning of the game, FloorDAO will “sweep” (buy) the blue-chip NFT projects voted by the community. FloorDAO will buy NFTs at the lowest price of these projects. At the same time, FloorDAO imitates OlympusDAO’s POL (Protocol Owned Liquidity) system. This will give these NFT projects deep liquidity, allowing people to trade NFT assets instantly. Market transaction fees will be returned to the FloorDAO fund.
FloorDAO’s vision is simple – to bridge the gap between DeFi and NFTs and create new yield strategies and use cases.
To this end, FloorDAO will disrupt the way the NFT market currently works by stepping in as the largest decentralized NFTX market maker and provide NFT holders with deeper (and instant) liquidity, compatibility for DeFi and other use cases sex.
How to solve the liquidity problem?
In order to successfully bring an illiquid NFT to market, the first step is to make it liquid. For this part of the mechanism, FloorDAO uses NFTX to turn ERC721/1155 “non-fungible (illiquid) tokens into homogenized (liquid) ERC20s.
When it comes to NFT collections with thousands of items (CryptoPunks, Bored Apes, Doodles, Azuki, etc.), the most fungibility and liquidity are found in collections – most notably “floor” (lowest value) items.
By bringing together flooring items from a collection, a set of interchangeable assets with a single flooring price can be created.
Let’s take a look at NFTX first:
“NFTX is a marketplace and liquidity protocol that facilitates the buying and selling of NFTs.”
Collectors can deposit entire NFTs into the NFTX vault and mint fungible tokens (vTokens) that represent the value of the NFT. At any time, collectors can use their vTokens to randomly purchase assets in the vault. Alternatively, individuals can redeem specific tokens from the same vault by paying an additional fee.
A feature of NFTX’s model implementation is that users can obtain instant liquidity of NFTs with high vToken liquidity. For example, BAYC owners can instantly deposit their PUNK into the NFTX vault to receive PUNKvTokens. However, instead of staking PUNKvTokens, owners can sell tokens on a decentralized exchange like SushiSwap. If liquidity is poor, NFT owners may sell NFTs at lower prices than exchanges like OpenSea, however, the ability to get instant liquidity is often worth the price reduction.
This is exactly how marketplaces like NFTX work, allowing fungible ERC20 tokens to be minted from NFTs, diversifying projects and unlocking instant liquidity.
This process produces PUNK and other — ERC20 tokens that will be at the heart of FloorDAO’s treasury and yield strategy.
Decentralized market maker
These ERC20 tokens can be used in AMMs like Uniswap and Sushi in exactly the same way someone might exchange or provide liquidity for AAVE or OHM.
In the case of NFTX, transaction fees from the market do not flow back to the creators of the platform, but to those who provide liquidity (i.e. PUNK-ETH). This incentivizes more liquidity additions, resulting in more trading volume (lower slippage and more choice) and more rewards for liquidity providers.
Yields for NFTX market making have always been high – annual yields can be as high as several hundred percent. But the decentralized exchange of NFTs has not been well understood and utilized – NFTX, with a daily transaction volume of hundreds of ETH, compared to tens of thousands of ETH in a centralized market such as OpenSea.
FloorDAO operation mode
Above we discussed using a decentralized NFTX marketplace to earn transaction fees, but how will FloorDAO start acquiring assets?
FloorDAO sees an opportunity to acquire a large percentage of blue-chip shares for its treasury. These items will be deployed to a decentralized NFT marketplace (starting with NFTX) as liquidity and inventory to earn perpetual transaction fees.
FloorDAO will use the bonding mechanism of Olympus V2 to distribute discounted FLOOR tokens in exchange for PUNK and PUNK-ETH liquidity.
FloorDAO will also use the rebase mechanism of Olympus V2 to distribute protocol rewards based on the growth of the treasury. These rewards can come from NFTX fees earned by the treasury. Not only does this make the pattern more sustainable than others, it’s also scalable.
FloorDAO is a light fork of the Olympus V2 contract. This means that two core mechanisms designed by Olympus will be used as part of our protocol – bonding and rebase.
Bonds are an efficient way to raise capital through additional issuances for projects with clear revenue opportunities. New bonds can be created for specific assets (like $PUNK), which the market will bring to the treasury. In a related case, the team sold $FLOOR (FloorDAO’s native token) at a discount to obtain strategic NFT assets bound in the protocol.
Rebasing is a mechanism to reward collateralized tokens with new tokens, Rebasing ensures that $FLOOR holders are incentivized to work with FloorDAO to “capture” the yield generated, as well as the potential treasury asset appreciation.
APY is an important number, if it is too high, users run the risk of runaway inflation, far exceeding Treasury yields; too low, and $FLOOR holders will look elsewhere for yield, so the APY formulated is An important balancing act.
Before reading on, let me summarize.
bond will mint new $FLOOR as a way to acquire strategic NFT assets, which in turn are used to generate yield.
Rebasing will mint new FLOORs to reward policyholders with yields and represent growth in treasury assets.
Both mechanisms will increase the supply of $FLOOR in circulation. As long as our strategy produces sufficiently high yields, the growth of treasury assets will outpace inflation.
If FloorDAO is successful, it will eventually have a meaningful place in various NFT collections by way of NFTX vault tokens. This brings up the possibility of FloorDAO becoming an NFT governance giant. While the vault tokens that FloorDAO will have are not direct NFTs, they do represent a “direct mapping” of those NFTs.
The most practical path is for NFT DAOs to adopt NFTX vault tokens directly in their governance process. Therefore, owning gFLOOR or veFLOOR tokens will provide a share of power over all governance decisions that hold NFT collections in the protocol.