The NFT season is well and truly back and is going from ignition into an inferno. However, it is all fun and games when NFT prices are going up and there are willing buyers at all times, but when volume slows down and you can’t find a willing buyer for your Jpeg it can become quite frustrating. NFTs rarely go to zero people just stop buying them as they are illiquid assets. Sudoswap was the first protocol to solve this problem by creating NFT liquidity pools that paired NFTs with ETH through a bonding curve.
Gumball protocol takes a slightly different method to ensure the NFTs on their platform are always liquid. Let’s dive in.
What is Gumball Protocol?
Gumball Protocol is a platform that facilitates the creation of NFTs and trading of the said assets. They aim to solve the lack of liquidity with NFTs by creating a unique ERC-20 token for every collection that enables instant liquidity that represents a true price at liquid levels. While some NFT collections can rise to high valuations, there are not always buyers these valuations make it hard to switch to a liquid asset. This is what Gumball aims to mitigate with the bonding curves that determine how the NFTs and ERC-20 tokens are interchanged.
How Does It Work?
The protocol architecture is layered in three different main segments. The first one is the Gumball Factory which deploys new NFT collections by creating gNFTs (Gumball NFTs) and ensures that the correct parameters are in place to optimize it for success. When the collection is created it interacts with the ERC20 Bonding Curve which is similar to Sudoswap but uses native GBT tokens instead of solely ETH. What allows this to materialize is the Gumbar machine that facilitates the conversions between GBTs and gNFTs at any time.
Bonding Curve
Instead of having a floor price that determines the NFT price based on ETH trading activity, the price is determined by a Gumball token (GBT) paired with ETH. The price of the GBT is controlled by a bonding curve that increases the GBT price with each purchase and decreases it with each sale.
High volatility at specific price points will stabilize the price as buyers and sellers find an equilibrium for the token value. The trading activity from users interacting with the bonding curve generates swap fees and retains liquidity inside the protocol through the Gumbar.
Gumbar
The Gumbar allows users to benefit from the trading activity of NFT collection by staking the GBT and gNFT to earn swap fees generated from hot pairs. This helps the protocol maintain liquidity which is the most crucial component of DeFi and the challenge that has been surrounding NFTs.
Protocol Value Accrual
While Gumball Protocol has not yet released any indication of a token, there are still ways that the protocol is accruing value. If we take a look at the top three NFT collections on the platform we get these numbers:
This is based on the three NFT collections that solely were released on the platform now and we can expect that the fees generated will improve with further collections launching on Gumball if marketing efforts step up. Considering the protocol assists creators with marketing their launch to their community, it partly removes one of the biggest hurdles that creators fear.
Based on the 2.5% fees generated by the swap it is distributed as follows:
0.5% of the Swap Fees go to the Gumball treasury.
1% of the Swap Fees go to the creator.
1% of the swap fees go to the GBT/gNFT stakers that facilitate swaps and keep liquidity inside the protocol.
At the current ETH price (at the time of writing) the protocol has generated
≈ $17,688.37 since 10th of January. Daily revenue of $707 since it’s 25 days after launch.
Annualized that’s a protocol revenue of $707.53 * 365 days = $258,248.
While the economics of the protocol are well set up to align creators, the protocol, and users accordingly, it doesn’t make sense for the protocol to launch a token as there is no governance needed (unless you want to include a barrier for whitelisting protocols) and the revenue is not high enough to generate any demand for fee share yet.
Opportunities & Flaws
Considering the gNFTs can freely be exchanged with their own GBT that represents the collection, successful tokens give more control to the creator(s) and allow it to be used outside of the protocol to take overcollateralized loans against and integrations in other protocols which drives further utility for the NFT collection (this is only reasonable for collections that potentially could obtain blue chip status). However, it also fragments liquidity compared to just using ETH which obviously is the most liquid asset on the market outside of USDC.
Nonetheless, numerous NFT collections create their own ERC-20 token in the end anyway which dilutes value from NFT holders and by doing this from the get-go you don’t dilute them at a later stage.
Also, considering these NFTs that are created on Gumball Protocol also can be listed on other exchanges such as Opensea, arbitrage opportunities, and inefficiencies will arise that create some disparity between the ETH value and GT value on Gumball. The danger with this premise is that if these NFTs garner interest after being listed on Opensea, NFT holders will flock to wherever liquidity is the highest. This leaves the stakeholders related to the NFT collection without revenue, including the protocol.
Security
Gumball was audited by Tier-A auditing firm Peckshield in December 2022. They determined that the smart contracts, in general, were well-designed by the team although they found some issues including 1 medium-severity bug and 2 low-severity bugs along with some advice that has been acknowledged by the team.
They were also audited by Zokyo prior to the Peckshield audit in June 2022 and passed their initial audit with flying colors (although changes to the contract were done after that hence a 2nd audit). However, this indicates how important it is to get different perspectives by approaching two different audit firms and it is a positive sign of taking security very seriously.
Conclusion
Gumball is a new iteration of the NFT / ERC-20 pairs that Sudoswap revolutionalized in the summer of 2022. It is an interesting concept in regards to creating instant liquidity for NFTs while ensuring that users, creators, and the protocol are pulling in the same direction by aligning incentives.
It competes in a fierce NFT market with other exchanges that operate on Ethereum where the majority of NFT traders find themselves but will be well-positioned to capitalize in case an NFT season takes place on Arbitrum. While they don’t have shared any indications of releasing a token (rightly so), interacting with the platform during the early stages might pay off in the long run.
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Disclaimer: All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing on the site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. I am just a random degenerate sensei sharing an opinion.