FLOOR Sweeping Treadmills
Exploring FloorDAO's use of Uniswap v3 LPs to acquire NFTX wrapped NFTs with Olympus Bonds
Disclosure, I have the great pleasure of advising FloorDAO.
Discussing their MAYC bond series with the team had me geeking out, and I want more people to geek out with me. I hope you enjoy.
0) Intro NFT Market Mechanics
Order books are the dominant way to trade NFTs, but like the fungible DEX’s before them, orderbook performance is limited. Due to this we see many experiments toward more pooled asset markets ranging from the up and coming sudo swap to the reliable, establised NFTX.
Order Books
Order books are by default a manual process, though savy users can wrap the expirience in automated bots. This default expirience causes listed asks to go stale relative to the most recent market activity. It also isolates sales to a specific asset, making it harder to produce pooled strategies.
NFTX
NFTX creates floor indecies of NFTs by using a wrapper contract which fungibly represents the assets held by the wrapper. This allows listing NFTs on AMM’s such as Sushi, and therefore enables pooled ownership of liquidity in an automated manner.
Uniswap V3
Offering concentrated liquidity, when paired with NFTX indecies, allows for nuanced control of lazy market making. In my expirience combining NFTs with uniswap v3 is quite rare.
1) Intro FloorDAO
FloorDAO focuses on acquiring floor assets of NFT collections to bootstrap the floor liquidity DeFi economy. While NFTX provides a way to create and sustain a market for floor assets, it does not incentivize liquidity in any market (though it has its own stash of PUNKs from its initial raise).
Like all things, low liquidity is problematic, especially for the full range pairs incentivized by NFTX on Sushi. They need volume to generate fees, and they need liquidity to generate volume. Chicken and the Egg.
FloorDAO is dedicated to addressing this gap by collectively providing liquidity to these collections to earn the fees the available markets will generate. However this requires it to solve tricky problems like how to acquire that liquidity and how to determine which collections are supported.
Bonds
In order to acquire protocol owned liquidity for market making, FloorDAO offers bonds where it sells FLOOR at a discount with a short locktime in exchange for NFTs.
The absolute best resource for understanding Bonds so far is this blog by Jordan Hall.
2) Sweeping MAYC
Initial Market Conditions
NFTX Vault Contains:
5 MAYC
Sushi Pool Liquidity
7.85 WETH
0.31 MAYC (NFTX Vault)
Mutant Ape Yatch Club Floor Price
22.4 ETH
Goals
Sell out MAYC bonds
Users must acquire MAYC
Through purchase
Through existing asset
Users most likely to bond while mechanism offering a discount
Provide an easy way for Users to acquire the MAYC to bond.
If through purchase, by low slippage buys of partial units.
If through existing assets, by low slippage sells of remaining partial units.
Unique Problems
NFTX has a minting fee, but FloorDAO has a deal which avoids this fee.
the price of the bond is dependent on the relationship between the NFT price and FLOOR price, but 10%/ swing in realized value can impact the attractiveness of bonds.
FloorDAO has ETH,
wants to have bonding for MAYC,
Bonding in current market
hard for folks to acquire MAYC in partial units without buying whole unit, selling remainder of partial at high slippage.
To provide adequate full range liquidity to minimize this slippage would require significant capital and require sweeping a large amount of the floor ourselves to provide both sides.
Mapping Out The System
Create uni v3 pool between NFTX wrapped wMAYC, and ETH
with narrow range,
single sided entry of only wMAYC,
which sells for ETH w/ price sliding up
as price slides up, has ETH available to buy MAYC
if price drops quickly, wont eat sells from outside holders
if price moves can adjust range
FloorDAO owns 75% of staked NFTX MAYC positions and would earn 75% of fees generated by new mints seeking bonds.
FloorDAO does not pay NFTX fees to wrap
Outside arbitrage can occur if we buy remaining MAYC at a 10% premium
Initial Approach
Create a small full range v3 position to give us flexibility to move price when we withdraw our primary position
Create a concentrated range position of MAYC from current price to a 10% premium.
At a 10% premium, outside forces, will be able to mint on NFTX and sell the remainder
This performed beyond my expectation, and sold out extremely quickly processing through the position with barely any slippage and minimal market liquidity was needed to facilitate.
Refinements For Second Approach
After the first set of bonds sold out, we exited position 2. The outside arb was not arriving in a timely fashion, and our pool was now mostly ETH.
We made a small trade against position 1 to move the price down from the premium to the current Floor on Order Books.
We then swept the MAYC floor w/ Gem.xyz again and resupplied liquidity. This time we only chose to extend the range from the current floor up to a 5% premium since we were now more attuned to arb order books ourselves and didn’t need to tempt outside capital with a premium. This allowed even more efficient entry into our bonds.
3) Closing Thoughts
By using a Treadmill Approach, we were able to minimize the upfront liquidity the DAO needed to effectively bundle purchases of whole NFT’s and then recapture that upfront cost in ETH by selling in a small range. This put us in a position to repeat the process and slowly increase the floor through sweeps, on a collection which did not have deep available liquidity.
Buy, sell, bond, repeat.
By using two positions in a pool of our creation we were able to easily manaage removal and resupply of Position 2 with Position 1 ready for price adjustments, simplifying accounting.
This process also enabled us to earn additional yield from the bonding process.
I think this process will be very useful for any future applications trying to acquire NFT’s with low liquidity, and look forward to how it can become more automated in time.