Market Making
NFTH tokens are supported by automated market making that provides liquidity on HyperCore spot markets.
Why Automated Market Making?
Fractionalized NFT tokens face unique liquidity challenges:
- Illiquid underlying - NFT floor prices update infrequently
- Price uncertainty - Fair value depends on subjective NFT valuations
- Thin orderbooks - Low trading volume leads to wide spreads
Automated market making addresses these challenges by continuously providing two-sided liquidity based on real-time price signals.
How It Works
Hybrid Oracle
The market maker uses a hybrid oracle that blends two price signals:
| Signal | Strength | Weakness |
|---|---|---|
| NFT Floor Price | Fundamental value anchor | Updates slowly, can be stale |
| Market Price EMA | Real-time, responsive | Can diverge from fundamentals |
By combining both signals, the oracle achieves:
- Bootstrap capability - New markets start with floor price
- Price discovery - Market signal gains weight as trading develops
- Staleness protection - Graceful degradation when floor data ages
The oracle dynamically adjusts how much it trusts each signal based on data freshness.
Price Ladder
Instead of quoting a single bid and ask, the market maker maintains a ladder of orders at fixed percentage intervals from the oracle price.
This creates:
- Deep liquidity - Orders across a range of prices
- Balanced books - Symmetric depth on both sides
- AMM-like behavior - Buying pushes price up, selling pushes price down
Tranche Flipping
When an order fills, it creates a tranche that generates an order on the opposite side:
- A buy order fills at price X
- A sell order is placed at price X
- When the sell fills, profit is locked
This mechanism naturally mean-reverts inventory and captures the bid-ask spread.
Risk Management
Identified Risks
| Risk | Description |
|---|---|
| Adverse Selection | Informed traders pick off stale quotes |
| Oracle Manipulation | Attacker manipulates floor or market price |
| Inventory Accumulation | One-sided flow causes position buildup |
| Gap Risk | Large price jumps cause losses |
Mitigations
For Adverse Selection:
- EMA smoothing delays reaction to sudden moves
- Velocity limits prevent chasing manipulated prices
- Multiple price levels distribute risk
For Oracle Manipulation:
- Percentile-based floor excludes outlier trades
- Lookback window requires sustained price change
- Blended oracle limits impact of manipulating one source
For Inventory Accumulation:
- Tranche flipping creates natural mean reversion
- Position limits cap total inventory
- Size adjustment reduces exposure on accumulated side
For Gap Risk:
- Price bands limit how far from oracle we quote
- Per-order size limits cap exposure on any single trade
- Circuit breakers pause on extreme moves
Operational Safeguards
Circuit Breakers
The market maker automatically pauses when:
- Price moves beyond the configured band
- Data staleness exceeds threshold
- P&L exceeds loss limit
- Inventory exceeds maximum position
Graceful Degradation
When conditions deteriorate:
- First - Widen spreads (less aggressive)
- Then - Reduce order sizes (lower exposure)
- Finally - Pause quoting (cancel all orders)
For Users
As a user, you benefit from market making through:
- Tighter spreads - Better prices when trading
- Deeper liquidity - Larger trades with less slippage
- Price stability - Reduced volatility from arbitrage
The market maker operates transparently on-chain. All orders are visible in the orderbook like any other trader.
Technical Details
For technical documentation including algorithm specifics and deployment details, see the GitHub repository.