But that’s also their main burden. All web3 companies face the same challenge. You have a vision, you start executing it, and your first stop is building your community of early adopters.

The next tactic fallacy

So you do what web3 companies do. You work on your first NFT drop. You craft your vision, identify your audience, define the utilities and the brand, develop your smart contract, and design your marketing campaign. You launch.

If you’re not in the top 1%, you, unfortunately, don’t mint out. But even if you’re in the top 1%, after a few weeks, you notice that the activity slows down, and some people are trying to sell. The spread is significant, and the liquidity is small. So sellers start lowering their prices to find an exit, and the floor drops, but you think they are just a few short-term speculators, and you don’t care about them. Also, the floor is not the end goal. But still, you want to improve the situation.

Your product won’t be ready for the next couple of years. But you could still hype your project with some announcements. You announce a nice partnership and get high-level profiles to mention your project. You hire a Discord manager to make sure your community is alive.

It works. It stabilizes the price and stops the bleeding as new people discover your project and buy NFTs.

But then, a few weeks later, prices start crashing again. No way! You’re back at your initial point.

What is happening here is that you are in the pre-product-market fit stage. You sold a vision to early adopters, but you also sold them assets. People can trade your assets, so they do. And without a systematic way to manage it, your project suffers from it. Finding your product-market fit is a long and complex process with many variables. And 99% of projects forget an important one.

We met many projects in this situation. After a couple of years of working with clients, trading NFTs, and building in web3, here are two big misconceptions from first-time web3 builders.

« Floor price doesn’t matter! »

The reality is that if you’re selling NFTs, price stability and appreciation are important. Of course, it’s not about building a Ponzi, where anyone will always win money until the show ends. But it’s about finding the right parameters for your economy. People don’t like to lose money - whatever the investment is. That’s nothing to do with whether people love your project or if they are pure speculators. So they should be able to believe that they could sometimes win, or they won’t buy into the project.

If you buy music NFTs, you should dream of buying the next big hit NFT and making profits. If you’re buying in-game NFTs, you should believe you can be rewarded by playing well in the game and investing time and money into it. If you’re buying land in a virtual world, you believe that, at some point, it could be worth more. If you’re buying a piece of art, you expect somehow it would appreciate over time, especially if it’s expensive, etc.

But if you don’t manage liquidity properly from day 1, what ever you’re trying to optimize on the side, prices will go down.

« First the product, then the liquidity »

Finding the product-market fit is the toughest challenge for entrepreneurs or companies launching a new product. Especially in web3, where usages are new. You could tweak many variables to make it work: product positioning, features, marketing messages, distribution channels, target, etc.

Chatting with a few teams in the space, we realized they had forgotten an important variable: managing liquidity. There’s a misconception that if you do your job correctly on the product and marketing side, your liquidity problems will disappear.

Liquidity is a feature of your product. By using NFTs, you attach a value proposition of liquidity to it. For a game, what’s the point of minting NFTs rather than selling in-game assets the web2 way? For a piece of digital artwork, what’s the point of minting it as an NFT? For a brand, what’s the point of selling loyalty NFTs instead of just distributing VIP cards with perks? What’s the point of bringing real estate or collectibles on-chain? Because NFTs create global, 24/7, decentralized markets where people can transact. By acquiring your NFTs, your users believe they will be able to resell them in the future.

By the way, we’re not inventing anything. The most successful web3 companies had a way of managing their liquidity from the start.

Long story short, if you’re developing an economy with NFTs, liquidity is a core feature of your product. And managing it should be a daily endeavor like product development.

Building, adjusting, and managing liquidity in the long term is tough. And that’s exactly why we built Gekko - to bring Wall Street-level algorithmic trading to the hands of any web3 team in the world.

PS: if your market is dead, don’t worry, there is a solution 😉

We explained in this piece how liquidity should be considered a feature of your product. And how building, adjusting, and managing it should be an everyday concern, like product development is.

Let’s illustrate it now with a recent example from one of our clients in the gaming industry.

Before market making, the 15d volume was around 12Ξ, with only a few daily transactions. Liquidity was low on the market with a spread of ~20% (the difference between the best price to buy and the best price to sell). If you bought an NFT during this period and tried to resell it immediately, you would have lost 20% of your investment. Making it extremely costly for users to transact, holding back new users from buying from the market and existing users from selling.

The price was also very unstable during this period because of the lack of liquidity. Someone tried to sweep the floor, which raised the price by +65%. After his sweep, he tried to resell the assets, but the price immediately dropped by -40%. He tried again a few days later. Same result.

That’s a good illustration of how the lack of liquidity negatively impacts a market. It’s super costly to transact, and the price is very volatile, so participants prefer not to transact.

Market-making aims to provide more liquidity to a market (reduce the spread and increase the number of buy & sell offers) via algorithmic trading.

But can market-making reignite the activity on a dead market sustainably?

A few things happened after we started market making. First, the volume increased by ~3.2x. We were only responsible for ~30% of the volume, meaning the remaining 70% came from users. Sometimes from wallets that haven’t interacted with the market for months.

What’s interesting to notice is how much the price has been stable during this period. Only a ±7% variation, while the volume more than tripled. This resides in our trading method. We algorithmically compute and post optimal prices to buy and sell in real-time. Said differently, we made a price discovery and made the market agree on what is a good price for buying and selling during this period.

Overall the spread went from initially ~20% to an optimal ~5% - which is basically the marketplace + royalties fees.

Looking at the market, new users have been reassured by the liquidity (“I can buy because I know I’ll be able to resell it if needed”). Existing users purchased again (“It’s a good investment, let’s put more money in the machine”). Increasing the volume and activity in the market naturally.

We rebuilt the confidence in the market.

While price and volume are pretty good indicators of a market's health, you might argue they are not the main indicators of a business's success. The next article will show how the spread and order book depth connect to your higher-level KPIs.