Since August, Sudoswap's rapid growth in volume and number of users has caught the market's attention. The so-called "Uniswap V3 of NFTs" has brought NFT AMMs into the spotlight, and the topic of NFT liquidity solutions is undergoing a heated debate once again. At one point, fractionalization was also considered a solution to NFTs’ liquidity struggles. While Sudoswap was on the rise in August, we cannot forget that Fractional, the NFT fractionalization protocol, also closed a $20 million Series A round of funding led by Paradigm.

In terms of DeFi, what is the best way to solve the issue of NFT liquidity?

This article will introduce various practical applications of NFT fractionalization and NFT AMMs. We will also analyze which solution to the NFT liquidity problem will likely be the catalyst for the breakthrough of the NFT market.

Content:

I. What is NFT Fractionalization and NFT AMM

II. Product Features and Applicable Scenarios

III. Current State of the Industry

IV. Analysis of Key Projects

V. Problems Solved and Created by Each Approach

VI. Market Outlook and Projections

I. What is NFT Fractionalization and NFT AMM?

NFT fractionalization generates multiple ERC-20 tokens associated with an undivided ERC-721 or ERC-1155 NFT by deploying a contract. This allows anyone holding these ERC-20 tokens to have fractional ownership of the associated NFTs.

Fractionalization is intended to allow NFTs to be turned into fungible token assets that are more liquid, profitable and productive. Some use cases for NFT Fragments include:

a. DEX market making and earning transaction fees；

b. As collateral to participate in DeFi Lego；

c. Lowering the NFT Market’s barriers to entry

Fractionalization methods can be divided into two types:

• Aggregation: multiple NFTs of different types, for example ERC-1155 and ERC-721 NFTs, can exist in the same pool

• Indexation: only NFTs of the same type can exist in same pool. In this case, a pool can contain either ERC-1155 or ERC-721 NFTs, but not both.

An NFT AMM is a decentralized alternative to centralized NFT marketplaces that use off-chain order books such as Opensea, X2Y2 or Magic Eden. NFT AMMs primarily use liquidity pools to enable low slippage and low-cost transactions.

Due to the high barrier to entry for many NFT markets, even blue chip NFTs sometimes don’t have much liquidity in the centralized market. However, with NFT AMMs, anyone can add liquidity to the chain and receive a portion of the transaction fees.

For example, SudoAMM is an NFT AMM protocol created by Sudoswap. It consists of a number of independent NFT liquidity pools, each managed by an LP that has control over the pricing function curve, initial fees, incremental thresholds, and transaction fee ratios.

Unlike the traditional AMM Constant Product Algorithm (XYK) curves, SudoAMM uses Concentrated Pricing Curves (allowing the selection of any curve; mainly the Linear Curve and Exponential Curve) to construct liquidity pools to facilitate NFT trading. Recently, Concentrated XYK curve is being added as a new pricing curve model that allows users to control the depth and slippage of their liquidity pool by setting concentration parameters, thereby controlling the price range of the liquidity pool.

In short, fractionalization breaks up NFTs into fungible tokens in order to increase liquidity, and an AMM is a market making strategy that uses algorithms to creates trading pairs of NFTs or FTs.

II. Product Features and Applicable Scenarios

NFT Fractionalization

Features:

1. By splitting an NFT through a smart contract, multiple people share ownership of that NFT, and holding an NFT fragment means obtaining partial ownership. After fractionalization, if a single holder buys all the fragments of an NFT, they can unlock the original complete NFT.

2. Security depends on the smart contract.

Scenarios：

1. Fractionalization of ownership in high value NFTs, especially blue-chips. An example of this would be a popular but costly collectible NFT.

2. Asset fractionalization, e.g. real estate or physical art pieces, to increase the liquidity of these physical assets.

3. Lower barriers to purchase, enable price discovery functions and allow more people to participate in transactions.

4. Public ownership of NFTs: artists and creators can build communities around their work and enhance exposure through ownership fractionalization.

NFT AMMs

Features:

1. The AMM mechanism intends to solve the NFT liquidity problem. For both buyers and sellers, the pool can be used for immediate buying and selling, while selling can also take place in a manner similar to pending transactions on OpenSea. For LPs, they can choose to earn transaction fees by double-sided market making similar to V3's NFT-ETH pool, or they can earn either ETH or NFTs by single-side market making;

2. AMMs can also provide single-sided liquidity pools for either NFTs or ETH, with each pool being managed by a liquidity provider, NFT/ETH pair, adjustable liquidity pool parameters at any time, fees set by double-sided pool creators, optionality of pricing curves, also with each pool being managed by a liquidity provider;

3. Rarity and other unique properties of a given NFT are disregarded;

Scenarios：

1. CC0/Meme：Long-tail assets, the most suitable for NFT AMMs and resisting centralized exchanges such as Opensea；

2. Game props: matching by demand, but in the early stages, the platform does not rely on third-party;

3. NFT projects: provide liquidity for official NFTs and earn fees from it, without relying on royalties for secondary income；

4. NFT market making: can be used for quantitative trading strategies, arbitrage, volatility long-short, and more, to make profit；

5. Launchpa

In terms of implementation, the two solutions are different, especially in terms of usage scenarios. NFT fractionalized is more suited to specific needs, while the AMM solution is more generic.

III. Current State of the Industry

NFT Fractionalization

• As the market gets cold, fractionalized products become less popular

The NFT market has seen a significant decline in transaction volume since the beginning of the year, and the current volume is less than one-tenth of the peak. In stark contrast to last year's fractionalization product boom, when the market was very hot, the NFT fractionalization product can now be described as in a cooling state, as transaction volume and user activity have declined significantly. Overall, the market is not nearly as hot as last year.

• Product Iteration Trends

  The emergence of fractionalized NFT products last year established the basic model of NFT fractionalized products. This model includes aggregated fractionalization, where multiple different NFTs packaged for fractionalization; and index fund-style fractionalization that is anchored to the same type of NFT. These forms of NFT fractionalization have been generally accepted by users.

  Compared to last year, most fractionalized NFT products have undergone multiple product iterations on top of this model, such as more flexible rate design, more wallet support, better NFT support and data presentation, more user-friendly interactive interfaces and a variety of exit methods. The overall user experience of the fractionalized product has improved to a certain extent, and subsequent product iterations will continue to focus on getting better rates, improving the interactive interface and the NFT itself.

• Comparison of Products

  Fractional, NFTX, Unicly, and NFT20 are the leaders in NFT fractionalization. Statistically speaking, all these products are trending downward in terms of transaction volume, and all have declined significantly compared to last year. Since most fractionalized NFTs are not bought back or redeemed, the TVL has only been going down.

  Fractional's transaction volume was phenomenal in August and September last year, reaching $200 million at one point. However, in the current bear market, the average daily transaction volume is less than a fraction of last year's. Despite the decline in trading volume, the number of new fractionalization pools has returned to last year’s level.

  Transaction volumes on NFTX and Unicly have also fallen to all-time lows, and overall TVL is nearing stagnation or even declining.

NFT AMM

After Sudoswap pioneered the NFT AMM mechanism, the field of NFT automated market makers blossomed. Among these is Goatswap, which launched directly cross-chain without adding any new mechanisms; there are also other protocols that have tried to improve the AMM mechanism. Most of the protocols are currently in the concept discovery or development stage, and no launched project has yet to surpassed Sudoswap's transaction volume.

Due to fractionalization’s early launch and relatively mature mechanism, the performance of the market shows that demand exists for this product. By contrast, Sudoswap’s AMM has been launched for less than 3 months. At this point, although the absolute value of transaction volume has dropped significantly, the ratio of Sudo's transaction volume relative to the overall Ethernet NFT transaction volume is increasing slightly, with the current market share being 2.3%. Therefore, it is too early to tell what kind of demand exists for NFT AMMs.

• Community Survey

We conducted a community survey on NFT fractionalization and AMM (the full survey report can be accessed at https://twitter.com/DodoResearch/status/158257484495650816). The survey received a total of about 164 responses, covering both the Chinese and English communities. 60% of the survey participants have experience trading NFTs, and 19% work in NFT-related jobs, such as as investors and project owners.

Among the survey participants, 56% of users had experience trading fractionalized NFTs. The top three benefits of NFT fractionalization, according to users, are 1) increased market liquidity, 2) lower barriers to participation and price discovery, and 3) better NFT valuation. About 5% of users said that there were no significant benefits to NFT fractionalization.

About 66% of users have participated in NFT AMM transactions. The main advantages of AMMs as perceived by users are 1) improved trading efficiency and 2) cheaper pricing, as users do not pay gas fees. In addition, 26% of users say that NFT AMMs’ strength is the opportunity for arbitrage, while about 4% of users expressed that there is no real benefit in AMM.

In summary, 49% of users are optimistic about the future of NFT AMMs, 38% of the users see a better future for fractionalization, and 13% are not so optimistic about the future of either schemes in the NFT ecosystem.

IV. Analysis of Key Projects

Twelve projects were selected for our analysis of NFT fractionalization and NFT AMM, as follows:

NFT Fractionalization

1. NFTX

a. Mechanism, Vision

• NFTX does not support fractionalization of individual NFTs. NFTX specializes in creating funds for NFTs with similar properties, thus helping to create a floor price for a specific NFT type.

• Minting: When minting, if a user deposits a CryptoPunk into the vault, he will receive 0.95 PUNK tokens in return. 0.05 PUNK tokens will be paid to the vault liquidity provider. If you deposit tokens for at least 48 hours, you can avoid paying minting fees.

  Users can choose to provide liquidity on decentralized exchanges such as Sushiswap, where the default token pair is with ETH.

• Redeemable: Customizable fee, through either random redeem (4%) or targeted redeem (6%)；

• Trading: Customizable fees, random trades (4%), specified trades (10%)

• Staking: There are currently three ways to stake on NFTX:

  • Staking NFTs on NFTX in exchange for xTokens (currently there are no use cases for xToken) - 100% of platform fees go to the LP.

  • Token+NFT Staking (Liquidity staking) - 80% of transaction fees go to the LP.

  • NFT Staking only (Inventory staking) - 20% of transaction fees go to the LP.

• The governance token $NFTX is used for governance only. The maximum circulation of NFTX tokens is 650,000.

b. Highlights, Value, and Risks

• Highlight: The upgraded NFTX V2 contract allows users to customize the fees collected by the NFT vault (from mints, swaps, and redemptions), which compensates LPs with those fees.

• Between July and November of 2021, NFTX established its top liquidity vault by leveraging CryptoPunks (PUNK), HashMasks (MASK), and CryptoPhunks (PHUNK).

• Risks: The user may not get back the staked NFTs. Therefore, do not stake rare NFTs or any NFTs with sentimental value.

Analysis：

• NFTX focuses on NFTs close to the floor price since, during product development, they observed that users generally create vaults for NFTs near the floor price.

• NFTX in Version 1 used to support combined fund. However, the team realized that since the underlying asset also need liquidity and the liquidity is not concentrated enough. Although the feature still exists, user doesn’t use it as much.

• Compared to NFT20, NFTX has NFT staking use cases, with the option of liquidity or inventory staking.

• The green line represents the redemption fees, which largely overlaps with the casting fee in the prior period and represents user demand for the redeemable.

2. NFT20

a. Mechanism and Vision

• NFT20 is a decentralized exchange and swap protocol for NFTs. NFTs can be transformed into ERC-20 tokens so that they can be traded on a DEX like UniSwap or Sushiswap, thus increasing the their liquidity.

• Minting: The NFT owner deposits their NFT into the NFT project pool and the NFT20 factory creates an ERC-20 token for that NFT project, generating 100 tokens for each NFT deposited, with a transaction fee of 5%.

  • The low-value NFTs are all deposited in the corresponding pools, thus setting an average price for the NFTs of each project.

  • If one holds higher value NFT assets, then he can choose to create a Dutch auction within the NFT20 assets page to more ERC-20 tokens of higher value for that NFT project

• Transaction fees: No transaction fee.

• Redeemable: NFTs in the pool can be exchanged for 100 corresponding tokens, allowing users to redeem the NFTs they desire.

• Governance token: $MUSE

  • Daily liquidity bonus of 500 MUSE. Currently, liquidity providers for the ETH-MUSE trading pair receive a daily reward of 250 MUSE.

  • Initially $MUSE was used to reward liquidity pools with more than 10k value in USD.

  • The NFT20 protocol converts 5% of the minting fee into ETH, which is then used to purchase MUSE, and rest of the 50% of the purchased MUSE is distributed to the stakers of the MUSE tokens.

• Currently, the three most liquid pools are: Chubbies, Nifty Dudes, and Hashmasks.

• Flashloans are supported, and Dutch auctions can be initiated.

• Compared to NFTX, the UI is simple - there is a surge in transactions on Uniswap but it is not as high.

3. Unicly

a. Mechanism and vision

Unicly launched V2.

• The tokens’ mechanisms:

  • $UNIC: Governance tokens with a total supply of 1 million. UNIC holders can lock UNIC tokens to receive xUNIC, and xUNIC is eligible for a fee of 0.05% of the protocol.

  • uToken: Similar in structure to an NFT fund, where users can lock NFTs and split the ownership of an NFT set into uTokens (ERC-20). A set can contain different types of NFTs (ERC-721 and ERC-1155).

• Collectors can bid on specific NFTs, not an entire series of NFTs.

• Introduced DeFi-like services:

  • UnicSwap: LPs earn UNICs by staking LP tokens through whitelisted uToken and ETH to increase liquidity.

  • Staking: Make regular deposit of xUNIC every 7, 30, 60 or 90 days and receive UNIC/uToken as earnings.

• The project established a partnership with Polygon, and launched Unicly V2

b. Highlights, value, and risks

• Highlight #1: Added incentives to hold uToken: these include governance and mining.

• Highlight #2: Fraction collection approach: For NFT trades, users can add new NFTs to the collection at any time, up to 50 in one collection. This mechanism allows institutional Curators to purchase and add new NFTs in a timely manner after they have sold the original NFTs.

• Compared to Fractional, uToken on Unic.ly has had a low trading volume during the downturn. However, liquidity mining rewards were able to maintain the mainstream uToken TVL. Most of this TVL is driven by DeFi mining rewards, and the actual demand for fractional transactions is yet to be determined.

• The DC group has not been very active, making it difficult to get timely feedback on questions.

4. Fractional

a. Mechanism and Vision

• Fractional is built on the Ethereum network. Users can lock one or more NFTs into a smart contract to create their own vaults, and customize the starting price and buyout price for other collectors to bid on. The owner of the vault thus adds liquidity to the NFT fragments.

• Matcha is now integrated to support spot trading of ERC-20 tokens and NFT fractions; users can also trade NFT fractions in their wallets.

• In the buyout vault, the price is determined by a time-weighted algorithm and by the holders of the NFT fractions - the low price setting in the Vault requires the support of more than 50% of the NFT fraction holders. By directly depositing ETH above the reserve price, the user can initiate an auction in the Vault.

b. Highlights, value, and risks

Highlight #1: Both ERC-1155 or ERC-721 NFT standards are supported in Vaults. There are several options for fragment distribution, such as time-limited fixed-price buying and selling on the front end of Fractional, and selling and airdropping activities in external NFT trading markets.

Highlight #2: The current fractionalized NFT vaults on Fractional include NFTs from BAYC, DogeNFT, and other popular series.

Highlight #3: After its rebranding, Fractional is now providing new value. In August, an announcement was made that Fractional would be rebranded as Tessera, which received $20 million in funding, led by Paradigm in August. Although Tessera has yet to launch, one of its planned goals is to bring collective ownership to the general public.

Risks: According to Dune data, the daily trading volume has dropped significantly this year since June compared to January, and the growth of cumulative users has levelled off.

Analysis:

Despite the significant drop in transaction volume and the uncertainty surrounding NFT fractionalization, a report about Fractional V2 shows that the post-rebrand Tessera has the potential to grow in the following ways:

1. Technical upgrades:

• Hyperstructures are conceptually designed to be the equivalent of perpetual motion contracts that do not require maintenance or intermediaries；

• RICKS NFT fractionalization solution: ensures that fragments can always be converted back to their underlying NFT while avoiding the issues of liquidity and coordination that are commonplace with all-or-nothing buyout auctions.

2）Projects:

• Fractionalization targets high-value NFT collections, such as Doge memes, CryptoPunk, Bored Ape Yacht Club, Cool Cats, etc.；

• Game integration: Tessera has launched an NFT integration with sci-fi card game Parallel. Holders of Parallel NFT cards can collect the Parasets collection together through Tessera and receive Prime token rewards through staking.

NFT AMMs

1. Sudoswap

   In July '21, founder 0xmons created an NFT liquidity provision protocol called LSSVM and published an original white paper, "LSSVM：A Liquidity Provisioning Protocol for NFT", which briefly introduced the basic idea of an NFT AMM.

   LSSVM stands for Least Square SVM , a theoretical method in machine learning. The name was randomly chosen by 0xmons to express his attitude towards the fact that many DeFi protocols use mathematical principles as their names.

   Since SudoAMM launched, its main functions include：

   1. Trading NFTs；

   2. Adding liquidity to NFTs: setting buy and sell walls, as well as double-sided liquidity provision；

   3. The pool creator can adjust the pool parameters: these include the LP fee, the tokens to withdraw or deposit, and the desired receiving address.

2. Goatswap

a. Mechanism and Vision

• A Solana-based NFT AMM market, founded by the co-founders of Solana's Jupiter Aggregator.

• Users can now create pools to automatically buy, sell or trade NFTs, or sell NFTs to any pool that has an offer.

• The most common liquidity pool on Goatswap is the NFT-SOL pool. Any NFT holder in the liquidity pool can swap their NFT for a SOL.

• The Mainnet beta version launched, with a fee of 1%.

b. Highlights, value, and risks

• There’s nothing special about Goatswap’s mechanism, and their TVL is low.

• The protocol has 3037 Twitter followers.

3. Rootswap

a. Mechanism and Vision

• Rootswap is an automated market maker (AMM) based decentralized exchange for NFT trading. It has a VE(3,3) token incentive model and a volume-based token incentive.

• The product has not yet launched.

b. Highlight, value, and risks

• Highlight #1：Rootners NFTs

Rootners NFTs are issued by Rootswap, with a total supply that has yet to be announced, but is expected to be between 1000 and 9999 NFTs. Rootners NFTs provide the following benefits to holders:

• Highlight #2: The VE(3,3) model will be used for governance and cost sharing.

• Highlight #3: Based on the $ROOT token incentive model, asking, bidding and liquidity funding will be incentivized by $ROOT tokens.

4. Elixir

a. Mechanism and Vision

• Elixir is another NFT AMM on Solana that offers trading of NFTs near their floor price. To provide incentives in the ecosystem, Elixir will be the first community-owned market to distribute ownership tokens directly to collectibles, the community and creators.

• Phase 1: Elixir's fAMM powers the NFT lending market, and allows users to long and short the pooled floor to earn passive income from their NFT. These features are in the alpha stage and are currently only available to Nectar holders.

• Elixir offers lending, staking and derivatives for Nectar holders, and Nectar will distribute 777 of them for free. The official Discord is currently closed and the exact rules are not available yet.

• There is a 1.3% fee when purchasing NFTs and a 0.3% fee when selling. 0.27% of this fee goes to the liquidity provider, 0.03% goes to Raydium's AMM, and the rest goes to the token holder. The exchange platform does not take any fees. The community ownership model enables revenue sharing with the community. Details on how royalties will be addressed through tokenomics will be released in the coming weeks.

• When a creator publishes an NFT series on Elixir, they are also required to set a percentage of mint revenue to be locked into a liquidity pool to provide initial liquidity, and the user is required to adhere to the associated fee structure determined by Elixir when creating the liquidity pool.

b. Highlights, value, and risks

• Mechanism Highlight #1: Sell NFTs instantly; buy NFTs at the lowest price; exchange NFTs in the series for free

V0: aggregates sellers, making sellers to wait for buyers.

V1: aggregates buying and selling demand, but still splits liquidity and pricing, with numerous single LP pools in each collection Elixir fAMM: gathers buying and selling demand for the entire collection into one market。

• Mechanism Highlight #2: Incentive model that distributes all tokens to the community. The proceeds from purchases and sales are also distributed to the community;

• Mechanism Highlight #3: Nectar NFT(issued for free) holders enjoy access to lending, staking and derivatives.；

• Elixir's fAMM market has launched for less than two weeks and LPs have already deposited over $200,000 in NFT and SOL, earning 10-200% APY on their assets. On the other note, only 10 LP applications are accepted per week；

• Will partner up with Solswipe（The Solana Debit Card），Twitter follower reached 17.6k。

5. Granular

a. Mechanism, vision

• Granular is a decentralized trading platform that supports NFT automated market maker. Sudoswap bonding curve only supports integer adjustment and large slippage, Granular hopes to resolve this issue through the use of Master Pool & Sub-pool mechanism.

• Master Pool & Sub-pool mechanism: Each NFT Collection consists of a Master Pool and multiple sub-pools; LPs and traders interact directly with Master Pool.

• NFTs are divided into different sub-pools based on "desirability score", with lower values being closer to the floor price. Each sub-pool has its own Bonding Curve. the number of sub-pools varies with the type of NFT and can be adjusted. The more liquid the NFT, the higher the number of sub-pools.

b. Highlights, values, and risks

• Based on DanuFinance, a "desirability score" is calculated for each NFT, which determines the price of the NFT, enabling price differentiation for similar NFTs.

• LP are not required to set parameters manually, which simplifies the staking process.

• With only one pool for each type of NFT, the concentrated liquidity boosts LPs' returns.

c. Opinion

• The algorithm for "desirability score" has not yet been announced and its pricing feasibility has yet to be confirmed.

6. Seacows

a. Mechanism and vision

• SeaCows is an AI-powered NFT AMM protocol that allows any web3 project to build its own decentralized NFT AMM market locally, providing instant NFT liquidity and increasing trade volume.

• Settings: Built-in GameFi、PFP

b. Highlights, values, and risks

• Price predictor collects aggregated NFT metadata and on-chain transaction history. The data will be scraped, cleaned and processed for eventual use in training AI algorithms.

• Uses the Bonding Curve + AI Oracle mechanism, a comprehensive assessment of an NFT's value.

• Provide SDKs for integrating different front-ends, such as GameFi built-in market.

c. Opinion

• Details of the AI mechanism have not yet been released and its pricing feasibility has yet to be confirmed.

7. Furion

a. Mechanism and vision

• The first NFT platform that integrates trading, lending, liquidity aggregation and stake mining.

• The one-stop platform is designed to solve the trilemma of NFT financialization: NFT pricing, capital utilization and risk management.

• By converting NFTs into fractionalized ERC20 F-X tokens, F-X tokens can then be traded via AMM trading pairs or the Furion pool. The price of the F-X Furion pool is determined by the Furion oracle.

• F-X tokens can be converted into FTT-X tokens, with different FTT tokens in the same pool, improving the intrinsic liquidity and indirectly enabling NFT to NFT conversion. The pricing mechanism is as follows：

b. Highlights, values and risks

• NFT fractionalization has two approaches: storage and lock-in.

  • Storage: releases 100% of the liquidity in the underlying assets.

  • Locked-in: releases a portion of the liquidity of the underlying asset while retaining ownership of the asset.

• The two approaches, split pools and aggregated pools, are suitable for different needs. Split pools can be used for individual NFT types, while aggregated pools can be used to create NFT index.

c. Opinion

• Aggregated index tokens aggregate the liquidity of different NFTs and helped boosting its liquidity to some extent. However, their pricing process is complicated, and the volatility of NFT prices and oracle risks may cause significant fluctuations in FTT tokens.

Currently, there are no new projects in NFT fractionalization, and only 5 projects have tracked transaction volume. Meanwhile, NFT AMM has just begun. There is about 20 NFT AMMs in the secondary market, and only a very small number of products are in use. With Sudoswap setting the benchmark, other products are becoming very homogenized.

V. What problems have NFT Fractionalization and AMM Solved or Created？

Problems Solved by NFT Fractionalization

1. Enabling Value Discovery；

2. NFT’s low liquidity and its inability to be used as collateral；

3. Democratization of Investment

Problem created by NFT Fractionalization

1. Ownership issues: buyers are forced to sell the fragments in hand after buyout.

2. Unable to solve the liquidity problem of NFTs themselves (unable to capture the differentiation of NFT prices across rarities)

3. Friendly to rare, blue-chip NFTs and unfriendly to long-tail NFTs.

4. Inefficient and incurs additional costs.

5. Chance of NFT fractionalization Ponzi scheme, value bubble.

6. Copyright issues.

Problems Solved by NFT AMM

1. Lower entrance barrier: compared to NFTX, Fractional and other projects, Sudoswap lowers the user's entrance barrier (buying and selling), the cost of education is extremely low.

2. Instant liquidity: can exit at any time.

3. Completely on-chain, no license required: completely on-chain posting, bidding, trading, without the need of license, and pricing is better.compared to the NFTX homogenization of xyk.

4. Efficient and flexible: NFT - FT LP directly involves in market making and has higher rates. Pool parameters (LP fee, buy and sell tax, price discovery methods, etc.) can also be customized.

5. New NFTfi building blocks: takes advantage of combinability, and can be used as the underlying infrastructure of NFTfi, gamefi project marketplace. e.g. Sudo Inu's LP mining.

6. Another form of incentive: the previous model was too simplistic and not sustainable. NFT project side can be deeply bound to Stakeholder, and can use transaction fees as a new type of "royalty" incentive LP/project side.

7. New NFT trading, market-making model: a few changes in the trading habits of the NFT order book, and provides a new method of NFT market-making (provides DCA, etc.).

Problems Created by NFT AMM

1. Bonding curve is not flexible: Linear, Exponential; (theoretically can use any type of curve such as linear, S-curve, sine curve); why not use the XYK model? The team thought that the XYK model for NFT pricing would make the price fluctuations too drastic (the liquidity distribution would be too discrete and the NFTX model would incur minting vtokens for no reason). Therefore, Sudoswap uses a centralized liquidity approach similar to Uni V3, which mitigates the problem of the XYK model making prices too volatile (which may be a double-edged sword here).

2. The rarity of NFT is eliminated in the process: it cannot fit all NFT market needs, but can be achieved by a simple buy/sell wall.

3. Frictional costs: NFT will be stored (hosted) as LP in the pool, each withdrawal, pending orders have costs incurred, can not do off-chain order book records, can not be pending orders in multiple marketplace.

4. The authority to create LP: superior administrator privileges, the pricing function, incremental thresholds, initial fees, global fees can all be controlled.

5. LP risk amplification during the bear market: due to the poor liquidity of NFT itself, pool model itself provides Exit liq, whch makes NFT LP prone to infinite risk. Hence, if there is no corresponding incentive, no one will participate LP.

In short, the fractionalization approach introduces questions about post-fractionalization ownership, essentially added a new external feature without directly addressing NFT liquidity issues. The AMM is more questionable in terms of whether it can be broadly applied to the pricing of all NFTs, and whether the risk-reward ratio is disproportionate for market making LPs. When comparing the two, AMM is the more promising option.

VI. Insight and Future development

NFT Fractionalization

1. NFT fractionalization focuses on high-value investment-oriented NFTs, such as blue-chip and real-assets. NFT fractionalization lowers the barriers of participation in these assets, allowing users to speculate and trade assets at reduced prices.

2. NFT fractionalization itself did not solve the NFT liquidity and pricing problem, resulting in the separation between the NFT spot market and the fractionalized market. In terms of market performance after NFT fractionalization, the liquidity of token is low and trading is inactive, which does not meet the expectation.

3. In terms of the asset itself, NFT comes with equity, which is difficult to divide. The NFT, as a non-homogeneous asset, brings a non-homogeneous experience to the user. NFT fractionalization makes it difficult to effectively divide the equity.

4. The development of the NFT fractionalization market is ultimately dependent on the development of the overall NFT market, and fractionalization of assets does not boost liquidity when the underlying assets are illiquid.

5. The structure of NFT fractionalization products will not go through drastic changes in the future. Product iterations will unfold from several aspects, such as, more flexible rate design, more wallet support, richer NFT support and data display, more user-friendly interactive interface and diverse exit methods.

NFT AMM

1. The model of AMM will add a lot of friction of trading/marketing, which is not friendly to low-priced NFT. Hence, low priced NFT traders are not the target users for the time being.

2. AMM, i.e. utility NFT, can be served as an important category of game assets. Therefore, a standardized market is essential to the future development of gaming ecosystem.

3. AMM provides new ideas for creators' incentive, i.e. binding the creators as stakeholders to incentivize their continuous output.

4. The AMM format also lowers the entrance barrier for market making of NFT and makes the deployment of strategies more flexible.

Reference

https://www.binance.com/zh-CN/blog/nft/nft%E7%A2%8E%E7%89%87%E5%8C%96%E5%A6%82%E4%BD%95%E6%94%B9%E5%8F%98nft%E9%A2%86%E5%9F%9F-421499824684903814

https://mirror.xyz/0xfD541c8A6710006a63C83eC32B9F2D7b3291eFa3/kv1YOjjzbOC_FVruhkIUjidgkisQV0FkPV7n5vevnLM

https://docs.nftx.io/

https://docs.nft20.io/

https://fortune.com/2022/08/17/nfts-fractional-tessera-paradigm-20-million-funding-round/

https://medium.com/tessera-nft/announcing-tessera-6cc66d92a6a6

最后，请关注 Dr.DODO 的最新招聘信息：

https://twitter.com/DodoResearch/status/1587274217082404864?s=20&t=dYHynANExeCjoV2C96SZmg