What are NFT Automatic Market Makers (AMMs)
Decentralized automatic market makers (AMMs) are not an unfamiliar concept if you’ve spent any amount of time trading crypto. However, they have been making waves in recent weeks as more and more are popping up to serve the NFT space. In a sense, some are now trying to treat our non-fungible tokens a lot more like their fungible counterparts. In this blog post, we will take a look at what AMMs are and how they work. We will also discuss the implications of AMMs for end users.
One of the larger challenges facing NFTs is liquidity. Liquidity is the ability of an asset to be bought or sold without affecting the price ‘too much’. For example, let’s say that you own one Bitcoin (BTC) and you want to sell it for US dollars (USD). If there is high liquidity in the BTC/USD market, you should be able to find a buyer relatively easily and at a price very close to the current market price of BTC. On the other hand, if there is low liquidity in the BTC/USD market, it may take some time to find a buyer and you may have to sell your BTC at a significantly lower price than the current market price.
NFTs are relatively illiquid items — meaning it’s not easy to sell your NFT for its presumed market value quickly. Ultimately leaving many traders with the only option of undercutting the floor until a buyer is found for instant liquidity. Optically, floor undercutting has some unintended consequences within communities from a sentiment point of view. Users judge low-floor prices as a reflection of the success of the project. Low floor prices can create uncertainty and lead to more speculative floor undercutting, which can inevitably send a project to zero. NFT AMMs aim to solve the illiquidity issues around NFTs.
How do NFT AMMs Work?
NFT automated market makers are decentralized exchanges that pool liquidity from users enabling them to trade and swap NFTs instantly. Much like their traditional DeFi counterparts, users can create buy & sell pools at set fees of their NFTs. This allows liquidity providers the option to yield farm and DCA (dollar cost average) in and out of collections at scale. AMMs create a friendly UX for whales who are often left having to list their NFTs one at a time in order to bulk list on a bonding curve.
What does this all mean for the little guy?
Now you don’t have to spend your time undercutting the floor of collections. You can simply go to an AMM and swap your NFT for another floor NFT or instantly sell it. This can help the true price discovery of a collection and solves the need for instant liquidity.
In simpler terms, you can think of an AMM like your local Pawn shop. You sell your used/new item to the pawn shop (the pool) the pawn shop relists your items for other prospective buyers. The liquidity of the shop is derived from the ongoing buying/selling that takes place at their store (pool).
Let’s take a look at some of the existing NFT AMMs out on the market.
Ethereum
SudoSwap — The sudoswap AMM — or just sudoswap for short — is a minimal, gas-efficient automated market maker (AMM) protocol that facilitates NFT-to-token swaps (and vice versa) using customizable bonding curves. Sudoswap supports ERC721 NFTs, as well as all ETH and ERC20 tokens.
Benefits
- Minimal fees 0.5%
- Fully on chain
- Decentralized
- NFT & ERC20 Token support
NFTx — NFTX is a platform for creating liquid markets for illiquid Non-Fungible Tokens (NFTs).
Users deposit their NFT into an NFTX vault and mint a fungible ERC20 token (vToken) representing a claim on a random asset from within the vault. vTokens can also be used to redeem a specific NFT from a vault.
Benefits:
- Liquidity Pool and staked minted vTokens to earn yield rewards
- Better distribution and price discovery for NFT projects
- Instantly sell any NFT by minting it as an ERC20 and swapping via Sushiswap
Solana
Hadeswap — A platform that enables users to trade and swap NFTs using liquidity pools and create two-sided liquidity pools for NFT collections.
Benefits:
- 0.5% platform fees
- 0% royalty fees by default, however, users can opt to pay royalty fees on the swap.
- DCA (Dollar Cost Averaging) buying and selling of NFTs via pools
- Earn SOL
- Earn additional platform fees as an ABC NFT Holder
Elixir — This is the next-generation, community-owned NFT trading platform powered by the Elixir fAMM, or Floor AMM. The fAMM is optimized to offer the best experience for trading floor NFTs. Elixir concentrates buy and sell demand for an entire collection into one market, you never have to wait for your NFT to sell or guess the floor price.
Benefits:
- 1 pool per NFT collection
- Swap floor NFTs for another floor NFT for no fees
- 1.3% fee on NFT purchases
- 0.3% fee on sales
- Nectar NFT grants users early access to exclusive & alpha features
- Friendly UI/UX
TensorSwap — An all-in-one marketplace aggregator and NFT AMM, with advanced trading tools for pro traders. Tensor aims to be the FTX of NFTs.
Benefits:
- Collection-wide bids
- Instant sell-side liquidity
- Bonding-curve based orders: DCA in & out of collections
- Anyone can run an AMM with custom fees
- Rewards program for early liquidity providers
- Fixed 0.9% royalties + 0.1% fees
Closing Thoughts
NFT AMMs provide users with new and exciting ways to get liquidity for their NFTs. They enable whales to earn rewards for setting up two-sided pools and to DCA in and out of collections at scale. Ultimately, for the time being, they seem to solve an immediate problem around floor price undercutting and provide the option for users to pay royalties to collections. We are still very early in the process and one of the key areas where all these AMMs can benefit is creating an easier-to-use UI and distilling down the technical complexities of creating pools.
Next steps
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