Could Uniswap fix NFT illiquidity and information asymmetry?

Could Uniswap fix NFT illiquidity and information asymmetry?

Decentralized exchange Uniswap is in talks with non-fungible token (NFT) lending protocols to address the liquidity fragmentation and information asymmetry surrounding the tokens.

In a tweet, Uniswap's Head of NFT Product Scott Gray said, “we are now in talks with 7 NFT lending protocols. We will be working with each one to solve liquidity fragmentation and information asymmetry. This is the first step to building NFT financialization.”

NFT holders who are looking to obtain liquidity from their tokens without selling are turning to NFT lenders, but the recently averted bank runs at BendDAO, highlighted some risks in the lending model. In light of this, BendDAO is scheduled to approve a series of changes to how the platform runs.

“Uniswap will need to solve the liquidity issue and develop a strong market maker model for its lending model if that’s eventually what it’s going to do. The existing lending protocols (like BendDAO) are struggling with liquidation risk and keeping itself out of losses when the market is volatile, which is almost every day in the NFT world,” said Chloe Tsai, Head of Legal and AML at WOO Network.

Tsai, who is active in the NFT community, said that while this is a welcome development, there are pros and cons to the AMM model that Uniswap seems to adopt.

“This model has been proven to work in the DeFi landscape, which will attract more participants (not just collectors); the marketplace can be more decentralized, and the prices are controlled by the liquidity providers,” Tsai said.

“The AMM model erased all of the uniqueness in the NFTs, but instead you'll be trading the NFT based on the liquidity provided in specific pools. This is a downside for many NFT collectors, as the traits of any specific NFT will have a huge impact on it, especially in the PFP NFT projects,” she said.

Uniswap’s talks and potential collaborations received double-sided responses - some viewed it as a step toward solidifying the future of decentralized finance (DeFi) while others pointed toward taking advantage of the liquidation profits.

Wishlist, NFT shorting option

Tsai said that further improvement to address NFTs illiquidity is an option to short an NFT.

“Most of the well-known lending protocols only allow you to borrow against your NFT (i.e. locking the NFT as collateral for a loan of ETH/DAI), which is a result of the previous NFT bull run. But what if I want to bet against an NFT collection? I'd be interested in seeing some protocol with a shorting option,” Tsai noted.

This is not the first time that Uniswap explored the NFT space. Cointelegraph reported that the company acquired Genie, an NFT marketplace aggregation platform, allowing users to find and trade digital assets across most platforms. They also reported that Unisocks was launched as the first rendition of NFT liquidity pools.

Before joining WOO, Tsai was the head of legal and compliance at UOB Asset Management. She has a Master of Law degree from Duke University School of Law (LL.M) and a bachelor's degree from the National Chengchi University.

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