Uniswap’s NFT platform shows DeFi’s reluctant acceptance of centralization
In November, the most popular decentralized exchange on the planet, Uniswap, launched a non-fungible token (NFT) trading platform. The new marketplace did not list NFTs directly, but instead scraped tokens from the entire market.
Uniswap then featured the NFTs on its website, allowing the financial institutions and early adopters dominating the platform to exchange any photo, video or MP3 file logged on the Ethereum blockchain in one convenient place.
Robert Stevens is a freelance journalist whose work has appeared in The Guardian, Associated Press, 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 stood out almost immediately after launch. In its first month of trading, Uniswap’s decentralized aggregator overwhelmingly diverted trades from two of the most popular NFT marketplaces: the highly centralized OpenSea and the slightly more decentralized NFT trading platform LooksRare. Most of the trades then came from OpenSea, a platform so centralized that a rogue employee was charged with insider trading in June 2022.
It may seem odd for a decentralized exchange (DEX) first dipping into NFTs to rely so heavily on centralized marketplaces, where employees and founders are free to run the platforms the way feudal lords command small fiefdoms.
After all, Uniswap was launched four and a half years ago with the aim of cutting out the need for centralized cryptocurrency exchanges, such as Binance or Coinbase. DEX allowed traders to exchange coins on-chain by allowing other Uniswap users to fund large pools of liquidity, then relying on algorithms to rebalance the prices of cryptocurrencies held in them. The platform has since processed over a trillion dollars in trades and is steadily eating away at the market dominance of centralized exchanges.
Despite the culture shock, Uniswap does not consider its integration of centralized marketplaces into its new NFT marketplace to be a major roadblock to its mission of decentralized trading. “We’re just acting as a wrapper around these marketplaces,” Scott Gray, Uniswap’s head of NFT product, told CoinDesk in an interview at the launch.
Uniswap has also made some efforts to protect its users from the dangers of centralized control. If a customer purchases an NFT on Uniswap that comes from a centralized marketplace, Uniswap only hands over the NFT to the customer after receiving it from the marketplace.
Indeed, far from compromising Uniswap’s ideal of decentralization, Gray said that connecting 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 share NFTs in different marketplaces. “If you don’t see all the entries, you don’t get the word.”
By supporting listings from all marketplaces, “regardless of their royalty stance or fee structure,” Gray said the bottom line is better for customers. He added the goal 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.” It “allows everyone to create their own preference plan and let the community decide what they value,” he said.
It is a lofty goal, and one that initially would not have paid off. Uniswap’s new NFT platform generated a cumulative trading volume of just $2.5 million about a month after launch, according to a Dune Analytics dashboard. Since then, that number has only grown to $7.8 million – while other NFT marketplaces like Blur have taken 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 ownership of virtual plots of land or unique renderings of an endlessly reproducible internet meme.
Demand spun out of control in 2021, with Axie Infinity’s monster NFTs generating billions of dollars in sales revenue and sparking cottage industries in economies struggling just to grow tokens. Rare Bored Ape Yacht Club and CryptoPunk NFTs often sell for millions of dollars, often to celebrities including Snoop Dogg, Paris Hilton and Jimmy Fallon.
When the broader crypto market bottomed out after a cascade of failures at top protocols and companies towards the end of 2021, NFTs stopped being so cool. That caused trading volumes to drop and caused 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 technology into its own platform.
Gray, Uniswap’s head of NFT product, was Genie’s old CEO. He has been given the task of spearheading the new market place’s development. Although few people use the marketplace, it is certainly pretty and easy to use.
NFTs are neatly divided into collections, and customers are given the opportunity to choose which marketplaces to include in their search for the perfect JPEG. It also has a “sweep” feature so traders can buy multiple NFTs at once. In addition, all the various fees and royalty payments that dig into a customer’s wallet are bundled into a single closing fee.
Uniswap added to Gray’s work by incorporating two new pieces of technology. The first is called Permit2, a token approval contract that Uniswap claims will make smart contracts more secure and lower transaction fees. The other, Universal Router, allows users to buy NFTs from different marketplaces in a single transaction and saves gas fees.
“The game plan now is really leveraging 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 may provide a way forward. It allows for direct listings on the marketplace, then undercuts fees if traders buy and sell direct listings instead of those aggregated from other marketplaces. But that marketplace has also produced weak 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?