The Sunday Drip #5 | Floor sweeps and buy backs are major red flags in NFT projects
You should run as fast as you can from projects that suggest a floor sweep and exit immediately when the phrase "it's just like a stock buy back" is uttered.
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Traditionally, a publicly traded company executing a share repurchase (or stock buybacks) of their own stock is very well-received by investors in the company. For good reason too. When a stock buyback occurs, a company uses its accumulated cash to reduce the number of outstanding stocks in the market, increasing the ownership and thus the share price for stockholders. Typically, this is done to signal the company is willing to reinvest in itself and also because the company believes the price of its shares are too low in the market (thank you Investopedia).
Recently, economists and investors have started to realize that many CEOs of companies executing stock buybacks are heavily compensated in their own stock and buybacks have started to look more like bullshit uses of cash to line their own pockets. Here, the Harvard Business Review agrees. There are several other major issues with share repurchases (such as shares immediately being issued again by the company), but let’s move on to the NFT part of the story.
To give some basic NFT definitions, the floor of the project is the current lowest price of any item in the collection that is listed for sale. The floor of the project is somewhat like the equilibrium price of a stock (supply = demand), but still very different since each NFT is different and the prices for certain traits can be different. Okay mooving on.
Managing the floor is toxic for NFT projects.
Right now in many NFT projects’ Discords there is beyond too much conversation about the floor of a project. The loudest owners of projects become very concerned about the price at which they can sell the NFT they purchased and they constantly talk about it.
We like to call these people moonboys. Moonboys take over Discords with “wen moon” and “we’re all buying lambos” and that is absolutely toxic for a project. In the worst case scenarios, the project owners give into the demands of the moonboys and begin managing the floor with the following tactics:
Floor Sweeps: The project uses treasury money to buy up the lowest priced NFTs in the collection, effectively increasing the floor.
Coordinated Delisting: Projects also like to run contests or coordinated efforts to encourage owners to delist their NFTs in an effort to artificially lift the floor.
the worstsome situations, the owner of a project will begin sweeping the floor, and will declare that they are reinvesting! And it’s just like a stock buyback! (queue TikTok “run” sound)
These are all bad, but what do we do about it?
My advice comes in two parts:
To the holders and moonboys in the project: you are killing the projects you care about when you constantly talk about the floor. You need to focus on the building the community or contributing to the project.
To the creators of the project: don’t give in to the floor. Focus on building what you wanted to build and manage the community. If you are a pfp project, your product is often your community. If your floor is dropping, figure out why people don’t want to join. (insert Field of Dreams reference)
It is completely fair to be concerned about the floor of a project. The floor price can be a signal that the general public understands your vision or strategy, and that can absolutely be useful. It can be the web3 version of a product market fit. But when the project is manipulating its floor to encourage outsiders to buy, it is very bad.
Some comparable questions when thinking about web2 companies:
Would you invest in a company that was only focused on artificially increasing its stock price? Never. (Well maybe, but it’s a bad idea)
What if the company was less than one year old and used the funds it raised selling the stocks to buy back its own stocks? OH MY GOD. You see my point.
They sell NFTs for high, buy them back for low, and call that reinvesting? They should be using the money to progress the project, not the cost of the project. Le sigh.
I am seeing this type of buy back, floor sweep behavior in way too many projects and it needs to be called out the second it is proposed. The most successful NFT projects are renowned for the community or the products they have built. Look at BAYC or CryptoPunks: they built their communities slowly and primarily through word of mouth. Both have several of the top thought leaders in web3 as holders of their projects, many of whom came up through these communities. That’s no coincidence.
This highlights a greater problem facing new NFT projects.
Many of the most popular new NFT projects sell all 10,000 NFTs to ~5,000 holders in a single day. The new holders are thrown into a Discord server that’s going a million messages a minute. 99% of the new holders participate 0% in the project and expect the
moon world. Unless the project has a clear goal (like buying a golf course), the members don’t know what do in the Discord. Changing your twitter pfp to a Rad Rhino is the equivalent of putting out “thoughts and prayers”.
Managing the community is a hard enough task that becomes 1000x harder when everyone is thrown together in a single day. How loyal can a person be to a project when they have been in the Discord for a week? There are solutions though.
To get around this issue, many of the best projects are allowing for a natural community build period before issuing their NFTs. BAYC made most of their money on the MAYC mint that happened several months after the BAYC mint (10k of the 20k MAYC were given to existing BAYC). RTFKT had a similar tactic, issuing whitelist spots to holders of old (often free) RTFKT NFTs and grew the project sub-Discord within their existing Discord under the code name “Akira.”
Building slow has significant advantages to creating a thriving community. Punks and BAYC minted for relatively low costs of entry and this is what allowed their communities to thrive without any external selling pressures. Why would anyone participate in an NFT community for free? Why do people answer the same beginner github questions over and over? I’m not sure, but it’s amazing when a community comes together to build something. The power of web3 is realized in the collective communities.
Finally the point.
I wanted to highlight an atrocity that I see in NFT projects as a way to discourage it and warn newcomers. Founders and projects buying back their own NFTs is the most backwards ass thing I have ever seen and it needs to immediately stop. If a project wants to give away NFTs, say it upfront and withhold those from the mint.
Also, I want to help people better understand why specific projects are successful and others are not. A project’s Discord is a great way to get a feel for if a project will be successful. What does a project discuss? How to the members get involved? Is there a vision for what this will become? Are the founders taking all of the money generated by the project and not investing at all (Free Pudgy)?
There are many other things that impact a project and I know this isn’t everything. I know projects are successful for many many other reasons. And I know growing organically is hard lol. But please don’t resort to floor managing.
In summary, managing the floor is a race to the bottom.
Ah I should have led with that. That was a great line.
Agree? Disagree? Comments? Questions? Let me know! Possibly some typos.