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Unicly

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Jun 2, 2021

· 4 min read

NFTs Meet Finance Part 1: Uniswap v3

Introduction

On the roadmap, I talked briefly about experimenting with “Financial NFTs” and how this could open up a wide range of opportunities.

This may be the first of a couple blog posts that I’ll write specifically about Financial NFTs and fractionalizing them on Unicly. The community has already started on testing ideas on the protocol, and finding cool partners that will make this a reality very soon. I’m excited to share what’s to come!

Uniswap v3 NFTs

Before, LP positions on Uniswap was represented as ERC-20 (fungible) LP tokens. With Uniswap v3, LP tokens are represented by unique NFTs instead.

If you’re curious about how this works, you can read more about Uniswap v3 here: https://uniswap.org/blog/launch-uniswap-v3/

Fractionalizing Uniswap v3 NFTs

On May 28 2021, a member of the Unicly community fractionalized a Uniswap v3 NFT. This NFT presents around $130 worth of the USD/USDT pair on Uniswap.

The NFT was fractionalized into a uToken called uCORN, which you can check out here: https://www.app.unic.ly/#/utoken-contract/0x4f3cddc821a5adfd66766b002b503d8d0214a50c

Why this is significant

NFTs started off as digital collectibles, gaming items, music and art. However, that is just the beginning. Financial NFTs are finding new use cases such as representing insurance policies and liquidity provider positions. Uniswap v3 could be at the forefront of this trend, where every one of its LP positions is represented by an NFT.

The market for art and music and collectibles is large, but it is highly fragmented and it may take years before we see the NFT asset class grow to the scale of billions of dollars solely on the back of these sub-segments. Meanwhile financial NFTs may scale much faster. Within just a month Uniswap v3 has seen its TVL grow from zero to $1.75b, despite a turbulent month end for overall crypto markets.

The speed at which financial NFTs are growing is astounding and we may find that this particular use case will be the one that propels the space into a trillion dollar asset class.

Source: uniswap.org

The opportunity presented to Unicly thanks to financial NFTs is enormous. We can envision crypto projects having a responsibility towards the community for providing liquidity on a DEX yet simultaneously needing to monetize their locked up treasury. With Unicly, these teams can satisfy both needs by opening a LP position on Uniswap v3, fractionalizing that NFT on Unicly and reselling a portion of those newly minted shards.

The risks:

Originally, Unicly aimed to respond to a growing need for NFT fractionalization while resolving the game theory weaknesses of some existing solutions. The main quality that Unicly contributes to the space is the ability to create shards with a set of multiple and diverse NFTs and allow shard holders to reclaim their assets in a way that is fair and efficient. Unicly also allows people to earn yield on previously illiquid NFTs.

We can be quite confident that under reasonable parameters set by the uToken creators, Unicly should live up to these expectations even for financial NFTs. Unicly’s uToken contracts should also be robust enough to support them the same way as with art and collectible NFTs.

An external flash loan attack would probably be unsuccessful against any traditional collection of NFTs on Unicly. For instance, if somebody borrowed ETH and exchanged it for uPUNK with the hope of draining the vault of its Cryptopunks, the flash loan borrower would struggle to repay his loan within the same transaction.

However, an external flash loan attack against a Uniswap v3 LP position could be successful if the vault’s parameters are set very loosely by the uToken creator . The attacker may borrow ETH, buy enough of the uTokens to unlock the vault, remove the NFTs, remove liquidity from Uniswap, liquidate the underlying assets in the pair, and return the ETH loan all within the same block. Under certain circumstances, this strategy could be profitable.

Unicly allows vault creators to decide on variables such as number of tokens and % threshold required to unlock a collection.

Being attentive to vault parameters will be important for any uToken, but particularly so when it stores financial NFTs. If a vault is created with a 50% threshold and less than 50% of uTokens are provided as liquidity in the AMM, a flashloan attack would essentially be impossible.

The potential for Unicly

Unicly has attracted over $50m TVL in its first two weeks of existence. Daily volumes range between $500k and $4m, which would comfortably place it as a top 3 NFT marketplace. This is a good start, but our ambition is to see Unicly’s TVL grow into the billions of dollars. Unicly is an open platform where anybody can shard their NFTs. We hope to see the community try out new and creative ways to use the Unicly protocol and create uTokens that will push the boundaries of what was previously possible in crypto, and of course, the beloved Metaverse.

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More from Unicly

Unicly is a permissionless, community-governed protocol to combine, fractionalize, and trade NFTs. Built by NFT collectors and DeFi enthusiasts, the protocol incentivizes NFT liquidity and provides a seamless trading experience for NFT assets.

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