Using AssetMerge, an overview of the product
AssetMerge is a trustless DeFi protocol that allows anyone to instantly buy or sell any NFT or become a liquidity provider by providing Ether and your NFTs of choice to earn some yield.
For an overview of features on comparisons with other solutions in the market check out the last post, The AssetMerge Protocol.
The AssetMerge dApp allows users to swap NFTs or provide liquidity, below we go into depth on how these features work and how pricing dynamics work in the protocol.
Assuming there exists a liquidity pool with the NFT collection you want to trade, swapping between Ether and any NFT is as simple as selecting the NFTs and executing the swap.
You can buy any NFT in the liquidity pool by selecting one or more that you want to purchase and then completing the swap by confirming one transaction.
Selling NFTs is the same process, select one or more items from your wallet and sell to them liquidity pool.
How do prices work
Prices are initially set by liquidity providers when they add liquidity, by adding the item + Ether of the same value.
Then prices are further influenced when users swap, the net demand to buy or sell an item influences its price compared to other items in the collection, and the prices of all items in the collection fluctuate based on the NFTs/ETH ratio in the pool. If NFTs are purchased from the pool there becomes less NFTs available and more Ether rising the price, the same works as in the opposite direction.
I’ve seen floor price before, whats a base price?
Floor price is the price of the least expensive item in the pool, a concept seen in other marketplaces representing the cheapest item listed for sale.
Base price on the other hand represents the initial price for any NFT that has no prior history in the liquidity pool. For most uses the base price should be treated as the floor for selling to the pool, but it is possible for an item to be priced below the base price.
Liquidity providers add both NFTs and ETH, with the ETH matching the equivalent value of the NFTs added. When you add liquidity you will receive liquidity tokens for the pool. These LP tokens represent a fraction of the pool, and are redeemable the same fraction worth of items+Ether when removing.
The first liquidity provider for a pair should set the prices of the items they add, as well as the starting base price.
The initial base price should be set to the floor price for that collection.
AssetMerge suggests values of items based off the current pool value when adding liquidity, but you can assign any price to items that you add in liquidity — as long as you can provide the equivalent amount of Ether.
Who should provide liquidity, what are the risks
As a liquidity provider, you have market exposure to both the specific NFT collection and ETH.
If the average price of NFTs depreciate enough against ETH you may also experience impermanent loss.
If you price items different when adding liquidity different that what the market prices the items you should earn less yield as if better pricing for similar NFTs exist elsewhere there will less swap volume to generate fees.
So the reason someone would provide liquidity would be if you are bullish on both pair assets (the NFT collection and Ether) and see a demand to swap the collection, earning yield on your position.