Waterfall is a protocol for trading and pricing NFTs. The mechanism is designed to discover prices and instantly request prices for NFTs that are included in the protocol (i.e., it does not price NFTs that are not traded).
Increasing NFT price exposure
Waterfall enables more users to access prices through NFT shards. This will lower the barrier to entry for NFT traders to predict NFT prices, as well as provide a baseline for NFT pricing.
In addition, due to their atomicity, entire NFTs can easily become illiquid, and this phenomenon is often presented by some as a feature of NFTs rather than a bug.
But this is an issue affecting the growth and adoption of NFT technology, and shards allow for more customizable volumes to be operated and trade risk to be hedged.
Price discovery for any NFT
For almost NFTs, there is no price benchmark. Without a way to determine fair prices, the market is highly inefficient: there is no price discovery.
Waterfall wants to provide price discovery for any NFT to sell.
How NFT shards work
When an NFT is offered for sale in the protocol, it is fractionalized into a certain number of shards (ERC-1155 tokens) that representpredictions regarding the future valuation of the NFT.
To list an NFT for sale on Waterfall, the seller must specify the number of shards and initial parameters to list the NFT.
Upon listing, the NFT is transferred to the protocol,and the specified number of shards are minted to the seller.
Shards may change hands, but the basic invariant maintained by the protocol is that all shards must be listed at all times. In other words, each shard has a price at which anyone can purchase it. This remains true until someone decides to buy back the NFT, which results in a payment to each of the shard owners and the transfer of the NFT from the protocol to the buyer.
NFT shard trading (NFT price prediction)
Suppose a shard trader wants to predict the price of a listed NFT by buying several shards.
Since each shard must always be listed, there are two things the trader must immediately do after buying a shard:
- Specify a forecast price (prediction of future value)
- Set an expiration date (the date until which the prediction is valid).
The protocol will then immediately relist the purchased shard(s) at the prediction price until the expiration date.
If the shard is not sold by the expiration date, it automatically goes into a linear Dutch auction at a price to 0 or until a buyer is found.
The price decreases linearly over the period of time that the NFT seller specified when creating the listing. Note that this time period is the same for all shards in the same listing.
Buyout funds are not distributed to shard owners due to Ethereum's gas restrictions.
Instead, a redemption timestamp is inserted into the contract that fixes the price of each shard at the time of buyout.. This allows for a demand for funds feature where shard owners can claim buyout funds in exchange for their respective fractions.
The fractions are burned after the shard owner claims their funds.
Note that shard owners are responsible for claiming their buyouts funds.
Fee
For this mechanism to work, the prices for both shards and NFTs must be such that buyers are willing to accept them.
Suppose a shard trader resells his shards at an unrealistically high price that no buyer can find.
While technically the entire NFT is still available for buyout, such a scenario effectively freezes the asset because no buyer will agree to the unrealistic price.
To solve this problem, the mechanism takes a percentage fee of the relist predict price, which increases the further into the future the forecast expires.
Upon placing a prediction, the fee is split between the respective shard seller and the Waterfall protocol. This prevents unrealistic prediction prices and expiration dates.
