Analyzing the five major application scenarios of SudoSwap, the NFT liquidity solution has a long way to go

Source: Liu Quankai, Wu Says Blockchain Real

Since entering August, the rapid growth of SudoAMM's trading volume and user numbers has attracted the attention of NFT enthusiasts. According to Dune Analytics data, as of August 14, the current trading volume of SudoAMM has exceeded 6900 ETH (over $10 million), with nearly 85% of the volume occurring since August. Thanks to the listing of the Based Ghouls Pool, referred to by the community as the "official pool," this "Uniswap V3 for NFTs," which had been lukewarm since its launch in early July, has been revitalized. Subsequently, its novel model attracted retweets and attention from crypto Twitter, media promotion, and pool creation by holders of well-known NFTs such as Azuki and Clone X, leading to a significant increase in SudoAMM's exposure and a surge in various metrics in August.

SudoSwap attempts to solve the NFT liquidity problem using the AMM mechanism, which is not particularly complex. If you are a player familiar with DeFi, the Uniswap AMM V3 and the x*y=k function curve will be familiar to you. In Uniswap V3, LPs allow users to provide liquidity for TokenA-TokenB within a custom price range. Similarly, SudoAMM cleverly uses NFTs as TokenA and ETH as TokenB, allowing users to provide liquidity for NFT-ETH at specified prices on SudoAMM. For buyers and sellers, the pool enables instant trading, while selling can also be done through order book trading similar to OpenSea. For LPs, they can choose to provide liquidity for NFT-ETH in a manner similar to V3 to earn trading fees, or they can provide liquidity solely for NFTs or ETH to obtain ETH or NFTs.

With SudoAMM's recent impressive performance, the topic of NFT liquidity solutions has surged. This article attempts to discuss SudoSwap's adaptability in liquidity scenarios. First, I acknowledge SudoAMM's attempts and contributions to NFT liquidity, but my fundamental view is that different types of NFTs should adapt to corresponding liquidity solutions based on different demand scenarios. Therefore, SudoAMM, in my view, represents only a specific use case and one layer of the hierarchical nature of NFT liquidity. In the future, as the NFT market becomes more specialized and vertical, and scenarios are further subdivided, the adaptation of NFT liquidity will likely become more layered.

Art and Top Blue Chips: Liquidity Does Not Need to Be Solved

The NFT liquidity issue is a well-worn topic. However, for some NFT assets, liquidity is not entirely a problem that needs to be solved, and thus SudoSwap may not be necessary. These assets can be roughly divided into two categories: art and top blue chips.

Art, such as ArtBlocks, embodies artistic styles, the creator's thoughts, and even the artist's status. It possesses high aesthetic and collectible value, and even if it is not priced, it will not be sold off indiscriminately; moreover, each artwork has distinct differences. Even a fine horse needs a discerning owner; the creator also needs an admirer, emphasizing the importance of fate, and should not be tainted by speculators.

Top blue chips may also not require direct trading liquidity, as most are likely loyal long-term holders. In the distant future, top blue chips may gradually become financial derivatives, applied in lending, leasing, and other markets, where the trading market may have prices without active orders. BAYC and CryptoPunks, the two top blue chips on the market, qualify for this, but perhaps are still not expensive enough.

cc0/Meme May Be the Most Suitable NFT Assets for SudoAMM Liquidity Solutions

SudoSwap essentially treats an entire NFT series as if it were a fixed quantity FT for instant trading, with less emphasis on rarity and attributes. For cc0, the main feature on the trading side is that it does not require excessive consideration of rarity in a floor-sweeping frenzy, and it resembles a "platform" that gives rise to derivative creations and vibes, which aligns closely with SudoSwap. The biggest danger faced by unofficial derivatives is the risk of being delisted by NFT platforms. OpenSea, currently the best NFT platform in terms of trading depth and recognition, is the preferred platform for various memes, but it often operates under the banner of "protecting genuine products," wielding the power to delist or revoke an NFT at will, which is fatal for various derivative cc0 protocols.

With OpenSea's influence, delisting essentially means death, leading to liquidity depletion. A recent example is Moonbirds, which saw a surge in clones after announcing its transition to a cc0 protocol. Particularly, Moonbirds2 gained favor from many users, with numerous large holders continuously sweeping the floor, but OpenSea delisted it under the guise of alleged infringement/piracy, leading to its demise.

However, so-called clones are actually memes of the original, and the original can also be a meme. Memes, leveraging the cc0 protocol, can greatly expand creative innovation and dissemination. Whether to recognize a meme or a clone should not be managed by centralized platforms but judged by users and the community. When a meme gains market recognition, its trading volume can be extraordinarily high. In other words, whether a meme is interesting enough can be gauged by its liquidity at a certain stage. If it leverages SudoAMM's function curve, its floor price will rise significantly. This creates a win-win situation for both LPs and NFT users. SudoSwap not only provides liquidity support but also serves as a counterattack against centralized power. If one day a meme NFT that was delisted by OpenSea experiences explosive growth on SudoSwap, it will be the best blow to centralized authority by decentralized protocols.

Game Items Are Suitable for SudoSwap, but May Not Necessarily Need It

Metaverse game items need to possess the non-fungible attributes of NFTs, but most do not have high demands for rarity, making them a significant candidate for using SudoSwap. However, the problem is that metaverse games often have exclusivity in their early stages. Subjectively, platforms prefer to control NFT liquidity themselves and build their own game item NFT markets. Establishing an NFT market can generate revenue through sales and circulation, part of which belongs to the platform, while the community can decide whether to share profits or how much to share with NFT holders or gamers. On the other hand, by understanding the supply and demand of NFTs in the market, project parties can manage the total supply of NFTs in the early stages to avoid inflation. Objectively, most game items become meaningless once detached from the game itself, so why would there be a need for a third-party market?

NFT Projects Can Have Their Own Liquidity Through SudoSwap

Game items may not be suitable for establishing their liquidity in third-party markets, but other PFP avatars may be feasible. Some project parties often reserve x% of NFTs to increase revenue from additional sales or auctions. Now, they can create their own, or what can be considered an official Sudopool, on SudoSwap using the reserved NFTs and ETH obtained from public sales. The project party itself can provide liquidity for their own NFTs, earning a 0.5% fee for being an LP, thus no longer relying on royalties for secondary income.

Introducing NFT Market Makers Through SudoSwap

The introduction of NFT market makers may initially still be facilitated by project parties or large holders contacting third-party institutions. By using market makers, NFTs can be utilized in quantitative trading strategies, arbitrage, and volatility trading, thereby achieving programmatic trading scales. For traders, this means they do not have to be forced to be holders, and they may not even need to understand the culture or roadmap of the NFT. When the trading volume and liquidity of this NFT are strong enough, bulk buying equates to going long on the floor price; bulk selling equates to going short. On the other hand, if buying and selling can be done at will, this ensures price support for NFTs, providing conditions for NFTs to serve as collateral for loans, which in turn increases the stability of the NFT market to some extent.

SudoSwap's exploration of NFT liquidity primarily focuses on floor price NFTs. Indeed, floor trading occupies a significant portion of NFT trading volume, but if rarity is not considered, it implies that the value of NFTs within the same series converges, and NFTs evolve into another form of FT. SudoSwap cannot solve the pricing issues arising from NFT rarity/attributes. Additionally, there are particularly many seller-only pools on SudoSwap, with some users only wanting to use SudoSwap for faster turnover, which, to some extent, provides convenience for some NFTs with uncertain prospects, posing a challenge to NFT loyalty.