Note: This article is not financial advice. Hubble does not endorse any tokens or platforms mentioned in this article.
- The NFT space has begun implementing DeFi primitives like the AMM.
- Users can pool their NFTs with SOL so other users can easily trade.
- Earning SOL from providing NFT liquidity carries inherent risk.
This post is Hubble's second article on staking NFTs (non-fungible tokens). Users can find Hubble's 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 users stake their favorite Solana NFT on an NFT AMM, it may get flipped out of their possession as they 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 facilitate 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 acquire their NFT. On an NFT AMM, users can swap their NFT immediately for SOL, 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.
When a bonding curve prices NFTs, each time an NFT is bought, its price can be raised on the AMM by a certain amount of SOL or by a percentage. This ensures that NFTs facing buy pressure increase in price while NFTs facing sell pressure decrease in price 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 users are providing liquidity with NFTs, they could face impermanent loss. This means users 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 users open their position as an NFT liquidity provider, they will deposit an equal value of NFTs and SOL.
- A user has 20 NFTs they want to deposit in a sell pool with a floor price of 2 SOL.
- They deposit 40 SOL into the buying pool.
- The collection's floor price hits 5 SOL when a few whales sweep the floor.
- The user now has zero NFTs and 80 SOL, because they sold them all.
- This users 20 NFTs would be worth 100 SOL if you held them.
- The collection's floor price falls to .5 SOL.
- A user is buying more NFTs through their buy pool position.
- They end up with 80 NFTs in their sell pool.
- They have no more SOL in Their buy pool.
- The floor price drops to .25 SOL.
- Their 80 NFTs are worth 20 SOL.
This loss is only realized if users exit their liquidity position. If the NFT ends up worth 2 SOL again, a user will be back to 50/50 in NFTs and SOL. Hopefully, the fees earned from trading will offset the impermanent loss incurred, but any fluctuations in price that do not reflect the entry price can leave users 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 Users 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 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 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 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 claims to be "the most advanced NFT AMM on Solana," and it certainly sports enough bells and whistles for users looking for information. For any user who wants to start supplying NFT liquidity to facilitate a Tensor trade, they must click on a collection and select "Market-Make" instead of buy or sell.
GoatSwap is the last project on this 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 now there are 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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