Could Blur Token Farming Tank the NFT Market?

Few entities have shaken up the Web3 landscape as much as the NFT marketplace and aggregator Blur has in the last year. In November of 2022, it began to consistently rival OpenSea, the previously undisputed NFT marketplace champion of the past six years. By February 2023, it had left the platform in the dust, outpacing OpenSea by as much as $400,000,000 in weekly trading volume. 

Blur owes its success to a few things; it addressed a major gap in the market by providing a frictionless way to trade NFTs in large numbers via a no-frills interface featuring tools that appealed to serious pro traders. It also took a hardline stance on the Web3 royalties debate by making them optional on the platform and later introduced its own native token, $BLUR. 

Through several airdrops, the token rewarded platform loyalty and user engagement. These users continue to interact with Blur through the promise of more airdrops to come. In May, the company dropped a lending protocol called Blend, which was aimed at unlocking liquidity in the space and, by tying protocol activity to token rewards, further motivated users to interact with the platform.

While the aftermath of the token launch and Blur’s Blend protocol saw activity spike, even securing the platform 82 percent market share in NFT lending, Web3 observers began wondering if the marketplace’s successes didn’t come without a potentially larger cost to the broader NFT ecosystem. Blur’s high volumes, while impressive, have a habit of coming from just a handful of traders, who — directly as a result of the platform’s incentivization system — are often accused of wielding an outsized influence over NFT prices. 

Blur is now the subject of a broader discussion in the NFT community about whether and how its infrastructure pushes NFT collection prices down, and fast. To get a sense of the platform’s successes, failures, and effects on the market, we spoke to Web3 observer and OG crypto participant Mihai, whose recent blog post on Blur’s ability to “nuke” NFT prices has reignited the debate surrounding the platform.

nft now: Blur has been the subject of criticism for how it affects the NFT market for months. What made you want to release this blog post now?

Mihai: When Blur came out, I thought it was great; we’re seeing a lot of bid liquidity. I thought it could pump the markets a lot. I had always thought of NFTs as Veblen goods; the demand gets higher when the price gets higher. I noticed some large holders of NFTS were using the bids as a chance to exit their bags at price execution points that should not really be available.

For example, OSF and Mando got rid of dozens of Apes. They shouldn’t have been able to get an execution that good on Blur. The only reason they did was because Blur token farmers bought up their bags and started continuously selling lower and lower. I realized you don’t have enough demand to absorb these people. It’s going to start a death spiral.

If Mando had sold his Apes on OpenSea in WETH bids, it might’ve pushed down the price 10 to 20 ETH. With Blur, you’ve offloaded it to some farmers who are incentivized to always be bidding, who are constantly willing to lose something like 0.01 ETH per Ape every time, it’s very little. As a farmer, that’s fine, just sell it to the next person.

The problem is everyone’s thinking the same way. There is no buyer of last resort. Everyone who buys is also the seller of first resort. So, what might have been an initial 15-20 ETH drop in price from the Ape sell or, because there isn’t enough liquidity, he might not have sold them in the first place, is now a recurring 0.5 ETH drop per day in perpetuity instead of being bought up eventually. Because the average NFT buyer is picking NFTs close to the floor, the supply is never able to be absorbed by real buyers.

When I saw that, it was startling but not alarming yet. Then Blend was introduced. They removed listing points, and there is no royalty on dumping. Ever since Blend came out on certain collections, royalties have gone down. You no longer have any listing potential, and the majority of the volume is people dumping into bids.

nft now: The Blur team claims these market dynamics are necessary for the NFT space to grow, as they are at the heart of what allowed other industries to scale. How do you view these statements and ideas?

M: I tend to agree with Pacman on most things. The pre-Blur NFT market was really inefficient, and it might have even been driving people away, which is my speculation. I was very happy with Blur popping up and having a zero friction, zero royalties, instant liquidity situation.

I love Blend. What I don’t like is how the incentives are structured. Blend, simplified, is a kind of mortgage. You put down the down payment and continuously start paying it off. But the average Blend loan is just farmers taking out a loan and dumping an hour later. It functions effectively more like margin trading. Most buy-now-pay-later buyers don’t make it past a day or two because they get auctioned off.

When you have 90 percent LTVs, those only exist due to the incentives to offer a lot of liquidity for an asset. If those incentives weren’t there, what would those LTVs be like? I don’t know. I don’t think this is feasible for any real [market] participants. The incentives make it impossible.

nft now: Part of the reason behind Blur’s native token is to help it achieve financial longevity. Is there a reasonable defense of Blur’s incentivization system, in your view?

M: I see this as a parallel to Curve. If you remember the Luna meltdown last year, Do Kwon was buying massive amounts of Curve’s governance token. You could use that token to allocate how many rewards are given to each liquidity pool. What Do Kwon was trying to do was buy up a ton of Curve to rig the votes to give the UST pool more token incentives.

The parallel here is that the Blur token is being farmed by mercenary participants, not genuine market participants. Machi Big Brother, for example, has lost thousands of ETH on Blur but still thinks he’ll come out positive after the next token drop.

It’s similar with NFTs. USDC and USDT at least claim to be backed. NFTs don’t have any sort of backing. Their floor is zero. There is no downside cap to NFTs; it can go to zero. When you put these parallels together, there is nothing stopping the Blur token from pushing the price of NFTs down indefinitely this way. Farmers aren’t seeing it. Even with the Blur token hitting 30 cents, farmers continue this behavior. It’s like everyone is dumping their UST, but this time the UST is NFTs, and no one is there to absorb it.

nft now: What does Blur do to get out of this position, if anything? Do you believe Blur feels it should concern itself with its large-scale effects?

M: The reason this is so bad now is because NFT market participants have decreased so drastically. The market is weaker and not able to sustain it. Because of this spiral from dumpers dumping into dumpers, people aren’t incentivized to buy NFTs. You buy three NFTs and, an hour later, 20 more dump right after you. After someone does that once or twice, they learn their lesson. Because the market is so sensitive, it leads people to not buy. My solutions revolve around minimizing this buyer’s remorse.

My first suggestion is to decrease the step, the minimum increment that you can move the price. On Blur bids, the step is 0.01 ETH, a hundredth of an ETH. What happens is Blur bidders want to bid as high as possible but don’t want to get filled. They’ll lower their bid by 0.01 ETH.

For an Ape which, let’s say is sitting at 45 ETH, that’s something like 0.02 percent. That’s negligible. But for lower-priced collections, lowering the price by 0.01 ETH is a much more significant figure. So, lower-priced collections are affected much more by this death spiral. Make the step go from one-hundredth to one-thousandth.

That way, farmers can keep dumping into each other, but instead of lowering by one percent a day, it might lower by 0.1 percent a day. That would cushion the amount of damage the industry is facing right now. The longer the NFT bear market goes on, the lower the potential of the industry to make a comeback will be. It’s way harder for large businesses to justify partnering with NFT projects when it’s considered a scam.

The second step would be to actively punish Blend recyclers. The idea is for farmers to maximize the liquidity that they can get for bidding. They take it from the lenders because it’s nearly risk-free. Both the lenders and bidders are essentially wash trading. The reason I say that is they pay zero fees when they dump. If you trade at the same price with no fees, that’s basically a directionless bet, and it’s just noise in the market that isn’t doing anything. Fees create more honest traders. People have to evaluate if their strategy is worth it; the answer is usually no. It inflates Blur’s volume and TVL but creates a lot of what I consider to be wash trading.

The third solution is for Blur to reimplement a 0.5 percent royalty to dumping on Blend. There’s no reason why you should be incentivizing people to use market orders and limit orders. In every other market system that exists, people are incentivized to add liquidity to the markets. You want liquidity to be thick, but you want it to be organic. If you make every participant pay the same fee, you go back to being organic.

Lastly, phase in listing points again. We have to be honest here: this issue is already past the tipping point. It’s about minimizing damage now. The only way for real NFT buyers to get NFTs back from farmers and end the cycle is if farmers list them. If you re-add a listing point incentive.

nft now: Do you think Blur has any real motivation to implement any of the changes you suggest? Their goal is to keep their volume up, which draws in funding. Would they realistically consider doing anything that could negatively affect that volume?

M: It’s not a win-win situation, sadly. One side has to lose for the other to win. That’s unfortunate. Blur does get a lot of volume from these Blend recyclers. While that creates huge volume and makes it seem like Blur killed OpenSea.

What’s implementable would be the step change. Change it from one-one hundredth of an ETH to one-one thousandth. It would continue the recycling but without moving the prices lower. That would stop the bleeding and allow more confidence to come back into the NFT markets. It also fixes the demand issue. Suddenly, if Mutants show sustained interest above seven to eight ETH, people might think NFTs are in better shape.

This is just about how much pain Blur is willing to endure in order to facilitate saving the market. I think a lot of what they’re doing is misguided, not malicious.

nft now: What role do NFT buyers and Web3 projects have to play in all of this?

M: Projects need to have a say in this, too. If you’re a project creator or owner, focus on getting NFTs out of farmers’ hands. Blur can add individual asset and trait bids, for example, to help this. If you know exactly which NFTs are in a farmer’s hands, you can bid on that asset; bid 0.01 ETH more than what the floor bids are.

Then the farmer is selling into you and not into other farmers. It stops the bleeding. The only thing worse than a price nuke, something like a 20 percent decrease in price in one day, is a consistent one-percent-down for months and months that makes people lose faith in the project. It’s in every project’s interest to minimize the amount of NFTs in farmers’ hands.

Editor’s note: During nft now’s interview with Mihai, Blur introduced trait bids and reminded users that listing points are available for collections that do not have the platform’s Blend protocol enabled.