Table of Contents
Main Lessons
- NFTs may be worth more than just their purely collectible value.
- NFTs are distinctive assets. Non-fungible financial items can be tokenized for usage in the DeFi environment.
- NFTs are already being used in DeFi initiatives for governance, loan collateralization, and staking pools.
NFTs have already left a lasting influence on the blockchain community and the broader public. However, we typically exclusively connect them to valuables and works of art. By far, the use of NFTs in decentralized finance is one of the less-examined aspects of their utility (DeFi).
If you’re not aware of DeFi, it’s a network of applications on the blockchain that provides users with access to financial services. For instance, you may utilize a DeFi platform to borrow money, offer liquidity, or use a decentralized exchange (DEX).
Non-fungible tokens (NFTs) have started to carve out a place in the DeFi sector that doesn’t rely on a creative or artistic nature. Anyone who considers themselves a blockchain expert should be aware of how they are innovating, creating, and disrupting one of the oldest and most prosperous sectors.
What Is DeFi?
Let’s first explain exactly what we mean by Decentralized Finance (DeFi) before moving on to NFTs. A variety of financial services can be accessed using DeFi’s blockchain-based platform. These encompass a variety of activities, including lending, saving, trading, and providing liquidity. DeFi makes it simple to combine its services to produce fresh, cutting-edge goods.
There are no intermediates, which is one of DeFi’s primary features. Users are still connected directly to other parties who want to trade, lend, loan, or engage in any other activity with them despite the fact that many DApps and services streamline the processes.
Smart contracts, immutable, self-executing pieces of code on a blockchain, are the foundation of DeFi. It is impossible to amend or modify code once it has been placed on the blockchain. The majority of the time, token-based governance methods are used to run the projects and applications within DeFi in a decentralized fashion.
What Advantages Does DeFi Offer?
DeFi is one of the most well-liked use cases for blockchain for a number of reasons:
Accessible. DeFi is an inclusive service because anyone with a wallet can use it.
Transparent. On the blockchain, every transaction and item is available for viewing. Nothing is concealed.
Decentralized. Transaction processing is not handled by a single central authority. Transparent smart contracts make it possible for traders and users to transact directly.
Interoperable. DeFi products can frequently be used in conjunction to build new products, even across blockchains.
How do NFTs work with DeFi and store value?
As previously indicated, NFTs have historically been associated with collectability or art. However, that does not preclude them from storing value in other manners. For instance, the value of Bitcoin comes from its various applications. A technical answer for establishing true, digital authenticity on a blockchain is provided by NFTs. There are numerous distinctive assets that have value when it comes to financing and investing. One example is real estate. Another is ownership deeds.
How might NFTs help DeFi?
The advantages of decentralization that we have seen with DeFi may be achieved by placing these assets on the chain as virtual tokens. The DeFi world provides a solution with ways to engage with people that are visible and verifiable. Let’s look at an illustration.
The traditional market for pollution permits uses brokers, exchanges, and over-the-counter transactions. Each permit has a set amount of allowed pollution, and any extra permits can be sold to other organizations. These may be sold via a blockchain system that would create a transparent market that would help buyers and sellers find the best deals. They provide a strong use case for tokenizing NFTs because each pollution permit is distinct.
Use Cases for NFT DeFi
After looking at one hypothetical example, let’s consider some current applications for NFTs in the DeFi industry.
Mortgage collateral
The DeFi strategy often employs digital currency and fungible tokens as lending collateral. In order to create the stablecoin DAI, for instance, you’ll need to put up cryptocurrency as collateral in quantity greater than the loan.
Now that many NFT collections have clearly distinct floor prices, it is rather easy to use them as collateral. For instance, you might put up a $200,000 Bored Ape Yacht Club NFT as security for a $100,000 loan on one of the several DeFi NFT loan sites.
NFT staking advantages
NFTs can be quickly created to offer the holder advantages and utility. For instance, certain DeFi projects only let owners of a specific NFT participate in certain staking pools. As a result, the NFT is valued based on how appealing the returns from the staking pool are.
DeFi management
DeFi governance typically entails token holders having a certain amount of votes based on how many tokens they own. The methodology has significant drawbacks, though, and some DeFi groups are experimenting by including permanent participants or councils. NFTs that gives the holder a vote are employed to make this possible. These are typically soulbound, which means they cannot be transferred and must be kept in the same wallet at all times.
NFTs Are Growing For DeFi
You’ll quickly recognize NFTs’ enormous potential if you realize that they can be valuable in contexts other than as artistic collectibles. NFTs and the DeFi market are both very new technologies with a lot of room for development. However, we can already see them becoming more sophisticated with more sophisticated and complex use cases. What started with games like Colored Coins and CryptoKitties about ten years ago is now reaching its full potential in the DeFi community
