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Bringing NFTs to the DeFi World With Real User Benefits

2022-08-18

Main Takeaways

  • NFTs can have more value than just pure collectibility.

  • NFTs represent unique assets. We can take non-fungible financial products and tokenize them to use in the DeFi world.

  • DeFi projects have already begun implementing NFTs in staking pools, governance, and loan collateralization.

There's more to NFTs than collectible artworks and creations. Learn how NFTs can store a variety of different values on blockchains beyond the typical use cases you already know.

Non-fungible tokens (NFTs) have already made an impression on the blockchain world and the general public. However, we usually only associate them with art and other collectibles. By far, one of the less-explored aspects of NFTs’ utility is their application in decentralized finance (DeFi)

If you're unfamiliar with DeFi, it's an accessible blockchain ecosystem of applications allowing users access to financial services. For example, you could take out a loan, provide liquidity, or use a decentralized exchange (DEX) through a DeFi platform.

In the DeFi space, non-fungible tokens (NFTs) have begun to carve out a niche that doesn't rely on a creative, artistic nature. They're innovating, building, and disrupting one of the oldest and most successful industries, and it's worth understanding for anyone who fancies themselves a blockchain aficionado.

What Is DeFi?

Before we dive into NFTs, let's define exactly what we mean first by DeFi. DeFi offers a blockchain-based way to access a range of financial services. These include borrowing, lending, savings, trading, liquidity provision, and more. With DeFi, it's easy to stack DeFi services together and create new, innovative products.

One of the key characteristics of DeFi is that there are no intermediaries. Different DApps and services facilitate the processes, but users are still connected directly with other parties who want to trade, lend, loan, or conduct any other activity with them.

DeFi relies on smart contracts, self-executing pieces of code immutable on a blockchain. Once the code is on the blockchain, it cannot be edited or changed. In most cases, the projects and applications within DeFi run in a decentralized way with token-based governance mechanisms.

What Are the Benefits of DeFi?

There are several reasons DeFi is one of blockchain's most popular use cases:

  1. Accessible. Anyone with a wallet can access DeFi services, making it an egalitarian service.

  2. Transparent. All transactions and products are visible on the blockchain. Nothing is hidden.

  3. Decentralized. There is no one central authority that processes transactions. Traders and users deal directly with one another, facilitated by transparent smart contracts.

  4. Interoperable. Even across blockchains, DeFi products can often be used together to create new products.

How Do NFTs Store Value and Work With DeFi?

As mentioned, NFTs have typically been synonymous with art or collectability. But that doesn't mean they can't store value in other ways. Bitcoin, for example, derives value from its multiple use cases. NFTs provide a technical solution to creating genuine, digital authenticity on a blockchain. When we look at finance and investment, there are also a lot of unique assets that possess value too. Real estate is one example. Deeds of ownership are another. 

How can NFTs benefit DeFi?

Bringing these assets on chain as virtual tokens can help bring about the benefits of decentralization we've seen with DeFi. The DeFi world offers a solution with transparent and verifiable methods of interacting with others. Let's take a look at an example.

The traditional pollution permit market works through brokers, exchanges, and over-the-counter deals. Each permit allows the holder to pollute a certain amount, and permits with leftover allocations can be sold to other entities. A blockchain system for selling these would create a transparent market that benefits buyers and sellers in finding the best deals. As each pollution permit is unique, they make a solid use case for tokenizing as NFTs.

NFT DeFi Use Cases

Now we've looked at one possible example, let's look at where NFTs are being used today in the DeFi world.

Loan collateralization 

When it comes to loan collateral in crypto, the DeFi model typically uses cryptocurrencies and fungible tokens. For example, to mint the stablecoin DAI, you'll need to provide crypto collateral in a larger amount than you're loaning. 

Many NFT collections now have easily distinguishable floor prices, making it reasonably simple to use them as collateral. For example, you could use a Bored Ape Yacht Club NFT worth $200,000 as collateral for a $100,000 loan on one of the many DeFi NFT loan platforms.

NFT staking benefits

NFTs can be easily designed to provide the holder benefits and utility. For example, some DeFi projects have limited entry into certain staking pools only to holders of a certain NFT. This gives the NFT value based on the attractiveness of the staking pool's returns.

DeFi governance

DeFi governance typically takes the form of token holders having voting rights based on their number of tokens. However, some DeFi projects have seen limitations with this model and are experimenting by adding permanent members or councils to the process. To facilitate this, NFTs are used that allow the holder a vote. These are usually soulbound, meaning they're non-transferable and will always be held within a specific wallet.

DeFi NFTs Are Growing

Once you understand that NFTs can have value in other ways than artistic collectibles, you'll soon see their vast potential. Both the DeFi space and NFTs are incredibly young technologies and still have a long way to grow. However, we're already starting to see their maturation with more advanced and nuanced use cases. What began roughly ten years ago with the likes of Colored Coins and CryptoKitties is now living up to its potential in the DeFi world.

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