Original article: "Understanding the NFT Floor Price in One Article"
Simply put, the NFT floor price is the lowest price in a certain NFT series.
This article will share with you the following:
The purpose of NFT floor prices. Basic calculation methods for NFT floor prices. Other factors that set NFT floor prices. Advanced calculation methods for NFT floor prices. How standardized NFT floor prices can bring DeFi and NFTs closer together.
Definition of NFT Floor Price
Generally speaking, the NFT floor price can give market participants insight into the fair market value of NFT projects at the collection level. NFT buyers can refer to the NFT floor price to focus on the process of analyzing and making purchase decisions, eliminating the interference of intrinsic factors of the collection, such as rarity and other attributes.
The easiest way to calculate the floor price of an NFT is to refer to the lowest NFT price in the collection. For example, on Opensea, the floor price of the Bored Ape Yacht Club (BAYC) series of NFTs is 72.69 ETH, which is the lowest price BAYC NFT has ever been listed on the market.
Screenshot from September 9, 2022 How to calculate the NFT floor price
There are many ways to calculate the NFT floor price. The most direct method is to take the lowest price in a series as the floor price as described above.
For example, if the lowest price in a certain NFT series is $20, then the actual floor price is $20. If someone buys this NFT, then the second lowest priced NFT (assuming it is priced at $30) will become the new floor price, so the floor price will rise to $30. If someone lists an NFT below $20, then the floor price will drop to the price of this NFT.
Expanding on the basic NFT floor pricing mechanism
The lowest price in a series of NFTs is the floor price of the series, which seems to be a very simple and effective measurement method at first glance. However, in the actual process of measuring the floor price of NFTs, a series of other factors need to be considered.
Market fragmentation
Usually, the floor price of each NFT platform varies depending on the specific NFTs listed on the platform. For example, in the screenshot below, the floor price of the BAYC series listed on LooksRare is 73.88ETH. However, we can also see that LooksRare compared the floor price of Opensea, and the floor price of Opensea is actually 72.69ETH. Therefore, to calculate the NFT floor price more accurately, it is necessary to search for prices from multiple platforms and consider market differentiation factors.
Screenshot on September 9, 2022
fluidity
"Liquidity" is a widely used financial term that refers to the ease with which an asset can be changed hands. In the field of NFTs, liquidity measures the ease with which an NFT can be sold in exchange for tokens.
Let’s take a liquid asset like a token or a stock as an example. If an exchange publishes a price for a digital asset, then anyone can immediately sell it at or near that price. This is also true for most NFTs. An effective NFT floor price mechanism should take into account different levels of liquidity. The best way to do this is to look at recent NFT sales data, which can not only quickly understand the true price of the NFT, but also the turnover rate of the NFT.
Outliers
The basic floor price of NFT is easily affected by outliers. Suppose in a certain NFT series, 99% of the NFTs are priced at 10ETH, but suddenly a few NFTs are sold at 3ETH.
This will quickly push the floor price of NFT down to 3ETH. Although 3ETH is indeed the floor price according to the calculation method of NFT floor price, it cannot reflect the real floor price of NFT. To obtain a more accurate NFT floor price, outliers must be removed from the calculation, because these outliers often cause the floor price to deviate from the actual situation. Only after removing outliers can the fair market value of NFT be effectively judged.
Price manipulation
Some NFT series, especially lower-priced NFTs, often see price speculation due to large-scale purchases. This is often referred to as "sweeping the floor" in the NFT community, where individuals or teams with deep pockets work together to raise the floor price. In this case, the floor price is the lowest market price in the NFT series.
Another way to manipulate prices is through wash trading, where individuals buy their own NFTs. In short, wash trading refers to an individual or team that has enough NFTs, lists them on the market at a high price, and buys them themselves to drive up the price.
Both methods will mislead potential NFT buyers into believing in fake NFT prices that are not based on real market demand. This is more difficult to identify than other factors that affect the NFT floor price, and NFT buyers need to research NFT ownership indicators, sales data, and project communities on their own.
Advanced NFT Floor Price Calculation Method
Since there are many factors that affect the actual floor price of NFT, many NFT analysis tools have appeared on the market to help users judge the floor price of NFT more accurately and reliably.
Here are some of the most common floor price calculation methods. These methods will not be used alone, and different NFT analysis tools will combine them in different ways. Therefore, we must understand the logic behind these calculation methods.
Market Aggregation
NFT market analysis tools typically aggregate price data from multiple mainstream NFT markets, collecting as many data points as possible to reliably calculate the NFT floor price.
The most important aspect of market aggregation is quality. Markets with low liquidity and low usage are usually not included in the calculation. Low liquidity markets cannot provide reliable data, and the quality of data from high liquidity markets will be diluted in the aggregation process.
Even a low-quality data source mixed in may affect the accuracy of prices during the aggregation process
Historical average
Usually, the historical average transaction price of NFTs is taken over a period of time (such as a month or a year), and then the current and future NFT floor prices are estimated based on this data. For example, the historical average floor price can be calculated based on the average of the top 5% lowest NFT transaction prices in the past thirty days. The average can then be combined with the prices obtained by other methods to finally determine the NFT floor price and share it with users.
The key links in calculating the historical average include the time span, the data points available over a period of time, and the average calculation method. Each link will have a direct impact on the reliability of the floor price, especially when the market is volatile.
The historical average estimates the average floor price of NFT based on the lowest transaction price over a period of time
How to filter outliers and wash trades?
NFT data analysis tools will remove outliers and fake transactions. The biggest purpose of this is to accurately identify real market behavior and distinguish it from fake transactions.
Why is it necessary to establish an NFT floor price standard?
The NFT ecosystem is developing rapidly, and innovative NFT floor price pricing models often appear. However, in the current environment, users and developers have to study various NFT data analysis tools on their own, and each tool has its own set of methods for calculating NFT floor prices. We now have almost no standards for how to set floor prices for NFTs.
The lack of pricing standards also hinders innovation and development, and NFT lending is one example. NFT holders can pledge NFTs to borrow tokens. NFT collateral needs to be backed by a real floor price and can be reliably liquidated when necessary to protect the interests of borrowers.
Standardized NFT floor price feeds will provide core infrastructure for the Web3 ecosystem, driving innovative features such as NFT derivatives, lending protocols, efficient NFT pricing, and NFT comparisons.