βš™οΈSetting up your Market-Making Order

It might seem scary to setup your first MM order, but it's really not that complicated. Read along.

Config Options 🎚

Let's start by looking at the different config options you have available to you when you're creating a market-making order.

1 Starting price

This is the price at which first sale will happen (the first purchase will be just under this price).

βœ… We recommend setting it as close to the floor as possible.

If your starting price is too far away from the floor your order won't get any trades.

2 Delta / "Change By"

The "change by" parameter, or "delta", is actually 2 params in one:

  1. Curve type (selected by the two β—Ž/% buttons on the left

  2. Step size (the number you enter)

Here's a quick visual guide to each of the 4 options:

Linear curves are great for more stable NFTs that you don't expect to move as much. Think your SMBs, Claynosaur and Okay Bears! πŸ’

Exponential curves are great for volatile NFTs that move quickly. Think your new hot mint that is sitting at 1-5 SOL. πŸ”₯

Large step size lets you cover a broad range of prices. It makes your order less risky, but you'll probably earn fewer fees. 😒

Small step size lets you cover a narrower range of prices, but do so more effectively. Your order will be riskier but you'll earn more fees. πŸ’Έ

What do we mean by order risk here? Check out Impermanent Loss

βœ… So here's a good way to think about it:

  • Expensive, stable NFT πŸ‘‰ Pick linear curve.

  • Cheap, explosive NFT? πŸ‘‰ Pick the exponential curve.

  • Want to take less risk, but make less fees? πŸ‘‰ Pick a large step size.

  • Want to take more risk & make more fees? πŸ‘‰ Pick a small step size.

3 Market-Making Fee

The market-making fee is how you make money as a market-maker. You can set this to be anything in the range of 0-25%.

The fee gets charged to the seller of the NFT when they sell an NFT into your pool.

If your fee is 25% and the current price is 1 SOL, the seller will see 0.75 as the price (because you're keeping 0.25 for yourself).

The higher your fee, the less competitive your order.

Let's think about this:

  • Trader A is buying an NFT at 1 SOL but has a 25% fee

  • Trader B is buying an NFT only at 0.9 SOL but has a 5% fee

Even though in theory trader A is paying more (1 SOL vs 0.9 SOL) - trader B ends up winning because of lower fees. B's shown price will be ~0.85, while for A it will be 0.75.

βœ… We think fees in the range of 1-5% are the most competitive.

To learn what APY you can expect from a market-making order check out What APY can you expect?

4 Position Size / Quantity

Finally, there's the size of your order. The more NFTs / SOL you deposit, the more trades you'll be able to accommodate.

You should worry the least about this parameter. It's much better to set up a small pool with the correct starting price/delta / MM fee than to set up a large pool and mess up any of those.

Summary

So to summarize, here's how you should think about config options:

Config option 🎚Recommendation βœ…

Starting price

Set it close to floor

Curve type

Expensive, stable NFT πŸ‘‰ Pick linear curve

Cheap, explosive NFT? πŸ‘‰ Pick exponential curve

Step size

Less risk, but make less fees πŸ‘‰ Pick large step size

More risk & make more fees? πŸ‘‰ Pick small step size

Market-making fee

1-5% is reasonable. The lower you set it, the more trades you'll get -> which might mean the more fees you make!

Position size

As much as you can!

3 Simple Config Templates βš™οΈ

Now let's play out some potential scenarios and what kind of MM pools you'd set up for each.

An example assumes you have a bag of ~30 NFTs and the equivalent amount of SOL to market-make with.

🟩 Low Risk: "I'm no Pro Trader" Order

You:

  • don't have a strong opinion on where the market goes (up? down? flat? Β―\_(ツ)_/Β―)

  • are ok gaining a few NFTs from this collection or losing a few - but you don't want to 2x your bag, or lose all of it

  • generally want to "set it and forget it"

The config:

  • πŸ’²Starting price = floor price

  • πŸ“ˆ Exponential curve. This will ensure that if the price does move a lot in any one direction, your pool isn't exhausted

  • 20%+ delta. This way if the price 2x's you'll only sell <5 NFTs out of your 20-30

  • πŸ’Έ 5-10% MM Fee. You're providing over a very broad range already, you can easily set a higher fee

Explanation:

You're setting up a very broad order that captures a lot of range. You're not expecting a lot of trades nor a lot of fees - but you'll make some if the market is volatile.

On the positive side, you're also very unlikely to be wrong. When you're providing liquidity over such a broad range, the market would really need to do something crazy (5x?) for you to lose all of your NFTs. And even then - hey you sold them off at 5x!

🟨 Medium Risk: "Replicate Royalties" Order

You:

  • want to replicate royalties (so earn ~5-10% in annual yield)

  • are ok having meaningful changes in your bag - not all of it, but 50% up or down

  • generally want to "set it and forget it", although you might have to edit the order if the market 3-4x's

The config:

  • πŸ’²Starting price = floor price

  • πŸ“ˆ Exponential curve. Still better range than linear gives you more protection

  • 🎚 10-20% delta. This way if the price 2x's you'll only sell 5-8 NFTs out of your 20-30

  • πŸ’Έ ~5% MM Fee. Should be just enough to cover your royalties (remember you're also getting a fixed 0.9% from Tensor)

Explanation:

You're setting up a somewhat broad order, but your bag could shift significantly if the market is 3-4x. Eg with a 10% delta you'll sell off 50% of your bag if the market does a 4x. In return, you expect to earn some nice fee income, which will let you replicate your lost royalties.

We think this is more or less the optimal config for collections providing liquidity for their own NFTs.

πŸŸ₯ High Risk: "Here to Make $" Order

You:

  • are here to earn a high amount of fee income

  • are ok depleting your SOL balance or selling off all your NFTs (the ones in the order ofc) if the market moves a lot

  • are an active participant in the market, monitor your order daily, and adjust for any news events

The config:

  • πŸ’²Starting price = floor price

  • πŸ“ˆ Linear or Exponential curve. You'd pick linear for larger collections (SMBs) and smaller for exponential. To be honest, in the tight range you're providing liquidity it might not even matter

  • 🎚 <10% delta. At 5% if the market 4x's you'll sell your 30 NFTs

  • πŸ’Έ <5% MM Fee. You want your prices to be most competitive, so you can't afford a high fee. You expect to make it up in volume though

Explanation

You're setting up a very tight order. You're ok buying/selling a ton of NFTs if the market moves a lot on you, but that's ok because you know what you're doing and will be monitoring the order closely.

The beauty of TensorSwap is that it offers something for everyone. If you're a pro and know what you're doing - by all means go aggressive and capture those juicy fees.

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