The Tie Research
Sudoswap: NFT Concentrated Liquidity
By Jack Melnick
May 09, 2023
- High protocol fees and royalties add a lot of friction to liquidity.
- Differing traits on NFTs collections cause pricing off-floor to be inconsistent, and difficult to model via traditional v2 AMM curves.
- Fractionalization of NFTs (NFTX, NFT20) helps deepen liquidity on NFTs, but forces people to trade portions of an NFT. This adds difficulty making markets on specific rarities or custom traits. Fractionalization also reduces asset composability, and renders it useless outside of the original system.
- People prefer trading whole NFTs (Opensea), as opposed to fractionalized alternatives. Part of the surge in NFT activity has been driven by a desire to hold specific items, rather than generalized exposure. This has led to protocols like Opensea, which allow users to trade and filter for specific items in a collection. Finding immediate liquidity here often requires execution significantly below ‘fair market value’.
- NFT collections generally have significantly smaller circulating supply (NFTX). Fractionalization helps with this, leading to protocols like NFTX, who fractionalize NFTs within collections to help with liquidity. Even in fractionalized protocols, the x*y=k model’s bias to never run out of liquidity is visible, and the majority of available assets remain idle.
- Adjust LP price range(e.g. from [0.667 ETH, 1.5 ETH] to [0.5 ETH, 2.0 ETH])
- Adjust current pool price (e.g. from 1 ETH to 0.75 ETH, buy/sell quotes automatically adapt)
- Adjust the fee % taken on buys/sells
- DCA in & out of positions, via single-sided liquidity pools
- A substantially lower fee model. Both LookRare and OS are charging single digit percentages, while Sudoswap charges less than 1%. Aside from Seaport, which isn’t out yet, Sudoswap is significantly cheaper for swaps than peers. After Seaport’s release, comparable gas costs may change.
- Flexibility. If Sudoswap is able to have listings supported via aggregator, then discoverability becomes less important than offering best pricing in the short term. Aggregation will also make LPs very profitable to start.
- Composability and participation. Pools are on-chain, so DAOs and multi-sigs can manage them without delegating for signing, or writing custom governance code. There’s a lot more programmability available off-the-shelf. This would allow for the creation of custom products & pools, like we’ve seen for Uniswap v3.
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Jack Melnick
Jack Melnick, Author at The Tie
VP of Research