Since its appearance blockchain has gradually been changing the financial world. Now we’re witnessing two blockchain-based concepts — NFT and DeFi — merging together to transform the way we manage finances.
What are NFTs and DeFi?
Non-fungible tokens or NFTs are just a unique way of storing value. Just like gold or a dollar bill, NFTs have their value locked in a particular asset. The estimate of the NFT’s value differs profoundly on the market and individual levels. It is difficult to replace or replicate non-fungible tokens easily thereby implying that two NFTs cannot be the same. Decentralized finance or DeFi is basically a financial system based on blockchain technology. Many public blockchain networks such as the Ethereum blockchain contribute to the development of the DeFi ecosystem. DeFi opens up the door to decentralized financial management through different in-built tools such as cryptocurrencies, oracles and smart contracts. The definitions of NFT and DeFi clearly indicate the possibilities for discovering a link between them.
How can NFTs benefit DeFi?
It’s clear that NFTs can make quite a difference in a number of traditional operations, but what can they bring to the sphere of finance?
Traditional centralized finance has always been controlled by governing authorities that supervise transactions, investments, and trade contracts, judging them to be trustworthy and accountable. Yet this approach has its disadvantages — going through verification and approval can be a very long process resulting not only in physical delays but also requiring tangible expenses. Not to mention that the chances of fraud or error are greater when too many people are involved.
However, decentralized finance comes as a solution to these issues, offering a transparent and efficient means of handling finances while not compromising on privacy and security.
Sounds good, right? Wait until NFT comes on the scene.
Many DeFi projects are now adopting NFT for its ability to store value and serve as an immutable proof of ownership. In its turn, DeFi helps to unlock this value and perform all kinds of operations with tokenized assets. These two technologies are mutually beneficial and open new possibilities in the financial domain.
So, where do you start discovering the association between DeFi and NFT? Looking at their definitions, you can clearly notice that NFT offers a unique way for storing value and DeFi offers an infrastructure for unlocking value.
NFTs Store Value…
In order to understand the possible NFT decentralized finance link, it is important to know the type of assets which can be tokenized. Tokens with realistic value propositions such as real estate are one of the first examples of NFTs. Real estate investments were highly illiquid and demanded lots of documentation. Bringing the assets on blockchain in the form of virtual tokens can help in the easier representation of ownership and flexibility for transfer. In addition, NFTs could help in unlocking and mobilizing value in cases where it was difficult to mobilize value. For example, music artists could offer NFTs as tokens for participating in direct engagement sessions with them. The value of the offering is an important factor for determining the value in them. Since NFTs offer a value proposition, it has to be priced.
DeFi Unlock Value…
Exploring the definition of DeFi further could help a promising idea of the foundation for NFT use in DeFi. The first thing you need to understand regarding DeFi is that it can work effectively with different types of financial solutions, instruments, and processes. NFTs would basically become another asset in the existing portfolio of DeFi. However, it is also important to find out the stream which would be influenced the most by the introduction of NFTs into the DeFi space.
NFTs are basically value-based assets. Therefore, they can provide the possibilities of growth in the asset’s value or accruing income from the assets to the owner. DeFi can offer the opportunity for unlocking the value from NFTs. How?
Using NFTs in Decentralized Finance
The NFT decentralized finance combination becomes instantly feasible, especially with the capability of NFTs to represent the commercialization of digital products and services. NFTs have become one of the promising applications in the DeFi sector. For example, Ethereum has introduced ERC-20 tokens for offering representation for digital assets. So, NFTs could easily serve as proof of ownership rights for digital art. Ethereum has become one of the top choices for creators to share art and interact with an engaged community of collectors. With the flexibility for proving ownership, NFTs could serve exceptional value advantages in the domain of DeFi. Let us take a look at the different possible ways for NFT use in DeFi.
NFT Ownership and Its Impact on DeFi
The examples of using DeFi platforms in association with NFTs for the music industry clearly imply a revolutionary change in the world of art. Furthermore, NFTs have found a crucial role in allowing ownership rights and profits to the actual creators. The owners of NFTs can earn a reliable share of the streaming revenue or resale value of their works. In addition, maintenance of verifiable earnings through NFTs also offers an effective variant of collateral. It can also enable easier access to the under-collateralized loans which is not possible without NFT use in DeFi. The monetization of art and collectibles through NFTs has become an integral part of the whole narrative of NFT hype. However, NFTs could become greater instruments for addressing the concerns of royalty sharing, licensing, and copyright ownership.
Another important aspect regarding the use of NFT DeFi together is the concept of fractional ownership. NFTs also allow the flexibility for the creation of shares of the NFT. As a result, investors and fans of NFT creators could get the opportunity to owing NFT without purchasing the whole NFT. However, the applications of fractional ownership of NFTs in the DeFi space are still in the initial stages.
Conclusion : Preparing for the Future of NFT X DeFi
One of the most important factors associated with the applications of NFT and DeFi together is the verifiability of ownership. The ease of proving NFT ownership opens up the DeFi space for NFT holders to obtain loans with NFTs as collateral. Most important of all, it is important to know that NFT has the capability for allocating value to almost anything. DeFi, on the other hand, helps in unlocking the value of a specific asset. NFT-backed loans are slowly gaining popularity and the growth of NFT DeFi as one would spell broader horizons of innovation. With the rising number and depth of users, DeFi and NFTs could transform the way we view assets, tokens, and financial services.
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