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Mr. Meng: Uniswap V3 brings NFT to mainstream financial applications

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If digital currency is programmable money, then financialized NFT is automated money, smart money.

原文标题：《孟岩：Uniswap V3 是 NFT 进入金融应用的起点》

原文来源：孟岩，链闻

Don't read the version if it's too long

Uniswap V3 brings NFT into mainstream financial applications. Each version upgrade of Uniswap leads to an upgrade of the entire Defi. Uniswap V3 is a key step forward for NFT financial applications. NFT has strong descriptive ability and is suitable for expressing complex and changeable financial contracts. ERC721 is only a starting point for Financial NFT, and by no means a mainstream one. Mainstream Financial NFTs must be both descriptive and separable. If digital currency is programmable money, Financial NFT is automated money, smart money, a universal tool that helps parties form contracts and facilitate collaboration. Financial NFT gives users the power to create a variety of Financial instruments. Freedom begets innovation. There will be a number of Financial NFT projects featuring DEFI.

Uniswap V3 brings NFT into mainstream financial applications

Uniswap V3 was launched on May 5. Among the many new features the authorities are most proud of is the ability of liquidity providers (LP) to make market within a specified price range (hereinafter referred to as "range making") (Figure 1-3). This capability not only greatly improves the fund utilization rate of LP, but also reduces the variable loss, which is indeed a major innovation in AMM field. People will see the great potential of NFT in financial applications.

Figure 1. Specify the market in the price range of $250-$12,000

Figure 2. Specify trading in the $0.960-$1.040 price range

Fig. 3. Comparison between V2 and V3

Each version upgrade of Uniswap leads to an upgrade of the entire Defi

In November 2018, Uniswap V1 brought Vitalik's vision of an automated market exchange to life, freeing the whole DEFI from the rigid dogmatism of copying the CEFI model and starting to move on the independent path. In May 2020 V2 allowed the free addition of trade pairs, directly sparking the Defi craze that continues to this day. What are the industry implications of this V3 release? I think it is to stimulate the application innovation of Financial NFT. Once NFT is widely used in financial applications, a huge new map will be opened.

Uniswap V3 is a key step forward for NFT financial applications

The average person might not associate V3 with the hottest NFT of the moment, after all, NFT seems to be synonymous with crypto art in the news. But in fact, the key to V3's ability to achieve interval market making is precisely NFT. The V3 LP Token replaces the original ERC20 with NFT, which is a key step for Uniswap and also for Financial NFT. LP Token is essentially an investment contract between Uniswap and LP.

In the V2 era, this contract was expressed in ERC20. The only difference between different LPs was the number of shares, and the terms of the contract were the same. In the V3 era, this contract was expressed in ERC721 so that different LPs could set different market-making terms.

NFT has strong descriptive ability and is suitable for expressing complex and changeable financial contracts

A lot of people like to argue that it doesn't have to be NFT, but he can do it with ERC20. Here's an example that's not entirely appropriate to see how this is not true. For example, pop stars A and B have to buy tickets for their concerts in Beijing, which is actually A contract between the organizer and the audience. The trouble with the ticket contract is that it is complicated. Tickets for A singer's concert are different from tickets for B singer's concert. Tickets for tonight are different from tickets for tomorrow night. Tickets for the front row are different from tickets for the back row. Seats from different angles in the same row are different.

If ERC20 were to be used as tickets, a separate company would have to be formed to produce each seat at each concert. For example, A company named "seat 7, row 1, ticket making company of A singer's May 5, 2021 Beijing Concert" and another company named "seat 1, row 2, ticket making company of A singer's May 5, 2021 Beijing Concert". The third one is called "B singer May 6, 2021 Shanghai Concert Ticket Making Company, Seat 5, Row 3."

In short, the ERC20 model would, of course, be ridiculous to have to set up a company to print tickets if the conditions on the tickets were slightly different. The NFT model is much more reasonable. All you have to do is set up a ticketing company and print different tickets for different concerts, different seating classes, and different special conditions. All the differences are reflected in the ticket, and there is no need to open a lot of short-lived companies for a little bit of difference, and the cost is naturally greatly reduced.

ERC721 is only a starting point for Financial NFT, and by no means a mainstream one

ERC721 is currently the mainstream NFT token standard and is widely supported, so this time Uniswap has directly adopted ERC721 as the standard for implementing V3 LP tokens. However, ERC721 is very good at describing unique items, so technically there is nothing in common between the two ERC721 NFTs, so there is no point in referring to each other.

ERC20 puts too much emphasis on commonalities. All like one must be exactly the same, and there is no room for any peculiarities. It is very good for financial calculation and liquidity, but very bad for describing complex contractual conditions. ERC721, on the other hand, puts too much emphasis on individuality. It thinks that any two things in the world are totally different and can't be compared. It doesn't care that there is such a thing as "similarity" or "type". Both are too extreme, too idealistic. The mainstream financial instrument token of the future will not be either ERC20 or ERC721.

Mainstream Financial NFTs must be both descriptive and separable

Descriptive enough to express advanced financial contracts at a low cost. In this way, several tokens of the same texture can be fission, and the prices of tokens can be cross-referenced. In this way, ERC721 is eliminated, which is computable and liquid. The VNFT standard we proposed in Solv was designed with the needs of Financial NFT in mind, combining the computability of ERC20 with the descriptive capability of ERC721.

Figure 4. VNFT combines the benefits of ERC20 and ERC721

If digital currency is programmable money, Financial NFT is automated money, smart money, a universal tool that helps parties form contracts and facilitate collaboration

In modern society, people cooperate with each other mainly through the establishment of contracts. Money is really just a tool to get people to work together. The main impediment to collaboration is transaction costs, a large chunk of which is spent on creating, negotiating, signing, and monitoring the execution of contracts, a large part of which is due to the "dumb" money of today.

In fact, the greatest value of digital currency is that it can be programmed, and the program can be rigidly and literally executed. But not everyone can program after all, ordinary people are still inconvenient to use. Financial NFT is a step up from digital currency. It's smart money that runs logically, automatically, and is built in. Financial NFT encapsulates many common money trading patterns and transfer rules so that ordinary people can easily use them. With a powerful Financial NFT, it will be easier for people to do deals, leading to greater and more efficient collaboration.

Financial NFT gives users the power to create a variety of Financial instruments

In the past, if you wanted to trade some kind of contract, you had to wait for the big guys to design the product, build it, approve it, and put it on the market. Now, with Financial NFT, any average user can create a variety of Financial instruments. Once this power is returned to users, it means financial liberation. And the whole meaning of DEFI boils down to one word: "liberation".

Defi is a redistribution of power. It is not a technological innovation, an engineering marvel, or a dark art. It is a redistribution of production relations. So what does DEFI do? It takes the creation of financial instruments out of the hands of CEFI and gives them back to ordinary users.

Freedom Brings Innovation

With the rise of Financial NFT, various users will create a variety of digital Financial instruments ina short period of time to optimize the allocation of resources, or manage risk, or speculate against gambling. Users who are given the freedom to create will be tempted by practice to make endless innovations.

There will be a number of Financial NFT projects featuring DEFI

The DEFI project, which attempts to directly copy traditional finance, has always been tepidish. For example, the DEFI project of bonds and options has attracted a number of traditional finance experts, who are full of confidence and bring the mature products and experience of traditional finance to DEFI, but the things they make often fail to attract DEFI players. Instead, many, many projects, conceived entirely from DEFI on a case-by-case basis, are often unexpected and have achieved great success. I believe Financial NFT is the same. Defi will also develop a period in the subversive barbaric growth phase. LP NFT in Uniswap V3 has no precedent in traditional finance. It is completely conceived and created in concrete practice. Such innovation has a greater chance of success.

The SOLV protocol we developed is intended to be a platform for every common user to create and trade Financial NFT. Solv's proposed VNFT is a generic Financial NFT description protocol and is being submitted to the Ethereum Commission ina bid to become an industry standard in the field. Solv provides powerful visualization tools to help users design and create a variety of Financial NFTs, customize their appearance, rules, and functionality, and facilitate their free flow.