May 20, 2021
One Small Step For Uniswap, One Giant Leap For DeFi x NFT
Topic of discussion:
1. Uniswap V3 brings NFT into mainstream financial applications.
2. Each upgraded version of Uniswap essentially drives the upgrade of the DeFi communities.
3. Uniswap V3 is a critical step in the financial applications of NFT.
4. NFT is highly capable of expressing financial contracts that are complex and varied.
5. ERC-721 is just a starting point for the Financial NFT and will not become mainstream.
6. Mainstream Financial NFT must possess two key indications: highly descriptive and the possibility to be fragmented.
7. If digital currency is programmable money, then Financial NFT is the automated, smart money, it is a common tool to help parties build contracts and foster collaboration.
8. Financial NFT gives users the power to create a variety of financial instruments.
9. Freedom brings innovation.
10. There will be a number of Financial NFT projects that feature DeFi.
01. Uniswap V3 brings NFT into the mainstream financial applications
On May 5, Uniswap V3 was officially launched. Of the many new functions, a notable feature is its capability to support the liquidity providers (LPs) to market by specifying price ranges (hereby referred to as “range market making”) (Figure 1–3). This capability not only significantly increases the capital utilization rate of LPs, but also reduces their impermanent losses, which is indeed a major innovation in the field of AMM(Automated market maker). This will provide the general public an insight into the great potential of NFT in the financial applications.
02. Each upgraded version of Uniswap essentially drives the upgrade of the DeFi communities.
In November 2018, Uniswap V1 implemented Vitalik’s vision of Automated Market Maker, freeing the entire DeFi community from the dogmatism of the rigid copy of CeFi and was finally on its path to independence. In May 2020, the newly developed V2 enabled the function of adding exchange pairs; it has directly fueled the DeFi boom which still continues to this day. What is the industry significance of the release of V3 this time? I think it’s to inspire the application and innovation of Financial NFT. Once NFT is widely used in the financial applications, it will open up a whole new arena.
03. Uniswap V3 is a critical step in the financial applications of NFT
People in general might not associate V3 with the growing buzz around NFT, after all, NFT seems to equate it with encrypted art in all news. In practice, however, the key to V3’s ability to achieve the range market making is precisely the NFT. V3’s LP Token has replaced the original ERC-20 with NFT, a crucial step for Uniswap and the Financial NFT. Essentially, LP Token is actually an investment contract between Uniswap and LP.
In the V2 era, this contract was represented by ERC-20, there was only a difference in the number of shares between the different LPs and the terms of the contract were the same. In the V3 era, this contract is instead represented by ERC-721, so that different LPs are able to set different terms of market making.
04. NFT is highly capable of expressing financial contracts which are complex and varied
Many people will argue that this does not have to use the NFT, they can also set it up with ERC-20. Here, I will give an analogue example to see how absurd this statement is. During a scenario where Singers A and B were to hold concerts and sell tickets in the town, we can agree that the concert tickets are actually a paper contract between the organizers and the audience. However the tickets can be complex and fickle. For example, the concert tickets of Singers A and B are different, the tickets tonight and the tickets tomorrow night are different, tickets for seats at the front and back rows are different, neither same for seats at the different positions in the same row, they are super varied.
If ERC-20 has to be used as a ticket, then every seat at each concert needs to be produced by a separate company. For example, one company will be called “Ticketing Company for Singer A on May 5, 2021 in Beijing Concert at Seat 7, Row 1”, another company is called “Ticketing Company for Singer A on May 5, 2021 in Beijing Concert at Seat 1, Row 2” and the third company will be called “Ticketing Company for Singer B on May 6, 2021 in Shanghai Concert at Seat 5, Row 3”.
All in all, in the method of ERC-20, as long as there is the slightest change on the tickets, a new company will need to be set up to reprint the ticket, which is of course, very ridiculous. While the NFT method will make a lot more sense, you only need to establish a single ticketing company to print different tickets for different concerts, as long as the tickets have different seating levels and different special conditions. All the differences are reflected through the ticket, rather than opening different companies with short lifespans tailored to make all the changes and most importantly the cost will naturally be greatly reduced.
05. ERC-721 is just a starting point for the Financial NFT and will not become mainstream
ERC-721 is the current mainstream token standard for the NFT and is widely supported, even Uniswap adopted ERC-721 directly as the standard for implementing the V3 LP Token. But the specialty of ERC-721 is to describe unique items, therefore technically, there will be nothing in common for two of the same ERC-721 NFT, thus their prices naturally have no reference to each other.
ERC-20 places too much emphasis on the commonality, and where its peers must be identical to each other, with no special features, which is extremely beneficial to the financial calculations and liquidity, but extremely detrimental to describing the complex contractual conditions. ERC-721, on the other hand, places too much emphasis on the individuality, it views any two things in the world to be hugely different with no analogy, regardless of things with “similarity” and “in same category”, it is very good in description, but quite the opposite in computability and mobility. Both of them are too extreme and too idealistic. Therefore, in my opinion, the future of mainstream financial instruments will not be ERC-20 nor ERC-721.
06. Mainstream Financial NFT must posses two key indications: highly descriptive and the possibility to be fragmented
The description needs to be strong in order to express the advanced financial contracts at a low cost. The ability to split enables the fission of a number of tokens with same textures, and the price between each other can be cross-referenced, so that they have the computability, a good liquidity, and thus eliminating ERC-721. The vNFT standard we have proposed in Solv was designed to meet the demands of Financial NFT, combining the computability of ERC-20 with the descriptive power of ERC-721.
07. If digital currency is the programmable money, then Financial NFT is the automated, smart money, it is a common tool to help parties build contracts and foster collaboration
In contemporary society, people collaborate mainly through the establishment of contracts. Money is really just a tool that enables people to collaborate with each other. The main obstacle to collaboration is the transaction cost. A large part of the transaction costs are spent on the creation, negotiation, signing and supervision of the execution of the contracts, which is partly due to the fact that money isn’t that “smart”. As the matter of fact, the greatest value of the digital currency is that it can be programmed, and the program can be rigidly executed without compromise. However, programming is not for everyone after all, and it’s not convenient for the ordinary people to use it. Financial NFT is one level higher than the current digital currency, it is smart money with built-in logic and runs automatically. Financial NFT encapsulates many common trading patterns and circulation rules of money, making it easy for the ordinary people to use. With the powerful Financial NFT, it’s easier for people to close deals and collaborate in a more wide and efficient manner.
08. Financial NFT gives users the power to create a variety of financial instruments
Previously, if you were to trade some sort of contract, you would have to wait for the Devs to design this product, make it, get it approved, and finally put it out on the market. But now, with Financial NFT, any average user is able to create a variety of financial instruments. Once this power is returned to the user, it means the liberation of finance. At the end of the day, the philosophy behind DeFi boils down to the word “liberation.” DeFi is in fact the redistribution of rights, it is not any scientific and technological innovation, neither the engineering miracle, nor black magic, it is simply the adjustment of production relations. In the past when people had to be subjected to the will of others, now have the chance to fulfill themselves on their own. So what essentially have DeFi accomplished? It’s about freeing the creation of financial instruments from CeFi and giving it back to the ordinary users.
09. Freedom brings innovation
When the Financial NFT emerges, users will create a variety of digital financial instruments in a short period of time to optimize the resource allocation, manage the risk, or speculations and value adjustment. Users who gain the freedom of creation, lured by practice, are encouraged with endless innovations.
10. There will be a number of Financial NFT projects that feature DeFi
DeFi projects that attempted to directly copy the traditional finance models have on the rocks, for example, a DeFi projects of bonds and options, they have attracted a group of traditional financial gurus who were confident enough to bring mature products and experiences from traditional finance to DeFi, but often failed to attract players in the DeFi community itself. Instead, there have been quite a lot of projects conceived entirely from DeFi itself, often exceeding all expectations and have achieved great success. I believe the same is true for Financial NFT. DeFi will still develop in the period of growth in a subversive way. The LP NFT in Uniswap V3 has no precedent in traditional finance, it is totally conceived and created in concrete practice, innovation like this will have a greater chance of success.
The Solv protocol we have developed is committed to becoming a platform for every ordinary user to create and trade Financial NFT. The vNFT proposed by Solv is a generic Financial NFT description protocol and is being submitted to the Ethereum network, making efforts to become an industry-standard in the field. Solv provides powerful visualization tools to help users design and create a wide variety of Financial NFT, users will be able to customize their look, rules, functions, and facilitate its circulation.
