“If you want a thing done well, do it yourself” — Napoleon Bonaparte
Liquidity is one of the most important concepts in NFTs. It can be the sole destructor of a project with bright prospects but can also be a factor leading to huge success. Therefore, collection teams and collectors alike need to fundamentally understand liquidity to succeed in their own fields.
So, what is liquidity?
In simple terms, liquidity is the ease of buying NFTs in a collection as well as selling them. Liquidity is affected by a myriad of factors, for example, transaction costs like platform fees, gas fees, and royalties, but more than anything, they are influenced by the riskiness of the collection as perceived by the market.
For instance, a flipper would require greater compensation to take on the risk of an early-stage collection compared to a blue chip collection. This is because there is a greater likelihood of a drawdown for any particular reason, for instance, the risk of a rugpull, something that now haunts those that experienced them last cycle. Similarly, existing holders of risky NFTs demand greater compensation because they may miss out on an explosion in the price of the NFT which is more likely for the early-stage collection.
What are the consequences of poor liquidity?
Firstly, moves up and down in price are a lot more extreme. This can become really scary, since the more a price moves down, the more likely it becomes that holders sell because narratives become more believable once there has been a significant move in price. In other words, holders are motivated by factors that do not necessarily concern their own fundamental views of the project, thereby listening to their emotions. This is how FUD can destroy a collection even though it was not necessarily warranted. Having an NFT collection traded in a liquid manner acts as insurance against events like the ones described and much more.
Secondly, it is difficult for new users to join the community by purchasing an NFT. Because people care about profits and losses, the more costly it is to buy an NFT, the less likely they are to be in the green at some point in the future. Obviously, seeing little growth in new community members is detrimental to a collection since it relies on this sort of momentum to thrive.
What is the current situation like?
Most NFT collections struggle with liquidity, especially ones that have not yet achieved blue-chip status. This is most prevalent during the very first days of early-stage collections where they have had little time to prove themselves to the community and earn their trust. Therefore, collection founders need to do everything in their power to improve liquidity as much as they can, as early as they can.
Until now it has been impossible to trustlessly incentivize and guarantee liquidity. This all changes today.
Introducing NFT Yield Farming
Yield farming allows projects to reward users that are providing liquidity for their collections by continuously giving them tokens for a defined period of time. These token rewards can come in the form of the project’s NFTs from their treasury, ETH in their treasury, any ERC-20 token, or any ERC-721 token that the team, their partners, or anyone else would want to dedicate towards rewarding liquidity.
How does it work?
Collection creators dedicate a certain amount of rewards to users who provide liquidity for their collection on Baton. These rewards are then distributed according to the user’s percentage stake of the liquidity pool. The more NFTs and ETH they deposit into the liquidity pool, the greater the rewards. Liquidity providers can claim rewards and withdraw funds from the pool at any time.
Some of the more observant readers, perhaps already familiar with yield farming, notice an oddity: as NFTs are given out gradually to the pool, how often are rewards given, and to whom? As NFTs are non-fungible, you could theoretically only give out 1 NFT to 1 liquidity provider at a time, right? Wrong. On Baton, NFTs dedicated to yield farming are fractionalized — divided into many smaller parts, essentially making it fungible — and given out to liquidity providers pro rata, just like in ERC-20 yield farming. These fractionalized NFTs can be sold back into the liquidity pool, retaining the value of the floor price of the collection. Read more about NFT fractionalization.
Why would collection founders use this tool?
Since anyone that provides liquidity would earn additional rewards on top of what they would usually earn, more deposits will come from existing holders to capture these rewards. This means that there is more liquidity for the collection and that trading the collection is less costly. Also, because yield farming programs produce high yields for liquidity providers, users that do not hold the NFTs but want to earn these yields are likely to buy the NFTs from the collection so they can provide liquidity themselves. Therefore, there is increased buying pressure on the NFT collection as a whole.
Finally, deciding to yield farm shows dedication to maximizing liquidity and is therefore seen as positive in the eyes of the community, especially to those most invested in the collection since they are being rewarded the most.
This process, although common in DeFi, has never been done before in NFT Finance. Collections that take advantage of narrative shifts will put themselves in a strong position for the long term.
Other Use Cases
Because anyone can permissionlessly deploy a yield farm on any pool, regardless of whether they own the pool, there are use cases other than deepening the liquidity of the collection that can be explored using the yield farming mechanism.
For example, upcoming NFT collections can target certain groups to increase awareness and onboard an initial set of members into their community. How this would work can come in multiple forms: For instance, if a collection founder is interested in tapping into the Milady community, they are able to reward Milady liquidity providers with NFTs from their treasury.
You can one-up the complexity as well: instead of pre-minted NFTs, why not reward liquidity providers with whitelist tokens, giving them access to your mint? The possibilities are endless, and we are excited to see what people come up with.
Yield Farming Testnet
To finally bring this product to market, Baton is thrilled to introduce its testnet: https://goerli.baton.finance/.
As a user, there are two main ways you are able to play around with our testnet:
- Depositing into existing yield farms
- Creating a new yield farm
Our testnet is located on the Goerli testnet implementation of Ethereum, meaning that users must acquire Goerli ETH. The best place to acquire Goerli ETH is from the Paradigm Faucet where you receive 0.5 Goerli ETH.
While Baton’s V1 Yield Farming implementation only supports yield farming on Caviar, we are planning on expanding to NFTX and Sudoswap to support more collections, communities, and use cases.
Depositing into Liquidity Farms
- Check out yield farms on Baton
2. To deposit into a Baton liquidity farm you will need some NFTs in addition to your Goerli ETH. The best place to acquire these NFTs is from the Caviar testnet. Once you have acquired some NFTs of your choice from the same collection head back over the the Baton Testnet page. The buying process is shown in Fig. 4
3. Select a farm that is made up of NFTs you have selected, and deposit them into the pool. Once this has been completed you will immediately start earning your rewards from the pool. The depositing process is highlighted in Fig. 5.
4. You can track your earnings, APR, etc. on the main page
Creating Farms
- To create a farm you will need to select one of the existing liquidity pools on Caviar. If the farm you wish to “create” is not available to select on the existing ones, it first has to be created on Caviar.
2. Once you have selected the pool you want the rewards to be dedicated to, choose the ERC-20s/NFTs which are going to be used as rewards.
3. Once these steps are completed the farm creator is able to input the period of time the yield farm should last for.
Discord Announcement
To collect user feedback & suggestions on our testnet we are happy to announce that we will be launching our Discord in combination with our Testnet!
Join our community, leave feedback, and complete the survey for the OG role!
Discord: https://discord.gg/yh5nBCaSkN
Closing Thoughts
Yield Farming will become a core part of Baton’s ever-growing Empire. With the upcoming release of our Launchpad, collection creators and users will be able to take advantage of both in combination.
Yield Farming is a common term in DeFi, however unheard of in NFT Finance. Today, Baton is going to change that forever. A long time ago DeFi summer started in oddly similar conditions as today, a sideways market, little to no innovation, and some ambitious builders trying to change the landscape. This is the beginning of a new era, a new run, starting with NFT-Fi Summer.
Links
Testnet: https://goerli.baton.finance/
Discord: https://discord.gg/yh5nBCaSkN
Twitter: https://twitter.com/BatonFinance
