Solving the NFT Liquidity Problem: Understanding Floor DAO in One Article

Author: Lao Yapi

Liquidity is a term in the securities market, referring to the efficiency with which an asset can be converted into cash without affecting its market price. The most liquid asset is cash itself.

Now let's try to understand NFTs from the perspective of liquidity:

NFTs are blockchain assets in the form of non-fungible tokens, typically representing products, artworks, music, or any other digital identity that creators decide to place on the blockchain. Their trading units are tokens.

Thus, as buyers or investors, those who purchase NFTs differ from traditional retail investors in the following sense. They are not buying stocks that represent a percentage of ownership in an off-chain company, but rather tokens that represent a percentage of ownership in on-chain products, artworks, games, or music.

However, 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 driving force for wealth accumulation.

When measuring the value of an NFT, past trading data is an important factor, but a comprehensive buyer will consider many other factors, such as liquidity compared to other similar products, known as relative liquidity. The reason is simple. A higher trading volume represents a higher liquidity to some extent.

The lack of liquidity may be the biggest concern for most investors, to the extent that some investors consider NFTs to be a riskier investment than most altcoins. Moreover, as the history of NFTs shows, few collectibles and artworks can withstand the test of time; unfortunately, most works lose value within months.

Have you ever wanted to buy an NFT but gave up due to their lack of high yields or liquidity in DeFi?

So far, the NFT market has largely relied on matching buyers and sellers in centralized markets like OpenSea, where sellers severely undercut the floor price for instant sales, while buyers pay a premium on the price spread, resulting in neither party making significant profits.

The fees from this trading activity flow back to the controllers behind the exchanges, rather than to users who provide highly valuable liquidity and trading volume.

What is FloorDAO

The world's first decentralized NFT market maker:

The game begins, and FloorDAO will "sweep" (buy) blue-chip NFT projects that the community votes on. FloorDAO will purchase NFTs of these projects at the lowest prices. At the same time, FloorDAO mimics the POL (Protocol Owned Liquidity) system of OlympusDAO. This will provide deep liquidity for these NFT projects, allowing people to trade NFT assets instantly. Market trading fees will return to FloorDAO's fund.

FloorDAO

The vision of FloorDAO is simple—bridging the gap between DeFi and NFTs, creating new yield strategies and use cases.

To achieve this, FloorDAO will intervene as the largest decentralized NFTX market maker, disrupting the current operation of the NFT market and providing NFT holders with deeper (and instant) liquidity, as well as compatibility with DeFi and other use cases.

How to Solve the Liquidity Problem?

To successfully bring illiquid NFTs to market, the first step is to make them liquid. For this mechanism, FloorDAO uses NFTX to turn ERC721/1155 "non-fungible (illiquid) tokens" into fungible (liquid) ERC20s.

When it comes to NFT collections with thousands of projects (CryptoPunks, Bored Apes, Doodles, Azuki, etc.), finding the most fungible and liquid items within the collection—most notably the "floor" (lowest value) projects—is key.

By aggregating the floor projects of a collection, a set of interchangeable assets with a single floor price can be created.

Let's first understand NFTX:

"NFTX is a market 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 NFTs. At any time, collectors can use their vTokens to randomly purchase assets from the vault. Alternatively, individuals can redeem specific tokens from the same vault by paying an additional fee.

One feature of the NFTX model is that users can gain instant liquidity for NFTs with high vToken liquidity. For example, a BAYC owner can immediately deposit their PUNK into the NFTX vault and receive PUNKvTokens. However, the owner can sell the tokens on decentralized exchanges like SushiSwap instead of collateralizing PUNKvToken. If liquidity is poor, NFT owners may sell their NFTs at prices lower than those on exchanges like OpenSea; however, the ability to obtain instant liquidity often justifies the lower price.

This is how markets like NFTX operate, allowing the minting of fungible ERC20 tokens from NFTs, diversifying projects and releasing instant liquidity.

This process produces tokens like PUNK—ERC20 tokens that will become central to FloorDAO's financial and yield strategy.

Decentralized Market Maker

These ERC20 tokens can be used in AMMs like Uniswap and Sushi in the same way that someone might exchange or provide liquidity for AAVE or OHM.

In the case of NFTX, the trading fees from the market do not flow back to the platform's creators but rather to those providing liquidity (i.e., PUNK-ETH). This incentivizes more liquidity, leading to increased trading volume (lower slippage and more options) and greater rewards for liquidity providers.

The yield from NFTX market making has been high—annual yields can reach several hundred percent. However, decentralized trading of NFTs has not been well understood or utilized—NFTX has daily trading volumes of hundreds of ETH, while centralized markets like OpenSea have trading volumes in the tens of thousands of ETH.

How FloorDAO Operates

In the above, we discussed using the decentralized NFTX market to earn trading fees, but how will FloorDAO begin acquiring assets?

FloorDAO sees an opportunity to acquire a significant proportion of blue-chip assets for its treasury. These items will be deployed as liquidity and inventory in decentralized NFT markets (starting with NFTX) to earn permanent trading 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 allocate protocol rewards based on the growth of the treasury. These rewards can come from the NFTX fees earned by the treasury. This not only makes the model more sustainable than others, but it is also scalable.

FloorDAO is a lightweight 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 rebasing.

Bonding is an efficient way to raise funds for projects with clear yield opportunities by minting new tokens. New bonds can be created for specific assets (like $PUNK), and the market will bring the assets into the treasury. In relevant cases, the team sells $FLOOR (the native token of FloorDAO) at a discount to acquire strategic NFT assets bound in the protocol.

Rebasing is a mechanism that rewards staked tokens with new tokens, ensuring that $FLOOR holders are incentivized to collaborate with FloorDAO to "capture" the generated yield and potential appreciation of treasury assets.

APY is an important number; if it is too high, users face the risk of runaway inflation, far exceeding treasury yields; if too low, $FLOOR holders will seek yields elsewhere. Therefore, the established APY is an important balancing act.

Before continuing to read, let’s summarize.

Bonding will mint new $FLOOR as a way to acquire strategic NFT assets, which in turn are used to generate yields.

Rebasing will mint new FLOOR to reward stakers with yields and represent the growth of treasury assets.

Both mechanisms will increase the supply of $FLOOR in circulation. As long as our strategy can generate sufficiently high yields, the growth of treasury assets will outpace inflation.

If FloorDAO is successful, it will ultimately hold a meaningful position in various NFT collections through NFTX vault tokens. This brings the possibility of FloorDAO becoming a governance giant in the NFT space. While the vault tokens that FloorDAO will hold are not direct NFTs, they do represent a "direct mapping" of those NFTs.

The most practical path is for NFT DAOs to directly adopt NFTX vault tokens in their governance processes. Therefore, holding gFLOOR or veFLOOR tokens will provide a share of power over all governance decisions regarding the NFT collections held within the protocol.