Since the launch of the Proteus AMM Engine, the Shell team has been wildly excited to deploy our first NFT AMM. That day is now here, with the launch of the TOUCOIN+ETH pool.

Unlike traditional order book NFT markets like OpenSea in which users buy and sell individual NFTs from each other, an NFT AMM allows users to instantly buy or sell NFTs without a counterparty, with the trade price determined algorithmically. This drastically improves liquidity and price discovery in the NFT market, just as the first wave of AMMs did for ERC-20 tokens. This unlocks new possibilities for using NFTs as collateral, or in futures or options markets.

The first few NFT AMM platforms like NFTX or Sudoswap were groundbreaking in their own right, but the AMMs they offer are functionally constrained, being subject to the same limitations as Uniswap AMMs or offering a small selection of bonding curves. Moreover, they suffer the same composability issues plaguing the DeFi space. For example, if an NFT is priced in DAI, users first have to convert their ETH before making a purchase. This requires an additional transaction, usually in another app.

The Government Toucan AMM, Shell’s first NFT AMM, is our first look at the future of NFT swaps. It’s exciting for a few reasons. First, it uses Proteus, the most flexible AMM engine on the market. Although the TOUCOIN+ETH pool implements a simple constant product curve with Proteus, future NFT pools could take advantage of more sophisticated Proteus bonding curves customized to any asset. Another big leap is its excellent UX, due to Shell’s composability: The NFT swaps work like any other token swap and can be batched with any other DeFi action. That means you can swap a Toucan for any token you’d like, or buy a Toucan with any token in your wallet. If you want to get really fancy, you can even use LP tokens to buy Toucans!

How the NFT AMM works

How does the Toucan AMM work under the hood? Let’s break down a simple transaction for selling a Toucan NFT.

• Step 1: Wrap Toucan into Shell (get shToucan).
• Step 2: Fractionalize shToucan and mint 100 Toucoin.
• Step 3: Swap Toucoin for ETH.
• Step 4: Swap ETH for any token in the Shell liquidity network:

    - USDT
    - USDC
    - DAI
    - ARB
    - wBTC
    - wstETH
    - COLLAB (coming soon)
    - shLP
  
  

Note the magic of Shell’s composability. Since you can combine any number of DeFi primitives in a single transaction, you can transform your Toucan from Step 1 into any token in Shell’s AMM liquidity network.

Why is it necessary to fractionalize the NFT, as done in Step 2? The Proteus AMM Engine only works with assets that are considered interchangeable, or fungible. In order to use Proteus, we need to temporarily “fungibilize” the NFTs. This is something you’d only do to an NFT if you consider its value equivalent to any other NFT in the set.

The fractionalizer is a pool that holds shToucans. If you give it a shToucan, it will mint you 100 Toucoin. If you give it 100 Toucoin, you can withdraw any Toucan in the pool. The fractionalizer does not care which Toucan you give or take. Regardless of whether your Toucans are common or extremely rare, all Toucans are exchangeable for the same 100 Toucoin. In other words: DO NOT put rare Toucans into the fractionalizer! It only makes sense to use common Toucans, aka “floor” Toucans, since these all have similar value.

You may have guessed this already, but you can also use the Toucan fractionalizer to simply swap a Toucan for any other Toucan in the pool.

Earn Shell Points in the NFT AMM

Of course, this article wouldn’t be complete unless we address the enthusiastic liquidity providers in the audience. Yes, you can LP into the TOUCOIN+ETH pool. And yes—you will be able to earn Shell Points by LPing. Warning: DO NOT LP with rare toucans!!! As explained in the previous section, you should only use common Toucans for this AMM.

Providing liquidity into the NFT AMM is a novel experience. Not only can you directly swap a Toucan for an LP position, but you could also swap directly from any other LP token, like Stablepool, into the TOUCOIN+ETH pool in a single click.

The future of DeFi and NFTs

For a long time, the Toucans have been an important part of Shell’s community, and we felt that it was bad UX to force new users to go to external NFT markets in order to get them. But even beyond our personal experience, we have long believed that NFT swaps are a strategic priority.

Shell is the only DeFi protocol that can natively interface with both fungible and non-fungible tokens. This is a critical step in bringing DeFi and NFTs closer together, and building out robust financial tools for NFT creators, collectors, and traders. We can already see this happening with Proteus: Because fractionalized NFTs can harness Proteus, it’s now vastly simpler to build finely-tuned concentrated liquidity pools for NFTs.

Most importantly, Shell’s NFT swaps showcase the power of composability. As we continue to innovate and add more functionality and new primitives to the core protocol, NFTs will be automatically included in the next wave of DeFi.

Ready to get started? Check out the tutorials to learn how to do NFT swaps and LP into the TOUCOIN+ETH pool.

How to Wrap Your Toucan NFTs
How to Swap Your Toucan NFTs
How to LP into the Toucan AMM

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