Introduction
Caviar is a decentralized, on-chain AMM (Automated Market Maker) protocol that facilitates the trading of non-fungible tokens (NFTs) with Ethereum (ETH) or ERC20 tokens. Designed with a focus on gas efficiency, it allows users to trade NFTs in both whole and fractionalized forms. This approach provides liquidity without the need for direct buyer-seller interaction by utilizing liquidity pools and AMM algorithms to determine pricing based on market supply and demand dynamics.
Liquidity Pools
Caviar operates using two main types of liquidity pools: shared pools and custom pools.
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Shared Pools: These pools are open to all users who wish to provide liquidity. Each shared pool supports a specific NFT collection and a reserve asset (e.g., ETH), allowing users to deposit NFTs and ERC20 tokens into the pool. These pools use the xy=k invariant to adjust prices as trades occur, ensuring a seamless and automated trading experience. Shared pools categorize NFTs based on desirability (e.g., floor, rare) to optimize liquidity.
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Custom Pools: Liquidity providers can create custom pools, which offer more advanced settings like adjustable fees, concentrated liquidity, flash loans, and stolen NFT filtering. These pools are owned and controlled by the creator, who can set specific trading parameters to tailor their pool to different market needs.
Buying and Selling NFTs
Users can trade NFTs within Caviar’s ecosystem through its intuitive interface. Traders have the option to buy or sell whole NFTs or fractionalized portions of NFTs. Fractional NFTs are represented by ERC20 tokens, which can be bought and sold in specific sub-pools based on their rarity or desirability.
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Buying: Users can buy either whole NFTs or fractional NFTs from available pools. For fractional NFTs, Caviar issues ERC20 tokens proportional to the ownership share of the purchased NFT.
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Selling: Similarly, NFTs can be sold back to the pool for the reserve asset (ETH or ERC20 tokens). Fractional NFT holders can sell their share of ownership back into the pool, facilitating liquidity and trading opportunities.
Fractionalization and NFT Wrapping
One of Caviar’s most significant innovations is fractionalization. This feature allows users to divide an NFT into smaller ERC20 tokens, enabling partial ownership and easier trading of high-value NFTs. These fractional tokens can be wrapped into ERC20 tokens or unwrapped back into NFTs based on user preferences.
Impermanent Loss
As with any AMM, Caviar users providing liquidity may experience impermanent loss (IL). IL happens when the price of assets in the liquidity pool fluctuates, potentially resulting in fewer NFTs or less ETH than originally deposited. However, liquidity providers earn a 1% trading fee on every swap, which can help mitigate or offset IL over time, depending on the volume of trades and the volatility of the assets involved.
Conclusion
Caviar offers a highly flexible, gas-efficient platform for trading both whole and fractional NFTs. Its AMM model, coupled with customizable liquidity pools and fractionalization, positions it as a key player in the NFT trading ecosystem, providing opportunities for both traders and liquidity providers to benefit from decentralized, efficient NFT markets.
