NFT's AMM was made by Sudoswap

0xLaughing, BlockBeats

Since 2021, the NFT market has created numerous wealth myths. After the explosion of NFT SUMMER, the total market value once exceeded 36.8 billion DOLLARS. NFT is more widely used in social avatars, games, music, metasurses, domain names, etc. Compared to DeFi, NFT is more widely accepted by the public.

Precisely because of the "non-homogenous" nature of NFT, gameplay in the DeFi market is "unsuited" to the NFT market and cannot be easily applied. As the new capital darling, the value of NFT digital assets in the financial field is urgently needed to exploit, the first is the problem of insufficient liquidity of NFT.

What is the illiquidity problem when buying or selling NFT?

Leaving aside the lending and leasing of NFT to release liquidity, traders can feel the difference from DeFi just by buying and selling NFT.

At present, the mainstream NFT exchanges such as OpenSea, X2Y2 and LooksRare all use the order book mode to trade: sellers put their NFT orders on the trading platform, and buyers selectively buy after browsing orders in the market. The buyer hangs out the offer for an NFT series in advance, and the seller accepts the offer selectively.

NFT price gap between buyers and sellers is too large

At first glance, this model looks very similar to the limit orders used by centralised exchanges such as Binance and FTX to buy and sell cryptocurrencies. In fact, the floor price often represents the lowest value accepted by the seller and the offer represents the highest value accepted by the buyer.Due to the undivided and high unit price of NFT (blue chip NFT unit price usually starts at 10E), small quantity (the total amount is most common below 10K), rarity difference (holders may think their NFT is more different), floor price and offer price often do not match, and the transaction depth is insufficient. This is the main reason for the inefficiency of matching transactions in the NFT market.

This creates a bad situation:

• Traders who want to close out their positions quickly by selling NFT at a fair value often suffer large slippage losses.As an example of the BAYC transaction on OpenSea shown above, the floor price is 93.42ETH, while the highest offer is only 86.7ETH. If a holder wants to sell his BAYC quickly, he has to suffer at least 6.72ETH slippage (not including transaction fees and royalties).

• Capital is inefficient.In addition to borrowing and borrowing, holders of homogeneous tokens can also form trading pairs of tokens to conduct liquidity mining and earn commissions (some have additional token subsidies). However, the value of NFT in this respect has not been released, and it is difficult for NFT holders to obtain additional liquidity, resulting in low capital efficiency.

So, is there a way to pair NFT and tokens for liquidity mining to improve capital efficiency and solve the problem of difficult pricing and low liquidity?

Sudoswap's latest Automated Market Maker (AMM) system for NFT, sudoAMM, was the first to deliver its answer.

Sudoswap: old OTC OG, new NFT market

Ex: over-the-counter trading platform

  Sudoswap started out as an over-the-counter trading platform.  

Sudoswap was originally created by  0xmons  Released in April 2021Over-the-counter trading platform (OTC), it supports any combination of tokens such as ERC20, ERC721, ERC1155, etc. Users can customize the order maturity time and designate any or specific buyers for transactions. In addition, there are no transaction fees or royalties charged through Sudoswap.

0xMons is an anonymous developer who sold a pixel monster.0 xmons series  NFT comes with tokens$XMON, has also released a ZKSync-based NFT platform.zkNFT.

It can be seen from the tweets of 0xMons that he is very concerned about the application of DeFi protocol, uniswap v3 version of the new protocol, Olympus economic model are among his discussions, which may lay the groundwork for his development of AMM for NFT.

SudoAMM's predecessor, LSSVM

  0xMONS officially announced LSSVM's NFT liquidity provision protocol

On July 10, 2021, 0xMons announced that he had developed an NFT liquidity provision protocol called LSSVM and published an initial white paper calledLSSVM: Liquidity provision protocol for NFTThe basic idea of NFT AMM is briefly introduced.

"It's kind of like UnisWAP V3, but for NFT."So says the white paper.

On August 7, 2021, 0xMons published another article titledSudoswap V69: an NFT AMMTo further explain how LSSVM works.

LSSVM literally stands for least squares support vector Machine, which is a theory in machine learning. The name was chosen by 0xmons as a way of making fun of the fact that many DeFi protocols have mathematical names.

LSSVM allows users to create multiple types of liquidity pools

LSSVM is a protocol for creating a custom AMM for NFT, which consists of a number of separate LIQUIDITY pools (pools) for NFT, each managed by a liquidity provider.

A liquidity pool is a contract managed by a single address that holds a certain amount of ETH and a certain amount of NFT.

They can be buy only, sell only, or both:

• The buy-only liquidity pool has ETH and is ready to provide a quote to purchase NFT using its ETH;

• A liquidity pool for sale only has NFT and is ready to offer a price to sell its NFT for ETH;

• If both buyers and sellers are enabled, the liquidity pool will provide quotes for both. Users trading with the pool will trade ETH for NFT or NFT for ETH.

LSSVM can aggregate multiple liquidity pools

When a trader trades, LSSVM aggregates information from multiple pools of the same series of NFT. The trader can select one pool or trade across multiple pools. After multiple pools of the same series of NFT are aggregated,Traders who trade across multiple pools are unconscious.

LSSVM will use the joint curve

Different from the traditional AMM x*y= K constant product algorithm, LSSVM will use the combination curve (allowing the combination of arbitrary curves) to construct a liquidity pool to facilitate NFT transactions.

The price quoted by each liquidity pool is determined by the curve specified by the liquidity pool when it is created. In theory, it can be linear, S-shaped, sinusoidal or any other type of curve (in practice, linear curve and exponential curve are used for the final line).

The combination curve can be constant (that is, always using a fixed price), linear (that is, linearly increasing/decreasing a fixed value price as you buy/sell), or exponential (that is, increasing/decreasing a percentage price as you buy/sell).

LSSVM designed the construction of the above liquidity pool and used components such as joint curve quotation to complete the basic architecture of sudoAMM.

Later: Sudoswap is officially launched

In 2022, 0xMons published an article in March and May titledAnnounced sudoAMM"And"Dig deeper: sudoAMM vs. other AMMs", further introduces what Sudoswap is, auditing, team members, specific features, and how it compares to traditional AMM.

9 July 2022, SudoswapOfficer xuanOfficially launched sudoAMM system.

Sudoswap uniswap v3

SudoAMM protocol is mainly for traders and liquidity providers.

Traders will be able to:

• Use NFT to exchange ETH

• Change ETH to NFT

Liquidity providers will be able to:

• When traders exchange with liquidity pools, deposit in ETH and receive NFT

• When traders exchange with liquidity pools, deposit in NFT and receive ETH

• Deposit in ETH and NFT and charge trading fees when traders exchange with liquidity pools

Uniswap V3 concentrated liquidity

As a trader, the experience is similar to other exchanges. The trader chooses the NFT to sell or buy,SudoAMM aggregates information from multiple liquidity pools to provide instant quotes.

As a liquidity provider, the experience is most similar to UnisWAP V3.SudoAMM is a concentrated liquidity AMM similar to UnisWAP V3 where liquidity providers are free to choose a price range to provide liquidity, improving capital efficiency.

However, unisWAP's x*y= K constant product algorithm is not suitable for NFT market, essentially because of the natural structure of NFT and FT trading markets. Projects with a total NFT of less than 10,000 are most common, while the number of FT is often measured in the hundreds of millions, resulting in a significant lack of depth in the NFT market. So & have spentSudoAMM uses a combination of curves (linear and exponential) to facilitate trading in NFT, automatically adjusting the prices of buyers and sellers to improve the flexibility of traders and liquidity providers.

Sudoswap and OpenSea

Admittedly, NFT on almost all Ethereum chains currently flows best on OpenSea.

OpenSea, with its first-mover advantage of early entry, has a large flow, so NFT has a good liquidity, which is the biggest moat of OpenSea, LooksRare and X2Y2, which rely on tokens and low transaction fees, are also hard to beat.

But sudoswap still has some advantages:

Compared to Seaport, Sudoswap has a lower Gas Fee when trading NFT

1. Gas Fee is lower. According to the official data released by Sudoswap, in terms of Gas saving, Sudoswap wins slightly when trading one NFT, and saves up to 40% Gas Fee when trading multiple NFT.

2. Transaction fees are lower. Sudoswap has a 0.5% transaction fee and no royalties. Compared to OpenSea's 2.5% transaction fee plus 7.5% royalty, this 10% "surcharge" is part of the slippery slope that traders have to pay for.

3. More decentralized. OpenSea has been criticized for blocking access to some countries and for blocking stolen NFT transactions. Sudoswap does not use the off-chain order book trading method, and the on-chain liquidity pool makes it more decentralized.

Problems with sudoswap

There is no doubt that Sudoswap has brought fresh air to the NFT market, but it still has some problems.

SudoAMM does not solve the entire liquidity problem of NFT

On the one hand, the rarity of NFT leads to different pricing of NFT in the same series.

Most common/non-rare NFTS appear to be more uniform in the market

In fact, in a research paper from University College London in April,How does rarity shape the NFT marketAccording to the Book,The mainstream NFT series in the comprehensive market. In the long run, those NFTS with ordinary attributes are more unified than those with rare NFTS in the secondary market, and the market seems to consider them basically "replaceable".. For those NFTS with rare attributes, the study also shows that the number of transactions decreases significantly as the rarity increases.

Sudoswap's current instant trading is more oriented to NFT hanging near the floor price, which is equivalent to weakening the "non-homogeneity" of NFT with these ordinary attributes.. However, for those rare NFT with high premium, liquidity pool can still be created in Sudoswap for trading, but because they will have higher unit price and lower transaction times, it may be more efficient to match with OpenSea's original order book transaction mode.

Sudoswap and Opensea: Buyer/seller spread vs. floor price

On the other hand, brand effect is currently the best solution for NFT liquidity.

As can be seen from the figure above, for NFT of Zorbs series, the price difference between buyer and seller on Sudoswap is only 0.001 ETH, while the price difference on OpenSea is 0.01 ETH, which is 10 times. It seems that dealmaking on Sudoswap is more efficient.

In fact, after careful comparison, it can be found that the floor price on Sudoswap is 0.011 ETH higher than OpenSea. As mentioned above, Sudoswap is not well-known, and OpenSea, as the most stable NFT trading market, has a strong brand effect. Most traders choose OpenSea as their first choice in trading NFT, thus resulting in the "winner takes all" situation.

However, on the optimistic side, there may be some arbitrage space after deducting transaction fees and other costs. Meanwhile, over time, Sudoswap will further expand its popularity and narrow the price difference between the two trading platforms.

The elimination of transaction royalties is highly controversial

Sudoswap isn't the only NFT trading platform to eliminate transaction royalties recentlyatomic0The platform's zero-platform transaction fee + zero-royalty transaction has also sparked widespread discussion. Some see this as a way to give NFT enthusiasts a hand, and a central entity imposing royalties on users goes against the decentralized spirit of Web3; Others worry that if this becomes mainstream, it will discourage NFT creators/operations teams.

conclusion

The lock-up volume of sudoAMM exceeded $200,000 two weeks after its launch

In the process of NFT financialization, solving the problem of insufficient liquidity of NFT is always the top priority.

Gem and Genie, two NFT transaction aggregators, were acquired by OpenSea and UNISWAP for their excellent solutions. Sudoswap has developed a more vertical segmentation track in the testing ground of NFT liquidity by borrowing some of UNISWAP V3's answers. Hand in your paper first.

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