Uniswap's NFT Platform Shows DeFi's Reluctant Acceptance of Centralization
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In November, the most popular decentralized exchange on the planet, Uniswap, launched a non-fungible token (NFT) trading platform. The new marketplace didn’t list NFTs directly but instead scraped the tokens from all over the market.
Then, Uniswap presented the NFTs on its site so the financial institutions and precocious children who dominate the platform could trade any picture, video or Mp3 file logged on the Ethereum blockchain in one handy place.
Robert Stevens is a freelance journalist whose work has appeared in The Guardian, the Associated Press, the New York Times and Decrypt. He is also a graduate of Oxford University's Internet Institute. This article is part of CoinDesk's "Culture Week."
One thing stuck out almost immediately after launch. In its first month of trading Uniswap’s decentralized aggregator overwhelmingly redirected trades from two of the most popular NFT marketplaces: the very centralized OpenSea and the slightly more decentralized NFT trading platform LooksRare. Most of the trades then came from OpenSea, a platform so centralized that one rogue employee was charged with insider trading in June 2022.
It might seem strange for a decentralized exchange’s (DEX) first dip into NFTs to rely so heavily on centralized marketplaces, where employees and founders are free to run the platforms in the same way that feudal lords command small fiefdoms.
After all, Uniswap launched four and a half years ago with the purpose of cutting out the need for centralized cryptocurrency exchanges, like Binance or Coinbase. The DEX allowed traders to swap coins on-chain by having other Uniswap users fund large liquidity pools, then relying on algorithms to rebalance the prices of cryptocurrencies held within them. The platform has since processed over a trillion dollars worth of trades and is steadily eating away at the market dominance of centralized exchanges.
Despite the culture shock, Uniswap doesn’t consider its integration of centralized marketplaces into its new NFT marketplace a major roadblock to its mission of decentralized trading. “We're only acting as a wrapper around these marketplaces,” Scott Gray, Uniswap’s head of NFT product, told CoinDesk in an interview at launch.
Uniswap has also taken some pains to protect its users from the perils of centralized control. If a customer buys an NFT on Uniswap that comes from a centralized marketplace, Uniswap only hands the NFT to the customer after receiving it from the marketplace.
Indeed, far from compromising Uniswap’s ideal of decentralization, Gray said linking up centralized marketplaces solved a problem that has long plagued the NFT market: “the fragmentation of liquidity across marketplaces.” It’s not very “capital efficient,” he said, to split NFTs across different marketplaces. “If you're not seeing all listings, you're not getting the floor.”
By supporting listings from all marketplaces, “no matter their royalty stance or their fee structure,” Gray said the outcome is better for customers. He added the aim is for Uniswap to become a platform that puts “all the options in front of the consumer” so that “the consumer can easily decide which marketplaces they support.” That “allows for everyone to create their own preference schedule and have the community decide what they value,” he said.
It’s a lofty goal, and one that hadn’t initially paid off. Uniswap’s new NFT platform generated a cumulative trading volume of just $2.5 million about a month after launching, according to one Dune Analytics dashboard. Since then, that figure has only grown to $7.8 million – while other NFT marketplaces like Blur shot off like a rocket.
Uniswap’s NFT venture’s slow start may be down to timing. NFTs took off in 2020 after convincing traders of the necessity of property rights to virtual plots of land or one-of-a-kind renditions of an infinitely reproducible Internet meme.
Demand spun out of control in 2021, with Axie Infinity’s monster NFTs generating billions of dollars in sales revenues and sparking cottage industries in struggling economies just to farm the tokens. Rare Bored Ape Yacht Club and CryptoPunk NFTs frequently sold for millions of dollars, often to celebrities, including Snoop Dogg, Paris Hilton and Jimmy Fallon.
When the wider crypto market bottomed out following a cascade of failures of top protocols and companies toward the end of 2021, NFTs stopped being so cool. That prompted trading volumes to dwindle and led many of the celebrities who had championed the technology to cast aside their new digital personas in favor of the next big thing.
But Uniswap still saw value in the market, and acquired NFT aggregation app Genie in the summer of 2022, then incorporated its tech into its own platform.
Gray, Uniswap’s head of NFT product, was Genie’s old CEO. He has been tasked with spearheading the new marketplace’s development. While few people are using the marketplace, it is certainly pretty and is easy to use.
NFTs are neatly separated into collections, and customers are provided with the opportunity to select which marketplaces are included in their search for the perfect JPEG. It also has a “sweep” feature so traders can buy several NFTs at once. Plus, all the various fees and royalty payments that dig into a customer’s wallet are baked into a single final fee.
Uniswap added to Gray’s work by incorporating two new pieces of technology. The first is called Permit2, a contract for approving tokens that Uniswap claims will make smart contracts more secure and lower transaction fees. The second, Universal Router, lets users buy NFTs from different marketplaces in a single transaction saving gas fees.
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“The game plan now is really tapping into all forms of liquidity,” Gray said, and to deliver better prices and more listings. Ultimately, he wants Uniswap to be “the interface for all NFT liquidity out there,” he said.
ApeCoinDAO’s first-party marketplace for Bored Ape Yacht Club NFTs might provide one way forward. It allows for direct listings on its marketplace, then undercuts fees if traders buy and sell direct listings instead of those aggregated from other marketplaces. But that marketplace, too, has produced lackluster volumes.
While all this aggregation is certainly innovative, NFT strategists may have to solve an obvious problem many fresh faces in the space haven’t had to deal with before: how to convince people to spend hundreds of thousands of dollars on JPEGs of memes and monkeys?