Unleashing NFT Liquidity: GumBall Protocol | TKX Weekly
GumBall Protocol is a creative NFT launching and trading platform on Arbitrum. GumBall utilizes a unique solution to bootstrap liquidity to new NFT projects. On top of NFT trading, GumBall also allows users to stake NFTs or fractionalized NFTs to earn trading fees and borrow assets.
Current State of NFT Liquidity
- Lack of price discovery mechanisms: NFTs are unique digital assets, and it can be difficult to determine their fair market value
- High volatility: NFT market is relatively new, and the value/floor price of NFTs can fluctuate wildly
- Limited Liquidity providers: There are a limited number of market makers or liquidity providers in the NFT market, which can lead to a lack of depth and difficulty for buyers and sellers to find counterparties to trade with
GumBall’s solution is to tokenize NFT collection into ERC20 tokens to build instant deep liquidity.
First, GumBall applies the basic DeFi concepts into NFT — tokenizing NFT as ERC-20 + AMM on tokenized NFT. Each NFT collection launched on the platform is accompanied by a corresponding amount of ERC20 tokens (GBTs) that are specifically created for the collection. The cost of each NFT (gNFT) is fixed at 1 GBT. These tokens are linked to a specific bonding curve (AMM) and their liquidity is generated from the sales of the associated NFTs (ETH received by the pool).
Then, the price of GBTs for each collection is determined by the bonding curve with ETH as the base currency. The price of GBTs increases/decreases with each purchase/sale. As the price of GBT is based on the bonding curve, the last GBT will be insanely expensive. Hence, it is impossible to fully mint a gNFT collection.
From the chart below, we can see the swap is ETH <> GBT(ERC20) <> gNFT(NFT). The token machine (bonding curve) is to purchase/sale of GBT, and the GumBall machine is to mint gNFT from GBT(ERC20). In the GumBall machine, users can either choose to mint a new gNFT or choose an existing gNFT.
Users can stake their GBT or gNFTs in the GumBar (staking contract) to earn swap fees from the NFT collection. Yield is paid in the form of ETH and GBT.
GumBall has two revenue streams at the moment:
- 2.5% swap fee on the bonding curve
- 10% fee on each redemption of an NFT
All revenue is distributed as follows:
- 40% to the collection creator
- 40% to GBT stakers
- 20% to GumBall Treasury
Through the bonding curve, GumBall makes itself the most liquid NFT platform. Currently, there are arbitrage opportunities if NFT’s listing prices between marketplaces like OpenSea are different. However, since the marketplaces are less liquid, trades are not guaranteed and are risky. But GumBall’s more guaranteed liquidity can make the protocol the centre of NFT liquidity.
For new NFT projects seeking deep liquidity, it has to launch on/use the GumBall platform. This could be a potential revenue stream if GumBall successfully builds up its model. In GumBall’s model, it is possible to use floor price to acquire rare NFT even after minting.
GumBall’s approach to tokenising NFTs significantly increases their liquidity in three ways:
- Allowing for instant buying and selling of NFTs through the bonding curve
- Enabling the trading of small fractions of NFTs to lower the barrier of entry and exit. It lowers the entry barrier and users are easier to enter/exit their positions
- Allowing holders to borrow ETH against their NFTs instead of having to sell them in times of liquidity crisis
In the current market, people have different approaches to tokenising NFT to release its liquidity, yet we don’t have a consensus on which is the best. I think GumBall’s approach might have a chance to become mainstream because once NFT is tokenized into ERC20 tokens, it makes NFT composable and able to connect to the existing DeFi ecosystem. As GumBall Protocol is built on Arbitrum, I am excited to see how GumBall partners with other Arbiturm native protocols.
Overall, GumBall Protocol is a project that has very good potential. Although its innovative model is yet to be verified by the market, it indeed significantly improves the capital efficiency of NFT. It combines NFT trading, staking, lending and lottery, all features are closely bound up.
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Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.