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What are Sweeper Pools (🧹🏊)
A summary of what Sweeper Pools are, their purpose and their benefits.
In partnership with our friends from FloorDAO and NFTX, we've released a revolutionary, game-changing, new way to sweep NFT floors via ‘Sweeper Pools’ (🧹 🏊)
Utilising the underlying tech of Balancer Liquidity Bootstrapping Pools, Sweeper Pools are a permissionless and innovative way for individuals and DAOs such as FloorDAO to acquire wanted NFTs in an automated way, without the potential harsh price impact that can occur from an immediate sweeping of the floor.
To understand the full context of how and why to use Sweeper Pools it's important to make sense of all the moving pieces, including the goals of our partners.
FloorDAO is a decentralised NFT market-making protocol. It enables deep, sticky liquidity for all NFT collections contained in the FloorDAO treasury. Decentralised exchanges such as NFTX use the underlying mechanism of Uniswap V2 to create instant liquidity for buyers and sellers for NFTs. NFTX works by pooling NFT floor items together in a vault, which mints a fungible ERC20 token eg. PUNK that can then be traded on exchanges like Sushi. These tokens are backed by the vault’s NFTs and can be burned to redeem NFTs from the vault.
From this mechanism a marketplace emerges, where buyers purchase PUNK on AMMs to redeem CryptoPunk NFTs from NFTX and sellers mint PUNK from their CryptoPunk NFTs on NFTX to instantly sell on an AMM.
Market makers earn the AMM trading fees but more importantly they also collect the NFTX vault fees, which are paid in the vault token. NFTX fees range from 1–10% and there are consistent high yield opportunities.
Decentralised exchanges like NFTX have existed for a while but previously lacked deep liquidity for these tokens, holding them back from wider market adoption in the DeFi world. Since they launched, FloorDAO has helped create deep liquidity for various NFTX pools that are voted on by the FloorDAO community.
The goal of FloorDAO is to obtain the most amount of NFT assets at the lowest cost basis possible to support their market making activities. However due to the illiquid nature of NFTs and the sometimes large difference in price between floor pieces, the acquisition of these assets can be inefficient.
Floor sweeping if undertaken all at once will lead to a sharp increase in price. For FloorDAO, this means they acquire less of the assets they desire.
Separate floor sweeping sessions are often necessary to mitigate this issue, but this creates further challenges and usage of resources as floor prices can change dramatically by the time the next sweep is ready.
For many individuals, sweeping the floor of a product is near impossible as the cost basis for the NFT is too high. Some blue chip NFT collections such as BAYC and Crypto Punks have floor prices of over 60 ETH, meaning many retail users simply can’t access these opportunities.
Additionally, the process for sweeping the floor is often resource intensive, and manual. Floor sweepers must visit different aggregators, and hope the market doesn’t move immediately in the wrong direction.
Sweeper Pools are a revolutionary new pool type that gradually acquires NFT assets, without the potential price impact that results in inefficient capturing of NFT assets.
To understand how Sweeper Pools work, it’s important to first understand how Liquidity Bootstrapping Pools work.
Fjord is the official home of Balancer Liquidity Bootstrapping Pools which are the foundation on which Sweeper Pools are built upon.
Liquidity Bootstrapping Pools have become the preferred method of generating liquidity for new tokens and communities, and Fjord has supported teams generating $750m in liquidity since September 2021. The FloorDAO treasury was built from a Liquidity Bootstrapping Pool, generating $9.45m in ETH at the time during a 3 day LBP event on Fjord (known as Copper Launch at the time).
Liquidity Bootstrapping Pools ensure liquidity generation events are as fair, open, transparent and sniper bot resistant. Using weighted liquidity pools, price starts high and decays over time. The price is demand responsive meaning once the price reduces enough, buyers will step in, increasing the price. It then gradually reduces again until demand steps in, ensuring an organic price is found based on market forces via supply and demand.
Sweeper Pools, flip this concept upside down (literally!)
Below is an example of a regular LBP. As displayed, price starts high , then decays over time since there has been no demand to cause a spike.
While the following example is a Sweeper Pool with 0 sell side pressure to bring the price down. It shares the same mechanics above, but in reverse!
A sweeper pool is a reverse Liquidity Bootstrapping NFT Pool, using ERC-20 tokens backed by NFTs from NFTX.
The price for a desired NFT collection in a Sweeper Pool starts low, and increases slowly, until such a point where an NFT seller is motivated enough to sell their NFT backed tokens.
Sweeper Pools are a completely autonomous way to sweep the floor that enables the pool creator to let market forces organically determine the final floor price over a custom time period.
Like regular LBPs, Sweeper Pools are demand responsive. As the price increases and participants sell into the pool, price then decreases. Price then gradually starts increasing again until sellers step in once more, ensuring an organic price is found based on market forces via supply and demand.
In this experiment, anything is possible and nothing is assured. However, rational behavior suggests that prices for these NFT assets should stay in line with current floor prices available across various marketplaces.
Sweeper Pool creators are able to set the duration and the weights for their floor sweeping event. These added variabilities provide greater opportunity for market participants to take advantage of various opportunities during the event through the use of arb bots.
Sweeper Pools could also potentially introduce various forms of PvP game theory as users try to predict where the floor price will fall, and whether to front run other sellers or not. If numerous sellers all choose to sell at once then this could then lead to other users buying into the pool to take advantage.
Importantly, if an individual wants to sweep the floor of an expensive NFT collection to gain exposure, and capture the most amount of the asset via fractionalisation, then a Sweeper Pool provides the most efficient opportunity to do so.