This article is an adaptation of LambolandNFT’s thread. Errors and omissions are my own. Credit for good stuff is Lamboland’s.
An NFT’s floor price is determined by a complex interaction of supply and demand.
While market conditions (bull and bear markets) have a significant impact on supply, demand is largely determined by factors such as the actions of community members (do they offer their NFT for sale?) and team actions (do they boost the supply or reduce it?).
At the end of the day, it all comes down to the fundamental principles of the free market. First, let’s look at some examples of supply shock and then dilution.
Case Study #1 – Azuki, Summer 2023
The Azuki NFT collection is a series of 10,000 one-of-a-kind PFP (profile picture) NFT that are stored on the blockchain of the Ethereum platform. In January of 2022, the project was launched, and ever since then, people in the NFT community have considered it to be a blue chip collection.
But later on, things started to alter.
When Azuki introduced their Elementals collection in the summer of 2023, the floor price immediately dropped by sixty percent.
The vast majority of people believe that it’s because the art for Elementals looks a lot like Azuki, which is true.
Having said that, there is more to this story…
During the bear market that took place in the summer of 2023, there was decreased demand for NFT in general, including Azukis.
Due to the fact that consumers can now get what is essentially the identical artwork (Elementals) at a price that is a fraction of what the original collection cost… Suddenly, there was much less of a demand for the extremely pricey original Azuki collection.
And to make matters even worse, the Elementals collecting costs 20,000 NFT points. Which is a significant increase in supply taking into account that there were fewer than 20,000 people on web3 at the time.
According to Luca Netz, Chief Executive Officer of Pudgy Penguins, “any mint in this market is a death sentence.”
Therefore, the group was successful in completely disrupting the supply-and-demand balance that Azuki had maintained all the way through the bear market of 2022-2023 (while other collections were, on average, down 90%).
Konger.eth was one of the founding members of Spirit DAO, which describes itself as a community of “High conviction collectors elevating the Azuki Universe.”
On Twitter X, he provides explanations for the community’s frustration.
Which has resulted in many people losing trust in the Azuki team. Causing even less demand for Azuki assets.
And a good many of the Azuki holders who were given a free Elemental immediately put it up for sale (owing to the fact that they considered it a dividend).
However, due to the fact that the prices of Azuki and Elementals are correlated against one another… The greater the loss of Elementals, the more Azuki suffered.
On the bright side, the organization did earn $40 million from the mint. Which provides a lot of resources for further development and innovation.
But everything came from their existing community. Therefore, the liquidity of the community has been distributed across yet another NFT collection.
As Lamboland explains “And Elementals did a bad job of onboarding people into the Azuki ecosystem. Since everyone who minted an Elemental already owned an Azuki asset. So new entrants had to buy an Elemental off a secondary market. Which is a terrible onboarding experience”
At this stage you need to understand that Blue Chip NFT collections are luxury items. For some, it’s about collecting, flipping and investing. But for the majority of holders it is about status, social identity through profile picture and being part of an exclusive community.
Excessive dilution and cheaper price is like Louis Vuitton introducing a cheap clothing line for millions of people overnight. Past and current customers would be angry at the brand.
Let’s check our second example.
Case Study #2 – Yuga
Yuga Labs is the owner and creative team behind the Bored Ape Yacht Club (BAYC) NFT collection and further sub-collections (like Mutant Apes, Othersides). They also introduced a token, the Ape token.
BAYC were introduced in April 2021 and as soon as August 2021 they introduced the Mutant Ape Yacht Club collection.
By doing this, Yuga made their current holders rich by giving them a ton of free NFTs.
And at first it worked out really well…
MAYC was the perfect form of dilution at the perfect time. The demand for Yuga assets was insanely high at the time. Demand was much higher than supply. So increasing the supply by creating 20k NFTs wasn’t a bad thing.
BAYC existing holders were rewarded since they got a free MAYC. The other 10k new MAYC went to a public sale. As a consequence, it onboarded more people into the Yuga ecosystem.
Yuga also made around $100m from the Mutant Ape mint. Important data point is that most of that money came from people outside of their existing community. So it was a win-win-win situation for everyone involved.
But now there are so many Yuga NFTs.
Yuga introduced :
- Bored Ape Yacht Club (BAYC): Launched on April 30, 2021. A collection of 10,000 unique NFTs, each depicting a bored ape with different attributes.
- The Bored Ape Kennel Club (BAKC) is a collection of 9,602 cartoon dog NFTs, each a part of Yuga Labs’ broader Bored Ape Yacht Club universe. The BAKC was launched on June 16, 2021, as a companion series to the original BAYC NFTs.
- Mutant Ape Yacht Club (MAYC): Launched on August 28, 2021. A collection of 20,000 mutant apes, created by exposing BAYC apes to a serum.
- ApeCoin (APE): Launched on March 17, 2022. A cryptocurrency that is used to power the Bored Ape Yacht Club ecosystem.
- Otherdeeds (LAND): Launched on May 30, 2022. A collection of 200,000 NFTs that represent LAND parcels in the metaverse known as Otherside.
- TwelveFold (NFTs on Bitcoin blockchain): Launched on March 6, 2023. A collection of 300 generative art NFTs, inscribed onto satoshis on the Bitcoin blockchain.
- In addition to these NFT collections and tokens, Yuga Labs also owns the intellectual property rights to CryptoPunks, a collection of 10,000 unique NFTs that were launched in 2017.
It’s becoming insanely hard to keep up with what’s going on in their ecosystem.
And liquidity continues to spread across more new Yuga assets. Causing each of them to decrease in price. The introduction of the Ape.
The result is a very complex ecosystem with a diluted brand. It makes it hard to onboard new entrants. The bear market factor is also reducing the demand for NFT and tokens in general.
To conclude with a word from Lamboland : “”if NFT projects are going to release new NFTs they should: 1. Reward current holders 2. Onboard new holders 3. Make $ from outside of their community”
