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 have added pricing curve 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. Launchpad

In terms of implementation, the two solutions are different, especially in terms of usage scenarios. NFT Fractionalization 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, fragmented products become more 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.

                                                        *Statistics：Dune Analytics*

• 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.

                                   *Fractional Daily Transaction Volume（Statistics： Dune）*

                                ****Number of Pools Added Daily on Fractional***（Statistics： Dune）*

                                     *NFTX Daily Transaction Volume& TVL（Statistics：Dune）*

                                   *Unicly Daily Transaction Volume & TVL（Statistics：Dune）*

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.