What are NFT Floor Prices?

Simply put, floor prices represent the barrier to entry for any NFT collection; or the cheapest variant in a given set.

Immutable, Non-Fungible Ownership

As we know, NFTs are represented by digital tokens as proof of ownership or authenticity of unique and non-fungible content. Their integrity and history of ownership is then immutably and publicly maintained on blockchain ledgers by a decentralized network of nodes. Unlike fungible crypto assets, NFTs are always unique in one way or another, meaning that each one has the potential to hold wildly differing values based on a number of factors.

Just at a superficial level, NFT collections often consist of thousands of variants of a similar image. Simple supply and demand dynamics often result in a few very popular images fetching the highest prices, sometimes but not always resulting from rarity parameters that constrain certain characteristics. One particular NFT might be wildly popular while another in the collection is lacking the same demand. 

Readers who have collected or traded cards in their childhood will remember buying a pack of cards and eagerly digging through them to find that one holographic image which signified a rare card. Unfortunately, more often than not we’d find only “common” cards of lesser value – and without the bling for which we had hoped. 

NFT collections often follow a very similar dynamic. However, the combination of NFTs with the immutability of blockchain ledgers and convenience of automated smart contracts is quite a radical idea in that we can now trade on a global scale, using a shared and trustless ledger to maintain the authenticity of each NFT. This is the magic of the peer-to-peer, DeFi revolution.

We can expect the impact of such tech to be more extreme than the Internet itself. The payoff is just hard to see for now because we’re in the heat of the moment; the fog of war veils our perceptions. Since there are many blockchains and many exchanges, both centralized and decentralized, we can track the value of NFT collections by using a shorthand pricing mechanism called floor prices. They’re the lowest priced NFTs in a given collection. Here’s a quick explainer of how this is determined.

Establishing NFT Floor Prices Economically

Floor prices provide baseline values for specific collections of NFTs. For potential buyers, the floor price gives an indication of the minimum investment needed to acquire an NFT from a specific collection. In other words, the floor price would be the cheapest NFT in a set–- hence the “floor” qualifier. For instance, the floor price of an NFT in the Mutant Ape Yacht Club is nearly 6 ETH while the Bored Ape Yacht Club’s cheapest collectible runs over 31 ETH.

The movement of floor prices can also serve as a measure of community sentiment around a particular NFT project. A rising floor price indicates positive sentiment, while conversely a dropping floor price signals the opposite. A steadily decreasing floor price may indicate a lack of buyers, or even a lack of liquidity on specific marketplaces, which makes a big difference when it comes to wide spreads between the floor price and median price, as well as overall volatility.

Floor prices can fluctuate based on several variables, and how a floor price algorithm happens to weigh each of those variables. Here are a few catalysts that impact NFT pricing, which contributes to the floor price of a given collection. 

Demand

If a lot of people want a particular NFT or collection, floor prices rise in response as available NFTs are bought and then bid up by investors. Popularity and availability are just a few of the reasons which might drive this variable upwards.

Supply

If an NFT collection has a limited supply in relation to its popularity, a higher floor price is often reflected as this dynamic only requires a little bit of demand to achieve it.

Publicity and Hype

When an NFT collection gets a lot of attention on social media or is endorsed by a celebrity, this can of course create temporary spikes in demand. Clever or well-timed marketing campaigns and even hackathons can also funnel new customers into a collection, though this does not necessarily make those users “sticky.”

Utility and Functionality

Some NFTs offer more than just ownership. For instance, the pop-up city Zuzalu issued “ZuPass” passports for event attendees. This granted “residency” along with access to events, fireside chats, presentations, and even discounted lodging. The exclusivity and utility aspects of NFTs can make a collection’s floor price extremely high.

Liquidity

Some NFT collections are on smaller blockchain networks and transact within low liquidity conditions. This could cause dramatic volatility to the upside or downside of a collection’s floor price. The volatility would of course be due to a sudden mismatch between buyers and sellers. 

Coinbase Cloud is one example we can use to visualize how NFT price floors can be determined in a rudimentary way. Since this is educational we will withhold any critiques of the infrastructure regarding efficiency or security risks at this time. The service nevertheless clearly demonstrates the process we’ve just introduced.

Coinbase Cloud Floor Price Formula

Coinbase Cloud is one example we can use to visualize how NFT price floors can be determined in a rudimentary way. Since this is educational we will withhold any critiques of the infrastructure regarding efficiency or security risks at this time. The service nevertheless clearly demonstrates the process we’ve just introduced. 

Coinbase uses a novel approach to calculating the floor price of NFTs based on more than just the lowest listed prices of a given exchange. Coinbase Cloud actually gives an estimate of the current floor price for a given NFT collection based on an aggregation of spot prices, with outliers filtered out to account for anomalies and other unusual activities like wash trading.

Coinbase uses an adaptive percentile approach in which a dynamic percentile parameter makes adjustments according to observed error rates over time. This flexible approach is similar to the temperature control system of a refrigerator by which the compressor automatically switches on when the temperature rises above the user settings.

First, any extreme price outliers are eliminated from the data stream reporting on prices across a number of ecosystems. Next, the floor prices are estimated based on a custom percentile parameter. Periodic backtesting and re-adjustment of percentile parameters ensure that floor prices become increasingly more accurate over time as the trading history expands and percentile parameters narrow. While NFTs are not normally volatile, mistakes are made at the margins and during times of crisis and therefore very high standards must be set from the moment of design and prior to launch.

Supra Intralayer: Trustless, Multi-Chain Liquidity Across NFT Markets

Supra’s DORA provides seamless, trustless price feed infrastructure which is critical for advancing universal standards for reporting NFT floor prices to smart contracts. See the Supra Data Feed Dashboard to see what developers are leveraging to keep up with a dynamic environment with new projects popping up all the time.  

Given this, developers need sophisticated but easy-to-implement tools that interoperate across blockchain ecosystems. That is to say that it is inherently aimed at multi-chain interoperability and composability to allow for the flexibility of new projects, soft forks, and other updates which have come to characterize the zeitgeist of the industry. 

When calculating floor prices across a variety of ecosystems, it’s important to use Oracles which offer the same or better security guarantees as any of the blockchains that they’re servicing. Thus, Supra is primed to offer NFT floor price validation at scale and with cross-chain fidelity and 2-3 second finality with regards to settlements. 

Friends don’t let friends get wrecked by slippage by using inferior Oracles. Get in touch with Supra and plug your dApp into the world’s premier cross-chain Intralayer network with native Oracles.

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