An NFTX vault with seeded liquidity pool provides your community with a stable floor price and helps ensure the long term success of your project.
Floor price mechanics without a liquidity pool
When you don’t have a liquidity pool for your project the only way to exit a project is to find a buyer on the open market, and this is most often done through marketplaces like Opensea.
Let’s say the mint price for a project is 0.05 and there are 10,000 NFTs within the collection. This generates 500ETH for the project creators who now have a pool of ETH to cover project costs and profit.
Let’s say that 100 people decide to list their NFTs for 0.1 ETH each to try and double their initial outlay (we’ll ignore the gas costs and fees for simplicity). We now have a floor price of 0.1ETH, which is actually just the cheapest price someone is willing to sell their NFT for.
Now we might have someone that has 5 NFTs from the collection who really needs 0.25ETH to invest in another project, so they list their 5 NFTs for 0.05ETH to try and make a quick sale. Seeing this, another 20 people that had their NFT listed at 0.10 decide they also want to get out quickly, so they now list their NFTs for 0.045.
Within a matter of an hour, the floor price is now at 0.045 and people begin to think that the project is losing value and more people start to list at lower prices.
The floor now becomes a race to the lowest possible price and can tank the project.
Floor price mechanics with a liquidity pool
Taking the same example as before with 10,000 NFTs minted at 0.05ETH each and the NFT Project making 500ETH. We will also assume that 100 people have listed their NFTs at 0.1ETH to try double their initial investment.
This time, however, the NFT Project decides to sweep the floor of 100 NFTs on OpenSea, picking them all up for 10 ETH (again, let’s ignore gas and royalty/fees).
The project then creates a vault on NFTX using the 100 NFTs and adds liquidity with another 10ETH. The project now has an NFTX vault with a liquidity pool that has 100 items with a floor price of 0.1ETH.
Now when someone wants to sell their 5 NFTs and exit the project they can sell them into the pool, but instead of changing the floor price by offering them at a super low price, they immediately get the current floor price.
This also means that if anyone decides to put an NFT from the collection onto OpenSea for less than the value of the NFTX vault, someone can buy it from OpenSea and sell it into the NFTX pool and make a profit (this is called Arbitrage).
Also, as users buy/sell/swap from the vault fees are earned and distributed to the liquidity providers.
In the example above the NFT Project has used up 20ETH, 4%, from their initial 500ETH. That’s just 4% of the initial sale. As a result they have provided their community with a solid floor which allows users to exit when they need to and not impact the project’s value.
To find out more about why it is important to add a large initial inventory/liquidity amount check out our article about why liquidity pool size matters.
Next, let’s take a look at how you can earn fees for the NFT project.