A decision "crashed" the NFT market. How did the Flooring Protocol lead to a general decline in blue chips?

Introduction:

This article provides a detailed introduction to the NFT fractionalization protocol called Flooring Protocol.

Last week, the NFT market experienced a general decline, with blue-chip NFTs such as BAYC, Azuki, and DeGods all falling by more than 10% for the week. Surprisingly, the source of this general decline may be the mechanism update of the NFT fractionalization protocol, Flooring Protocol, which was established six months ago.

FLC wants to be the “ultimate index” in the NFT world!

On December 31, 2023, the NFT fragmentation protocol Flooring Protocol released its first article on its Medium channel, titled “Revolutionizing NFT Trading: Introducing µToken/FLC Pairing on Floor Protocol”. The article stated that Flooring Protocol will relaunch in January 2024 with a groundbreaking new model that links the price of governance token FLC to the valuation of mainstream NFT collections through µToken trading pairs in the liquidity pool.

µToken is a token that represents the value of NFT fragmentation. Users deposit NFTs into the Flooring Protocol and receive the corresponding μToken representing the NFT. Prior to the mechanism update, users could only trade between ETH and μToken on Uniswap through the Flooring Protocol. However, with the introduction of the µToken/FLC trading pair, user transactions with FLC will directly affect the price of μToken. When trading on the Flooring Protocol, the best exchange route on Uniswap will be ETH -> FLC -> µBAYC.

This looks like a product that meets market demand. In the NFT market, NFT series with relatively certain values often have high investment thresholds, while for those newly emerging NFTs, it is difficult to determine their future appreciation potential. However, if FLC is included in the investment portfolio strategy, “choosing FLC = bullish on blue-chip NFTs”, this is undoubtedly attractive for users who are interested in investing in the NFT market.

FLC became the trigger for the NFT market crash

Empowering FLC is a positive news for traders in terms of certainty. Since January 2nd, the buying volume of FLC has surged. On January 3rd alone, the number of buy orders worth over $10,000 increased from 7 on January 2nd to 50. Previously, there were few large buy orders for FLC, with only about 10 orders worth over $10,000 traded in the week before the mechanism update.

In December 2023, the price of FLC ranged between $0.0075 and $0.012, while in two days from January 2 to January 4, the price of FLC surged from $0.012 to $0.035.

After significant fluctuations in FLC prices, Flooring Protocol began adding trading pools for FLC and various µTokens without considering market price fluctuations, which led to a rapid increase in FLC circulation. As of January 4th, the increase in buy orders for FLC was no longer sufficient to drive up the price, and the price of FLC has been trading sideways and slowly declining from January 4th to 7th.

After the price skyrocketed, investors and users who originally held or bought FLC in advance based on the news gradually began to sell their FLC or exchange it for µToken, withdraw blue-chip NFTs from Flooring Protocol using µToken, and sell them on Blur.

For example, on January 3rd, an address starting with 0xE6 bought a large amount of FLC six times and then sold FLC again on the same day after the price skyrocketed. In one of the transactions where FLC was sold, the address sold FLC worth more than $110,000. The next day, the same address continued to buy and sell FLC.

Some liquidity providers, such as those starting with 0x27 and 0xF6 addresses, began selling blue-chip NFTs such as BAYC, Azuki, and DeGods for FLC they hold on January 5th on platforms like Blur and Opensea.

The impact of transactions on the Flooring Protocol quickly spread throughout the entire NFT market. The floor price of BAYC has been declining for a week since January 6th, and as of January 13th, it has fallen 15% from its peak. In addition to BAYC, the floor prices of other blue-chip NFTs are generally trending downward.

After half a month, DeGods, whose floor price climbed from 2.60 ETH to 3.63 ETH, experienced a cliff-like drop after the 7th, with the floor price plummeting by 27% in less than a week.

After the double “collapse” of the FLC and NFT markets, the founder of Flooring Protocol tweeted twice on January 11 in response to the fluctuations of NFT and FLC. “I did not short NFT,” the founder of Flooring Protocol said that the decline of NFT has nothing to do with himself, and once again introduced the cooperation with NFT option protocol Wasabi Protocol, “but I am providing µToken for Wasabi Protocol, and others will short it.” As for the trend of FLC’s skyrocketing and plummeting, the founder of Flooring Protocol showed a slightly self-deprecating attitude, “this is just a correction.”

Good news supported the NFT series, but it was still affected. Azuki’s official Twitter account retweeted a tweet from Weeb3 Foundation on January 5th, and the community speculated that it might issue a token called ANIME. This caused Azuki’s floor price to rise more than 30% in two days, soaring to around 8 ETH. However, Azuki could not resist the impact of the sell-off. Since January 7th, Azuki’s floor price has started to decline and fell back to 6 ETH on January 13th.

The price fluctuations of blue-chip NFTs have driven the entire NFT market. According to Blur data, as of January 12th, the 7-day decline of many NFT series is between 10% and 25%, and the NFT market seems to be experiencing a general decline.

Is NFTFi “playing with fire”?

In the profit-driven world of cryptocurrency, the NFT market is often criticized for its emphasis on social attributes and unclear asset appreciation paths. In the development of the NFT market, crises triggered by events such as the Flooring Protocol incident are not uncommon.

On the one hand, providing liquidity solutions for the NFT market is often difficult to maintain. In 2022, when the NFT market cooled down, the floor price of BAYC triggered the liquidation auction mechanism of the NFT lending platform BendDAO, causing a large amount of liquidity to quickly withdraw from the platform, and the lending pool dropped from over 16,000 tokens to only 0.58 tokens in just four days. On the other hand, attaching the value of NFTs to FT tokens and introducing DeFi mechanisms to bring liquidity to the market also dilutes the cultural significance, brand value, and community loyalty that NFTs themselves carry due to “yielding to liquidity”.

Related Reading:

《BendDAO is insolvent, will NFT finally face a subprime mortgage crisis?》

《$19 million smashed through the entire NFT market, re-examining the liquidity brought by Blur》

Back to the Flooring Protocol, the fragmented trading model of NFTs has obvious advantages in reducing the threshold for investors to purchase NFTs and making NFT assets more easily tradable in the market. However, the value of NFTs, which originally relied on community culture, will undoubtedly be blurred in the process of relying on DeFi mechanisms and seeking appreciation space in the circulation of various tokens after leaving their artistic carriers, which may undermine the consensus root of NFTs.

This crash came to an end on January 13th, with FLC’s price hitting bottom and returning to its pre-pump surge of 0.012 USD. Since then, the prices of FLC and blue-chip NFT floor prices such as BAYC and Azuki have begun to rebound. Will a similar plot play out again?

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