How to Stake Solana NFTs with an NFT AMM

Trading Solana NFTs with NFT AMMs makes NFTs more liquid than ever. Earn fees from Solana NFT trading by providing liquidity on an NFT AMM.

This post is Hubble's second article on staking NFTs (non-fungible tokens). You can read our first post about Solana NFT staking here:

This article will explore a kind of NFT staking that relies on providing liquidity for an NFT AMM (automated market maker). This is very different from staking for project tokens, like staking DeGods for $DUST.

It should be noted that this strategy takes a laissez-faire approach to NFT ownership. For example, if you stake your favorite Solana NFT on an NFT AMM, it may get flipped out of your possession as you provide liquidity for trades, so it's a terrible idea to provide liquidity with rare NFTs.

What is an NFT AMM?

The automated market maker, or AMM, is an execution model for trading crypto assets on-chain. By pooling two different tokens in an AMM, traders can execute trades at any time based on a price quoted by the AMM, and the users who pool their tokens, called liquidity providers (LPs), earn fees paid by traders.  

Solana NFT trading recently adopted the AMM model for buying and selling NFTs. Here are a few features of the NFT AMM and how they work, including some examples of how impermanent loss (IL) can affect the capital efficiency of your strategy.

NFT AMMs Create Instant Liquidity for Illiquid NFTs

One of the primary benefits AMMs bring to the market is the ability to trade instantly, and liquidity is the key differentiation between an NFT AMM and a traditional NFT market. On NFT markets like MagicEden, traders may have to wait a while before someone decides to buy their NFT. On an NFT AMM, they can sell their NFT immediately, albeit under the current floor price.

Liquidity Pools Automate Pricing and Trade

On an NFT AMM, there are pools for buying and selling, and users can set parameters for each pool so that NFTs are only bought and sold at a certain price. In addition, the settings automatically allow the price of the next NFT sale to increase or decrease according to a bonding curve.

nft-amm-solana-nft-staking-goatswap-elixir-nft-tensor trade-hadeswap-trade nft-solana-nft-trading-bonding curve
Set a bonding curve to automatically price NFTs as they are traded.

When a bonding curve prices NFTs, each time an NFT is bought, its value can be raised on the AMM by a certain amount of SOL or a percentage of its value. This ensures that NFTs facing buy pressure increase in value while NFTs facing sell pressure decrease in value according to demand.  

Two-Sided Pools Earn NFT Liquidity Providers Fees

If a user sets up a buying pool for Collection X and supplies it with SOL, then sets up a selling pool supplied with NFTs from Collection X, then they essentially become market makers. By setting up a position automatically buying and selling NFTs, liquidity providers earn profits from periods of high volume.

Introducing NFT Impermanent Loss

If you're providing liquidity with your NFTs, you could face impermanent loss. You could end up with zero NFTs and lots of SOL, lots of NFTs and no SOL, or an imbalance somewhere in between. Here's why:

  • When you begin your position as an NFT liquidity provider, you will deposit an equal value of NFTs and SOL.
  • You have 20 NFTs you want to deposit in a sell pool with a floor price of 2 SOL.
  • You deposit 40 SOL into the buying pool.
  • The collection's floor price hits 5 SOL when a few whales sweep the floor.
  • You now have zero NFTs and 80 SOL, because you sold them all.
  • Your 20 NFTs would be worth 100 SOL if you held them.

OR

  • The collection's floor price falls to .5 SOL.
  • You're buying more NFTs through your buy pool position.
  • You end up with 80 NFTs in your sell pool.
  • You have no more SOL in your buy pool.
  • The floor price drops to .25 SOL.
  • Your 80 NFTs are worth 20 SOL.

This loss is only realized if you exit your liquidity position. If the NFT ends up worth 2 SOL again, you will be back to 50/50 in NFTs and SOL. Hopefully, the fees you earn from trading will offset the impermanent loss incurred, but any fluctuations in price that do not reflect your entry price can leave you rekt.

High Volume and Low Volatility Rule

As an NFT market maker, the best NFT staking conditions are found with collections that attract high volume (lots of trades) and low volatility (floor price remains steady). Therefore, the goal for an NFT liquidity provider is to collect as many fees as possible while a collection is in a sweet spot for trading and stable floor price.

Where Can you Stake Solana NFTs on an NFT AMM?

The Solana NFT trading community has witnessed several projects offer opportunities to provide liquidity on an NFT AMM. This section of the article will mention a few of these projects and tips for getting started as an NFT liquidity provider.

Hadeswap

nft-amm-solana-nft-staking-hadeswap-trade nft-solana-nft-trading
Hadeswap NFT AMM on Solana.

Hadeswap is currently the most liquid NFT AMM on Solana. To provide liquidity on the Hadeswap NFT AMM, click "+ Create Pool," choose a collection, then click "do both and earn trading fees" when asked if you want to set up a buying pool or a selling pool.  

Here is a nifty video guide on how to get started with market making on Hadeswap.

Elixir

nft-amm-solana-nft-staking-elixir-nft-trade nft-solana-nft-trading
Elixir displays the current spread based on Magic Eden floor prices.

Elixir is an NFT ecosystem that provides several services. The Elixir NFT AMM is open to buyers and sellers who want to buy and sell immediately, but access to market making is limited to "the chosen ones only."

Tensor

nft-amm-solana-nft-staking-nft-tensor trade-trade nft-solana-nft-trading
Instantly sell an NFT on Tensor Trade. 

Tensor claims to be "the most advanced NFT AMM on Solana," and it certainly sports enough bells and whistles for users looking for information. If you want to start supplying NFT liquidity to facilitate a Tensor trade, you must click on a collection and select "Market-Make" instead of buy or sell.

GoatSwap

nft-amm-solana-nft-staking-goatswap-trade nft-solana-nft-trading
Set up a two-sided pool on GoatSwap to begin earning fees. 

GoatSwap is the last project on our list. It's the least liquid market at the time of writing, but that also means there is less competition with other market makers. To start providing liquidity on Goatswap so others can easily trade NFTs, click "Create a Pool" on the landing page and choose "Do both and earn trading fees."


Earn Fees from Trading with NFTs Through Providing Liquidity

Providing liquidity is one of the most popular ways to earn yield in decentralized finance (DeFi). Recent developments in NFT markets have made it possible for users to earn fees from providing liquidity on NFTs, which could one day bridge the gap between NFT and DeFi communities.

A year ago, it seemed like it would be impossible to automate an NFT market and make NFTs a liquid asset, but here we are with several NFT AMM projects up and running! Keep an eye out for future developments in this space as the Solana DeFi and NFT communities continue chewing glass and building new utilities.

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