MetaFi: Unlocking NFT Liquidity
Intro
NFT projects today exist solely as a creative product, attempting to capture their slice of the collective attention pie. As we know, attention is the most scarce asset, and every project that manages to gain even a micro portion of your attention is actively diminishing the attention you give to a different source. Attention=Value.
However, attention has a ceiling if sufficient liquidity does not exist. Maximum attention is achieved through an increasing number of participants, large and small, entering the market. A highly liquid environment unlocks a new weight class of players — whales. Additionally, advanced participants have limitations to speculate and provide liquidity in illiquid markets (don’t want to be the last one out the door). While attention is scarce, capital is abundant. For the NFT market to grow as a whole, it must build out the necessary infrastructure to access this capital — “liquid bags are gud bags’’. This will only grow the collective value pie as Attention x Liquidity=Value². Quick mafs!
Important to note that the evolution of NFTs will include a much broader scope of digital objects outside of art and PFPs. While in-game objects (skins, weapons, pets etc.) appear like an obvious next step, the possibilities are endless on what the market will deem useful as NFTs.
Abacus is building an appraisal mechanism for NFTs that uses optimistic proof-of-stake to create “spot pools”. Anyone can create a pool for an NFT(s) but the owner of the NFT must turn on emissions (the NFT owner remains in full custody of the NFT at all times). Traders speculate on the value of the NFT by providing liquidity in tranches (0–1E, 1–2E, etc.). The owner of the NFT can close the pool at any time, in which a 48 hour auction ensues. If auction sale>pool price, the leftover value is distributed amongst appraisers. If auction sale<pool price, the upper bound tranche appraisers are slashed. The mechanism is considered “optimistic” because Abacus assumes the initial speculation is correct, and “Proof of Stake” because it slashes users if their initial speculation is incorrect. Appraisers are incentivized to provide liquidity as they receive a portion of emissions which can be purchased and converted into the Abacus native token (ABC). If you provide at the highest available tranche, you get a higher rate of emissions (as it is the riskiest).
One glaring use case of Abacus is lending!
Imagine Alice wants to secure a loan against her Pudgy Penguin, so she creates a spot pool. Andy & Bob know the floor of Pengs is 3 ETH, so they both add 1.4ETH to the pool (since they think if the Penguin goes to auction, it will most likely sell for >2.8ETH). Now Alice can instantly use this as collateral for a loan with a Loan-to-Value ratio of 93%! Lender has sufficient collateral, Alice got her loan, and Andy/Bob are earning ABC tokens!
There are many other use cases that Abacus can serve by offering deep liquidity in a single protocol for market makers, leverage platforms to tap into, as well as being a liquidity backstop for any platform as Abacus spot pools basically offer open bids to any holders.
Abacus also enables bribes to boost the incentive for traders to buy into a pool. There are two types of bribes: General & Concentrated. General bribes are offered on a per epoch basis, while Concentrated bribes are also offered on a tranche basis. This enables incentivization at the pool and price level.
Guzzolene is aiming to accumulate ABC tokens mainly by bootstrapping liquidity into Abacus spot pools with bonding and staking, essentially operating as a Liquidity-as-a-service provider. With a significant holding of ABC, they will be able to determine which NFT collections and spot pools provide boosted ABC rewards, aka “gauge-weighting” (sound familiar?).
FloorDAO is a decentralized NFT market-making protocol that focuses on owning and leveraging NFTs to generate yield. Currently, they use the all-too-familiar bond and rebase mechanism, but have plans to transition to a veToken model. FloorDAO lets users bond for certain NFTs in exchange for discounted FLOOR tokens. FloorDAO also sweeps the floor liquidity of a given NFT collection that is determined and voted on by the holders of gFLOOR tokens. After sweeping, FloorDAO deposits the NFTs into an NFTX vault. Once in the vault, they are able to earn fees from the NFTX vault as well as fees from the underlying Sushi pool. NFTX is now transitioning to Univ3 where the fees are 1% — a 4x increase from Sushi’s .25% fees. Recently, FloorDAO deployed 25 Miladys to Sudoswap, with plans for further integration. The Sudoswap integration will be similar to NFTX, where they can start a pool with their own custom curve and collect fees as well. FloorDAO also supports a Euler market for borrowing and covered calls.
Hidden Hand & Bribes
Hidden Hand (HH) is a generalized bribe marketplace for holders of veTokens incubated by the Redacted Cartel. The initial goal for Hidden Hand was to allow bribers and holders of traditional defi products to have an efficient place to facilitate bribes. However, they quickly found PMF with their newest market, FloorDAO. HH enabled holders of $gFLOOR to be bribed for what collections to vote for. Immediately HH saw a 8x increase in volume with the integration of FloorDAO. Hidden Hand realized the importance of NFT financialization with bribes and is opening up their next market around Abacus/Guzzolene. Abacus builds out bribes natively into the protocol, enabling them at the intra-pool level for individual spot creators/owners and at the macro level for ABC holders.
Bribes have shown their effectiveness in defi and are now slowly making their way into NFTs. Once Hidden Hand enables permissionless markets, anyone will be able to create their own bribe marketplace.
Sudoswap is an NFT AMM that enables custom curves for individual pools, as well as blanket bids/asks. Sudoswap offers .5% fees on all trades, markedly lower than other NFT marketplace solutions. This low fee and blanket order functionality entices market makers to deploy strategies on Sudoswap. This will quickly drive volume to the platform, as well as deepen the liquidity within all pools for greater efficiency. Sudoswap will also be integrating with Genie and Gem. Theoretically, if Sudo is offering the most competitive prices, Gem/Genie will programmatically route liquidity. These integrations are extremely important as it means Sudo doesn’t have to fight for user acquisition if projects like FloorDAO can bootstrap liquidity and Gem/Genie auto routes liquidity.
Blur is the first real-time trading platform for NFTs. Blur can be analogized to a Gem x Looks crossover, with a focus on capturing advanced and more active NFT traders. Blur supports bulk listing and delisting, real time listings, and portfolio management. The main differentiator between Blur and existing NFT marketplaces is the real time listing. This allows for traders to have instant metadata reveals, and live price feeds to better inform traders decision making. Instant metadata reveals are important in gaining an edge on a highly anticipated drop where traders are looking to snipe specific NFTs right at reveal.
Protecc aims to be a dedicated ecosystem partner and market maker for NFTs (Protecc floors, get it). They have announced they will be partnering with Abacus and Blur. A Sudoswap integration appears to be in the works, and potentially others. While very little has been released about this project, we can do a little speculating.
Imagine an NFT project that is lacking liquidity around its collection but has the treasury to deploy capital alongside Protecc to market make its collection. Protecc most likely will charge some small fee to these projects, but their service will be far more valuable. Remember, attention x liquidity = Value². The inefficiencies in the NFT market that lead to such illiquidity offer the opportunity for a “delta-neutral” market marker to provide significant value to NFT collections while capturing substantial yield.
Interop
If it wasn’t already clear, there are many synergies between these projects. While there are many other projects involved in this “MetaFi” stack, I tried to highlight a few projects that demonstrate how these partnerships deepen liquidity for the entire NFT ecosystem. A couple examples of this would be:
FloorDAO bootstrapping Sudo pools -> Gem/Genie route liquidity through Sudo -> Increased demand for FloorDAO collections thus increasing Hidden Hand bribes as well as increasing Sudo volume
Or,
Guzzolene bootstraps Abacus pools -> Protecc Market-Makes these pools or deploy their own -> Guzzolene and Protecc collect ABC-> Abacus volume increases
There are countless ways these partnerships can develop and many projects building within this stack that were not mentioned here. As users, all of these integrations are a best case scenario. As liquidity will become less fragmented, holistically prices should become more efficient as well.
Counter
Some have pushed back on the idea that NFT collections shouldn’t be financialized as it ruins the integrity of the collection.
While intuitively these views make sense, NFT traders and collectors have already proven that they value the optionality that financialization products offer. See no further than the recent volume on NFTfi. While the ethos of this sector is up for debate, it is still early and unclear how NFTs evolve over the next few years. The various use cases are yet to be explored, and while you may think that the financialization of these collections are foolish today, that sentiment may not hold true in 2 years’ time. I do not have the creative vision nor foresight to guess which digital/physical things will find PMF as NFTs, but the financialization of everything has been a multi decade trend in the traditional arena that has only been accelerated by the internet. With that being said, I am excited for Loom’s counter thesis.
Summary
The financialization of NFTs is very much in its early stages — teams are building out novel mechanisms that are not analogous to the infrastructure in the traditional economy. This is a good thing, the products that have found success in crypto thus far are not tradfi look-alikes, but rather, crypto native innovations. Excited to watch this space develop, and it feels as though “MetaFi” is due for its own version of defi summer.
