Sudoswap - The Uniswap for NFTs
General thesis: Architecture, Bull case Vs Bear case, and position in the NFT niche
SudoSwap has been around for a while now.Â
It first began its crypto life, as an NFT OTC swap service. It was known for peer-to-peer, no-fee swaps. This means that you could directly trade or sell NFTs without there being a middle man taking care of the transaction like an exchange or marketplace. So SudoSwap is not something necessarily new.
But recently SudoSwap announced something that will change NFTs forever recently.
It announced the new NFT marketplace that is altering how crypto users think about NFT liquidity and trading. This new marketplace does this, by introducing the âAutomated Market Makerâ (AMM) model to NFTs.
What is an automated market maker?
An automated market maker (AMM) is the underlying protocol that powers a decentralized exchange (DEX).
It allows assets to be traded using crypto liquidity pools as counterparties rather than a traditional market of buyers and sellers. In this protocol, users are incentivized to become liquidity providers in exchange for a share of transaction fees by automated market makers.
So, what exactly is Sudoswap?
Sudoswap is a fully on-chain, gas-efficient decentralized NFT marketplace that uses the AMM model.
Using the AMM model, Sudoswap enables users to trade and swap NFTs through a two-sided liquidity pool. So you can offer NFTs for sale as well as ETH for purchase.
In exchange, you will be paid a fee based on the transaction spread.
Sudoswap is unquestionably paving the way for non-traditional financial products. The ability for buyers and sellers to swap into customizable bonding curves created by liquidity providers distinguishes sudoswap.
You can use Sudoswap to create pools that sell along price curves. If you have some NFTs from a particular collection, but donât want to sell them all at once, you can gradually raise the price as it sells off. This allows you to efficiently exit an NFT position/collection.
On the other hand, you can create pools that buy along price curves. You can make collection offers with a price decrease after each purchase and a maximum number to buy. This allows you to create a floor, purchase over time (DCA), and sweep slowly.
The current sudoswap AMM protocol, like other floor NFT protocols, makes no distinction between different ERC721 IDs. Pools willing to buy or sell NFTs will return the same price regardless of which NFT is sent into or out of the collection. It works similarly to @Uniswap V2, in that a liquidity provider provides liquidity for an NFT collection in exchange for swap fees.
The AMM hosts numerous individual pools of NFTs, each managed by a single liquidity provider. Individual pools are configured to operate in one of three modes, allowing liquidity providers to choose whether to operate âsell-onlyâ pools or âbuy-onlyâ pools.
The protocolâs fundamental unit is the LSSVMPair, which can hold NFTs, tokens, or both. End users then use LSSVMRouter to switch between pools and manage their approvals on a single contract.
Under the hood, SudoSwapâs LSSVMPairFactory contract is creating new pools (referred to as âPairsâ at the contract level), each pool being a contract called LSSVMPair that is owned by the pool creator and created with custom parameters like pair type (Token, NFT, or Trade), bonding curve type (just linear or exponential, for now), spot price, delta, etc. These pairs can then be monitored for their assets and price quotes (obtained by calling âgetBuyNFTQuoteâ, shown below).
The LSSVMRouter contract is used to perform token approvals (combining approvals into a single contract) and swaps. There are several swap types (ârobustâ and ânormalâ), each of which addresses the question of âwhat happens if one leg of this trade cannot execute due to slippage or rapid price movements?â Alternatively, robust would skip the leg and refund the user, whereas normal would revert if there is too much slippage.
You might be wondering how you can put NFTs in a liquidity pool if each NFT is unique. The solution lies in the floor NFTs. These NFTs do not command higher prices based on rarity because they are all very similar. Hence, different liquidity pools for different rarities in a collection could theoretically be created (Ex: gold trait NFTs or Legendaries).
You may also want to obtain pricing yourself for a variety of reasons such as aggregator inclusion, MEV, and so on. To do so, youâd need to track all pools (via LSSVMPairFactoryâs NewPair events), NFTs in pools (via LSSVMPairFactoryâs NFTDeposit eventsâââor via the poolâs getAllHeldIds function), assets in pools (via the poolâs TokenDeposit & TokenWithdrawal events), and pricing (via poolsâ getBuyNFTQuote and getSellNFTQuote functions).
Furthermore, Sudoswap assists in determining the true floor of a collection rather than relying on sell listings, which may or may not represent market value. It may offer some unusual snipingâââBecause all NFTs are treated the same in each liquidity pool, you may be able to find undervalued NFTsâââopportunities for keen participants.
When you buy an asset on Sudoswap, you can choose which NFT you want to withdraw. If someone sells a rarer NFT to the pool by mistake, you could buy it and list it for a higher price, hoping that someone else buys it outside of the LP.
Finally, as Sudoswap gains popularity, we may witness unprecedented activity in the NFT space. Protocols may choose to set aside a portion of their collection for liquidity pools, which they can then combine with proceeds from their mint sale. If they list directly on the platform, ideally with NFT and ETH liquidity, it would likely provide substantial immediate liquidity to the project and the collection would have a high chance of becoming a highly traded limited token market.
Sudoswap has only been popular for a few days, but the experiments are getting better by the day. Sudo Inu was the first popular Sudo-native collection.
(
https://sudoswap.xyz/#/browse/buy/0xA78c124B4F7368adDE6a74D32eD9C369fe016F20âŚ
)
The first unique ideaâââwhich came from @surfcoderepeatâââwas a raffle system on a curve. It used a unique system of minting 50 NFTs to the pool whenever the pool ran out. Unfortunately, there was a critical bug and it went to zero. Looking forward to v2.
Sudoswap has experienced incredible organic growth in recent weeks; letâs look at the on-chain data.
Fees and Gas Optimization
Fees have made the market structure for NFTs inefficient.
The NFT market is currently dominated by centralized marketplaces such as @opensea @LooksRare and a few smaller marketplaces. These entities profit handsomely from the exchange by charging a platform fee every time an NFT is purchased.
SudoAMM alters this by being completely on-chain. Anyone can use Ethereum to source the same liquidity as the sudoswap marketplace in their applications.
Buyers frequently require a 10% price increase just to break even. Trading on sudoswap costs 0.5% instead of the standard 7.5% (2.5% + 5% royalty) fee on other platforms, allowing for better price discovery.
sudoAMM was designed from the ground up to save traders gas. Trading single NFTs is as cheap as trading the most highly optimized NFT swapping contracts, and trading NFTs in bulk can save you up to 40%!
Advantages/Bull cases for Sudoswap
0.5% fees that go to Sudo Treasury (0xb16c1342e617a5b6e4b631eb114483fdb289c0a4)
On-chain marketplace: true decentralization, no censoring
Automatically adjust selling price as price goes up
Instant liquidity for buying/selling
Fully on-chain (no centralized orderbook)
Cheaper pricing at times
Aggregators can take advantage of SudoSwap pricing, giving even non-SudoSwap-familiar users better pricing when available
Ability to earn trading fees
Ability to automatically DCA into/out of collections
Thicker liquidity on NFTs is a plus for the entire space because it means NFT markets become more efficient and price equilibrium is more realistic than some arbitrary floor price based on the lowest ask on any given collection.
Bear cases
TAM is limited because the userbase must be sophisticated in order to generate LPs. Using Uniswap as a comparison, what percentage of Uniswap wallets generate LPs rather than simply trading?
Competitors have the ability to clone
SUDO/XMON The token transition is unclear
Supply concentration isnât enticing. The largest holders account for 3â4% of the total, as VCs regularly purchase 10% or more of projects
The Sudoswap userbase comprises hypergamblers who jump from concept to concept. There is no stickiness
Wen token?
There is no token yet, but $SUDO is coming. It was confirmed in their blog post.
Upcoming catalysts
Gem integration
Uniswap integration
Novel uses of Sudo (launches, dutch auctions, buyback + burns, e.t.c)
Concerns
The rise of 0% creator royalties has the potential to kill or drastically alter the NFT market from what weâve known for the past year, as Sudoswap plans to add support for ERC1155, ERC20 token routing, as well as more novel bonding curves, and AMM management infrastructure.
I can see both sides of the issue. On one hand, we have many scammers and ruggers that are profiting greatly (in-perpetuity) via secondary sales. On the other hand, I see how royalties are a huge incentive for builders/artists to dedicate their time, energy, and life to projects.
Teams that are willing to put their money where their mouth is can benefit from sudoswap, as demand drives up the price of NFT collections. Theyâll benefit by replicating their royalties in their liquidity pools based on a fee, but it is not risk-free like traditional royalties.
If the founders are unwilling to create pools, communities can create them themselves; this is the beauty of decentralized software. In doing so, they completely remove royalties from bad actors, forcing them to deliver or be left behind.
Of course, as an NFT degen, I would prefer to pay lower fees. This could be accomplished by lowering Marketplace fees (0.5â1% standard instead of 2â2.5%) and Project royalties (1%-3%).
So, instead of eliminating royalties entirely, we would need to develop a new standard that would be adopted. If there are no royalties for creators, projects do not have a source of income after the initial mint. This could slow or halt project development.
Conclusion:
SudoSwap will make tradeoffs such as âincreased gas but all on-chainâ and âarguably more complex for new users but increased instant liquidity,â and users will be able to choose which exchange type they prefer.
Due to Sudoâs low exchange fees and liquidity that is typically concentrated on the floor, routing part or all of a batch trade through Sudo swap pools will result in lower execution prices for users without the user even needing to learn about (or be aware of) Sudoswap.
This is an intriguing choice that has sparked some discussion, as AMMs/DeFi are words that many NFT users/traders dislike.Â
However, as a bonafide degen, Iâm looking forward to doing business with both parties.