A small step for Uniswap, a giant leap for DeFi x NFT
The mainstream financial tool tokens in the future will neither be ERC20 nor ERC721.This article is from Meng Yan's thoughts on blockchain, authored by Meng Yan.
TL;DR Version
Uniswap V3 brings NFTs into mainstream financial applications.
Each version upgrade of Uniswap drives the upgrade of the entire DeFi ecosystem.
Uniswap V3 has taken a key step in the financial application of NFTs.
NFTs have strong descriptive capabilities, making them suitable for expressing complex and variable financial contracts.
ERC721 is just a starting point for Financial NFTs and can never be mainstream.
Mainstream Financial NFTs must have two special features: strong descriptiveness and divisibility.
If digital currency is programmable money, then Financial NFTs are automated money, smart money, a universal tool that helps parties establish contracts and promote collaboration.
Financial NFTs empower users to create various financial instruments.
Freedom brings innovation.
A batch of DeFi-themed Financial NFT projects will emerge.
01. Uniswap V3 Brings NFTs into Mainstream Financial Applications
On May 5, Uniswap V3 officially launched. Among the many new features, the one the team is most proud of is the ability for liquidity providers (LPs) to specify price ranges for market making (hereinafter referred to as "range market making") (Figure 1-3). This capability not only greatly improves the capital efficiency of LPs but also reduces impermanent loss, marking a significant innovation in the AMM space. People will witness the immense potential of NFTs in financial applications.
Figure 1. Specifying market making in the $250-$12,000 price range
Figure 2. Specifying market making in the $0.960-$1.040 price range
Figure 3. Comparison of V2 and V3
02. Each Version Upgrade of Uniswap Drives the Upgrade of the Entire DeFi Ecosystem
In November 2018, Uniswap V1 realized Vitalik's vision of an automated market maker, freeing the entire DeFi space from the dogmatism of rigidly copying CeFi models and beginning to forge an independent path. In May 2020, V2 allowed the free addition of trading pairs, directly igniting the ongoing DeFi craze. What is the industry significance of this V3 release? I believe it is to stimulate innovation in the application of Financial NFTs. Once NFTs are widely used in financial applications, a vast new landscape will unfold.
03. Uniswap V3 Has Taken a Key Step in the Financial Application of NFTs
Most people might not associate V3 with the currently hottest NFTs, as NFTs seem to be synonymous with crypto art in all the news. However, the reason V3 can achieve range market making is precisely due to NFTs. V3's LP Token uses NFTs instead of the original ERC20, marking a key step for Uniswap and a crucial step for Financial NFTs. The LP Token essentially represents an investment contract between Uniswap and the LP.
In the V2 era, this contract was represented by ERC20, where different LPs only differed in the quantity of shares, while the contract terms were the same. In the V3 era, this contract is represented by ERC721, allowing different LPs to set different market making terms.
04. NFTs Have Strong Descriptive Capabilities, Suitable for Expressing Complex and Variable Financial Contracts
Many people like to argue that this matter doesn't necessarily require NFTs, as it can also be done with ERC20. Here, I will give an imperfect example to illustrate how unreliable this argument is. For instance, if singers A and B both want to hold concerts in Beijing and sell tickets, the concert tickets are essentially a contract between the organizer and the audience. The trouble with this ticket contract is its complexity and variability. The concert ticket for singer A is different from that of singer B, tonight's ticket is different from tomorrow's, front-row tickets differ from back-row tickets, and even seats in the same row vary by position and angle.
If one insists on using ERC20 for tickets, then each seat for every concert would need to establish a separate company to produce tickets. For example, one company called "A Singer May 5, 2021 Beijing Concert Row 7 Seat Ticket Company," another called "A Singer May 5, 2021 Beijing Concert Row 2 Seat 1 Ticket Company," and a third called "B Singer May 6, 2021 Shanghai Concert Row 3 Seat 5 Ticket Company."
In summary, under the ERC20 model, as long as there are slight differences in the conditions on the tickets, a separate company must be established to print the tickets, which is obviously absurd. The NFT model is much more reasonable; you only need to open one ticket company to print different tickets for various concerts, different seating levels, and different special conditions. All differences are reflected on the ticket, without the need to establish a multitude of short-lived companies for minor variations, thus significantly reducing costs.
05. ERC721 is Just a Starting Point for Financial NFTs and Can Never Be Mainstream
ERC721 is the current mainstream token standard for NFTs, widely supported, which is why Uniswap directly adopted ERC721 as the standard for implementing V3 LP Tokens. However, the strength of ERC721 lies in describing unique items; technically, there are no similarities between two ERC721 NFTs, and thus their prices have no mutual reference significance.
ERC20 emphasizes commonality too much; all similar items must be exactly the same, allowing no room for uniqueness, which is very beneficial for financial calculations and liquidity but extremely disadvantageous for describing complex contract conditions. On the other hand, ERC721 emphasizes individuality too much; it assumes that any two things in the world are completely different, with no comparable aspects, completely ignoring the existence of "similarity" and "categories," excelling in descriptiveness but lacking in calculability and liquidity. Both are too extreme and idealistic. The mainstream financial instrument tokens of the future will be neither ERC20 nor ERC721.
06. Mainstream Financial NFTs Must Have Two Special Features: Strong Descriptiveness and Divisibility
Strong descriptiveness is necessary to express advanced financial contracts while keeping costs low. Divisibility allows for the creation of several identical tokens, enabling mutual price referencing, calculability, and good liquidity, which eliminates ERC721. The vNFT standard we proposed in Solv is designed to meet the needs of Financial NFTs, combining the calculability of ERC20 with the descriptive capabilities of ERC721.
Figure 4. vNFT Combines the Advantages of ERC20 and ERC721
07. If Digital Currency is Programmable Money, Then Financial NFTs are Automated Money, Smart Money, a Universal Tool that Helps Parties Establish Contracts and Promote Collaboration
In contemporary society, collaboration among people is primarily achieved through the establishment of contracts. Money is merely a tool that facilitates collaboration. The main obstacle to collaboration is transaction costs, a significant portion of which is spent on creating, negotiating, signing, and supervising the execution of contracts, much of which can be attributed to the current "dumb" nature of money. The greatest value of digital currency lies in its programmability, with programs capable of rigid and uncompromising execution. However, programming is not something everyone can do, making it inconvenient for ordinary people. Financial NFTs take it a step further; they are automated, smart money with built-in operational logic. Financial NFTs encapsulate many common transaction modes and circulation rules of money, making it easy for ordinary people to use. With powerful Financial NFTs, people will find it easier to make transactions, leading to broader and more efficient collaboration.
08. Financial NFTs Empower Users to Create Various Financial Instruments
Previously, if you wanted to trade a certain contract, you had to wait for the big players to design, produce, approve, and market the product. Now, with Financial NFTs, any ordinary user can create various financial tools. Once this power is returned to users, it signifies the liberation of finance. The essence of DeFi boils down to the word "liberation." DeFi is essentially a redistribution of power; it is not a technological innovation, an engineering miracle, or black magic; it is merely an adjustment of production relations, transforming what was once unattainable into something achievable through individual effort. So what has DeFi done? It has liberated the creation rights of financial tools from CeFi and returned them to ordinary users.
09. Freedom Brings Innovation
With the rise of Financial NFTs, various users will create a rich array of digital financial tools in a short time, used for optimizing resource allocation, managing risks, or speculative betting. Users who gain the freedom to create will, under the lure of practice, produce endless innovations.
10. A Batch of DeFi-Themed Financial NFT Projects Will Emerge
Attempts to directly replicate traditional finance in DeFi projects have always been lukewarm, such as bond and options-related DeFi projects, attracting a group of traditional finance experts who confidently bring mature products and experiences into DeFi, but the results often fail to attract DeFi players. In contrast, many projects conceived entirely from DeFi discussions often yield surprising success. I believe Financial NFTs will be similar. DeFi will continue to develop in a disruptive and wild growth phase for some time. The LP NFTs in Uniswap V3 have no precedent in traditional finance; they were conceived and created entirely through practical experience, giving such innovations a greater chance of success.
The Solv protocol we are developing aims to become a platform for every ordinary user to create and trade Financial NFTs. The vNFT proposed by Solv is a universal Financial NFT description protocol and is being submitted to the Ethereum committee, striving to become the industry standard in this field. Solv will provide powerful visualization tools to help users design and create various Financial NFTs independently, customizing their appearance, rules, and functions, and facilitating their free circulation.
