The NFT industry’s fragmented finance sector makes selling NFTs and lending money to NFT holders far more difficult and risky, but Uniswap, Ethereum’s most popular Decentralized Exchange (often called a “DEX“), aims to become a powerful player in fixing that issue. Uniswap Labs has been making moves and expressing interest in the NFT space over the past few months, and this could solve the biggest problem that NFTs suffer from.
When the first version of Uniswap dropped in 2018, it was revolutionary for crypto. Thanks to Uniswap, crypto holders could swap tokens from the comfort and safety of their personal wallets, including hardware wallets. Uniswap provided the ability to buy or sell cryptocurrencies that aren’t listed on exchanges by giving their creators the ability to create “liquidity pools” stocked with tokens that users could swap for, which kicked off a new era for Decentralized Finance (DeFi). While this was great for “fungible” tokens (tokens that are all identical), it did nothing for “non-fungible” tokens, or “NFTs“, which were still a new idea at the time. Unlike crypto lending/borrowing apps, building NFT lending/borrowing apps is difficult due to the near-impossibility of liquidating a repossessed NFT for a predictable price, which is owed mostly to how fragmented the NFT industry still is.
However, the NFT industry may not remain fragmented for long. On June 21, Uniswap Labs announced its acquisition of Genie, an app that combines (or “aggregates“) multiple NFT marketplaces into the same interface, which solves the problem for sellers choosing between marketplaces for NFT royalty payment policies versus customer base size. On August 23, Uniswap’s Head of NFT Product @Scott_eth posted on Twitter that Uniswap is now “in talks” with 7 NFT lending and borrowing protocols to fix the fragmentation and “information asymmetry” issues across the industry. These two moves combined are major for the NFT industry, as Uniswap’s trading volume has exceeded that of Coinbase’s in the past, which CoinDesk reported on back in September 2020. Having NFT marketplaces and financial services adjacent to Uniswap’s massively popular token swapping protocol could supercharge the NFT industry.
NFT Liquidity Is Fragmented, And Uniswap Might Fix That
The biggest problem the NFT industry currently faces is fragmented “liquidity“, which (as an adjective) refers to the ability to convert an asset into cash/crypto, and (as a noun) is usually related to the amount of cash/crypto waiting in reserve to buy an asset (such as the tokens in Uniswap’s liquidity pools). It is where the term “liquidation” originates from: converting an asset into “liquid” cash/assets. NFTs are widely considered “illiquid” assets due to how difficult they are to sell, and predicting the highest price an NFT will sell for at any moment is practically impossible, which makes NFT financial services difficult to create and often much riskier to contribute to than regular DeFi applications.
NFTs have a lot of potential for financial services and passive income opportunities if their liquidity issues can be solved. Loan liquidity may be more abundant through the use of fractionalized NFTs, often called “F-NFTs“, which break an NFT into smaller identical tokens, which could then be bought by many lenders taking a smaller risk instead of a single lender taking a big risk. NFT rental contracts will soon hit the market too, which will add to the financial services available for NFTs by providing a risk-free way to generate passive income from NFTs used in gaming and metaverse worlds.
While it is impossible to design a DEX that can instantly sell an NFT, Uniswap is seeking to get as close to that goal as possible by tying all NFT marketplaces into a single interface while implementing lending and borrowing services, and which can easily expand to more services as well. Uniswap is likely to become a critical piece of Web3’s financial system by serving as an all-in-one universal currency converter and NFT finance hub. Solving the issues facing NFT finance applications before their best use cases are invented may supercharge the industry, and Uniswap is the right app for the job.