1. NFT really needs a spark from DeFi

The NFT market enters into the most bearish phase since Q2 2023. Although we are continuously informed of the bad news, the good thing is that the NFT market keeps forwarding. Let’s be simple and clear about NFTs: focusing on the bright side is always the best way, and also the most efficient way to navigate bull and bear markets.

What we found really interesting recently is the new product release by Uniswap, which is a non-custodial Dutch auction-based trading protocol called UniswapX. In this article, we are going to talk about what is going on in DeFi with the release of UniswapX, and when it comes to NFTFi, what the NFT market can learn from UniswapX.

2. Addressing the DeFi dilemma

The user experience of DEX has long been discussed: as problems of the congestion of public blockchains, the manipulation of miners, high slippage, etc. remain unsolved, DEX is just not as smooth as CEX. This stalled the further development of DeFi, and the release of UniswapX is intended to tackle the challenge.

3. Proposing the solution

UniswapX introduces a mechanism of offchain node suppliers (Relay Network). The nodes can collect user orders to generate local order books, share the data with other nodes, and then cluster the orders into blocks. The mechanism that challenges the miner nodes, compels the reform of rules of miner nodes. As there are at least 60% trading transactions onchain, miners are likely to embrace the changes because they are not willing to lose liquidity.

With this set of offchain order-matching services, once a user initiates a transaction, it first goes through an offchain channel. The experience of user’s zero gas fee transactions, clustering of transactions, and matching at the best price, anti-MEV relies on this off-chain service supplement.

4. Core Features of UniswapX

(1) Gas-free

UniswapX designated an internal cycle where the user’s gas fee is borne by the LPs, and subsidized by UniswapX through commission fee concessions to LPs. This lowers the barrier for users entering into DEX trading. The only concern is whether the cost of LPs can be offset by UniswapX’s subsidy.

(2) MEV Internalization

UniswapX introduces features in the off-chain order matching stage, including not sorting entirely by price, executing limit orders, and local ledger digesting price differences. This makes transactions in the mempools difficult to predict, eliminating the arbitrage space for MEV.

(3) Dutch Auction Aggregator

UniswapX has ventured into the aggregator field this time, choosing third-party transaction routing through Dutch auctions. This is an innovative move and will optimize the transaction slippage among pools. UniswapX may create a siphoning effect in the field of aggregators, and increase the market size in preventing router malfeasance.

5. UniswapX vs CEX

Services like limit orders, stop-loss/profit orders, customized slippage, algorithm optimization, and monitoring tools can be categorized as part of the above three core features. Overall, users will find that UniswapX’s experience is more and more similar to a CEX.

Once the gas-free mechanism is put into operation, the injustice of MEV, the risks of malicious aggregators, and other uncontrollable risks of decentralization will be eliminated. Users using DEX will have the same experience as CEX, and naturally, they will flock to DEX. This may stimulate the growth of onchain market makers.

6. MEV in the NFT world

Compared to the ERC 20 market, the NFT world has a different market structure. The NFT market accumulates liquidity through frequent minting events, with lower secondary trading volume, liquidity challenges in bidding, with a presence of offchain order books.

Due to these differences, forming the NFT MEV market should be done in a different way. Although there may be fewer arbitrage opportunities, the potentiality of extracting more MEV during minting still exists. Additionally, the NFT market has some unique methods of MEV, such as clearing bid walls and re-listing (creating artificial trading volume for arbitrage opportunities), and extracting value from idle orders.

For being a more mature market, the NFT market can explore more opportunities such as MEV-aware minting solutions, more open pricing data, dynamic onchain order books, and providing additional communication channels for traders.

Currently, the value flow of NFTs primarily occurs during issuance and in the trading and lending processes on the secondary market. These flows may involve MEV (such as inefficient economic extraction from users during on-chain transactions), which can impact the business models and beneficiaries of market activities, including traders, markets, wallets, and developers.

However, compared to the DeFi market, MEV within the NFT space appears to be a relatively lesser-known topic. The NFT market has significant structural differences, including more primary activities, smaller token supply, and lower secondary liquidity, which also influence the flow of value.

7. Aggregators in the NFT world

Multi-functional aggregated NFT trading market will become mainstream. As an NFT trading market, spot trading serves as the foundation, providing users with a high-quality and smooth trading experience is key to market competition. The NFT spot trading function module mainly has two advancements.

The first advancement is trade aggregation. Initially, the seller was in a dominant position, and listing formed the basis of transactions, while buyer quotations were less prominent. Users went from buying from individual sellers on a single platform to buyers picking from aggregated listings across multiple markets on an aggregation platform.

The second advancement is the bid pool. The bid pool brought about a fundamental change in the trading model, where buyer quotations become a liquidity pool, and buyers relinquish their options to sellers. Sellers can choose to continue listing and wait or directly liquidate the NFT to the Bid Pool of buyers. Rarity or image differentiation is no longer the primary concern, instead, the focus shifts to significantly reducing transaction waiting time.

8. For a gas-free NFT market

Factors determining the fluctuations of NFT prices are supply and demand. Especially in the NFT world, the price can be difficult to understand. A large demand or a few supply may cause network congestion that can increase gas fees.

There are some innovations exploring the gas-free solution. In May 2023, Binance launched its NFT Loan feature that facilitates ETH loans, supporting blue chip NFT collections like Bored Ape Yacht Club (BAYC), Azuki, Mutant Ape Yacht Club (MAYC), and Doodles. Binance will act as the pool for these peer-to-peer loans. Each NFT collateral-loan pair will have its own distinct Loan to Value (LTV) ratio.

9. Heading for NFTFi Lego

NFTFi’s ecosystem is immature and needs developers and projects to participate in creating a diversified tech stack, applications, and use cases like what people did in DeFi.

As for the NFTFi projects, focusing on creating a permissionless and scalable platform or tool is always the key to making the NFT world bigger till the boost in the next bull market.