Uniswap (UNITED -3.55%), the world’s No. 17 cryptocurrency by market cap, is up more than 6% in the past week. Much of this increase appears to stem from reports that Uniswap Labs, the creator of the Uniswap protocol, is closing in on securing a monstrous $100 million in funding that would value the company at $1 billion. With this additional funding from Polychain Capital and a Singapore-based sovereign wealth fund, Uniswap Labs would be well positioned to expand Uniswap’s product offerings and further strengthen its role as the world’s largest decentralized exchange (DEX).
There is a potential problem here, however. Decentralized exchanges, just like centralized exchanges such as Coinbase (PIECE OF MONEY 12.96%), rely on trading volume to succeed. So, the middle of a crypto winter seems like a curious time to invest in an exchange, decentralized or centralized. The decision to buy Uniswap now clearly hinges on where you see crypto trading volume heading over the next 12 months.
From DEX to super DEX
By almost any metric, Uniswap is the dominant decentralized exchange for crypto trading. According to the source, Uniswap controls between 60% and 75% of all DEX trading volume. That’s a huge percentage of market share. If you look at the average daily trading volume, Uniswap far exceeds all of its rivals. For example, the average daily trading volume on Uniswap is over $1 billion. The next closest DEX competitor, Pancake Swap (CAKE -0.59%)has an average daily volume of around $200 million.
But how does it grow from here? One strategy is to allow non-fungible token (NFT) trading on Uniswap. In June, Uniswap acquired market aggregator NFT Genie as part of this strategy. And at the recent Messari Mainnet 2022 conference in New York, Uniswap Labs COO Mary-Catherine Lader suggested the ultimate strategy is to “bring your digital asset experience together in one place.” . In other words, Uniswap has the ambition to become the leading marketplace for trading any digital asset in the world.
Time to tackle Coinbase?
This strategy should sound familiar. This is similar to the strategy Coinbase seems to be following right now. Seeking new trading volume, Coinbase launched its highly publicized NFT Marketplace earlier this year. If people are unwilling to trade cryptos, the thought goes, maybe they will be willing to trade NFTs? And if they are unwilling to trade NFTs, then you need to find other digital assets to trade.
In many ways, you can think of Uniswap and Coinbase as similar investment games. Uniswap is the largest decentralized exchange and Coinbase is the largest centralized exchange based in the United States. Although Coinbase is still three times larger than Uniswap in terms of daily trading volume, there are days when it seems like Uniswap is getting closer and closer to catching up. Many in the crypto community are now actively urging Uniswap to take on both Coinbase and the industry giant Binance (IN B -1.51%).
The $100 Million War Chest
That’s why you can think of the next round of potential $100 million venture capital funding for Uniswap Labs as a sort of “war chest” to support larger centralized exchanges and expand into new markets. commercial. The big plan for now, it seems, is to strengthen Uniswap’s role in the NFT market. If Uniswap can show early success with NFT trading volume, it could open the door to trading other digital assets.
The big picture here, of course, is the return of decentralized finance (DeFi) as an investment thesis. In 2020, DeFi was all the rage as investors saw it as a real opportunity to disrupt the world of centralized finance through smart contracts and decentralized applications. This promise of future growth is part of the reason Uniswap’s price has soared to incredible heights. Now trading at just $6.67, Uniswap appears to be significantly undervalued. Down more than 85% from an all-time high of $44.97, Uniswap has plenty of room to appreciate as long as it finds new ways to increase trading volume.
Dominique Basulto has no position in the stocks mentioned. The Motley Fool holds posts and recommends Coinbase Global, Inc. and Uniswap Protocol Token. The Motley Fool has a disclosure policy.