Bringing NFTs to the DeFi World for Real User Benefits
Main Takeaways
NFTs can have value beyond pure collectibility.
NFTs represent unique assets. We can take non-fungible financial products and tokenize them for 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 values on blockchains beyond their typical use cases.
Non-fungible tokens (NFTs) have already made an impression on the blockchain world and general public. However, we usually associate them only with art and other collectibles. By far, one of the least 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, NFTs have begun to carve out a niche outside of the creative, artistic aspect. They're innovating and disrupting one of the oldest and most successful industries, and anyone who fancies themself a blockchain aficionado would do well to become familiar with this new development.
What Is DeFi?
Before we dive into NFTs, let's look into DeFi and what it entails. DeFi offers a blockchain-based way to access a range of financial services, including borrowing, lending, savings, trading, and liquidity provision. With DeFi, it's easy to stack services together to create new, innovative products.
One of DeFi’s key characteristics is that it has no intermediaries. While different decentralized applications (dApps) and services facilitate the processes, users are still connected directly to parties who want to trade, lend, loan, or conduct any other activity with them.
DeFi relies on smart contracts, which are self-executing pieces of code that are immutable on a blockchain. Once the code is on the blockchain, it cannot be changed. In most cases, the projects and applications in DeFi operate in a decentralized manner using token-based governance mechanisms.
What Are the Benefits of DeFi?
There are several reasons DeFi is one of blockchain's most popular use cases:
Accessiblity. Anyone with a wallet can access DeFi services, making it an egalitarian service.
Transparency. All transactions and products are visible on the blockchain — nothing is hidden.
Decentralization. There is no one central authority that processes transactions. Traders and users deal directly with one another, facilitated by transparent smart contracts.
Inter-operabilty. Even across different blockchains, DeFi products can often be used together to create new products.
How Do NFTs Store Value and Work With DeFi?
As mentioned earlier, NFTs have typically been synonymous with art and collectibles. Still, 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 many unique assets that possess value as well. Examples include real estate and deeds of ownership.
How can NFTs benefit DeFi?
Bringing these assets on-chain as virtual tokens can help to perpetuate the benefits of decentralization associated with DeFi, which offers transparent and verifiable methods of interacting with others.
For example, the traditional pollution permit market functions through brokers, exchanges, and over-the-counter deals. Each permit allows its holder a certain level of pollution, and permits with leftover allocations can be sold to other entities.
A blockchain system for selling such permits would create a transparent market that helps buyers and sellers find the best deals. As pollution permits are all unique, they present a solid use case for being tokenized as NFTs.
DeFi Applications for NFTs
While DeFi applications for NFTs still have great untapped potential, they are, in fact, already being used 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 must provide crypto collateral in an amount larger than your loan.
Many NFT collections now have easily distinguishable floor prices, making them relatively simple to use as collateral. For example, you could use a Bored Ape Yacht Club (BAYC) NFT worth $200,000 as collateral for a $100,000 loan on a DeFi NFT loan platform.
NFT staking benefits
NFTs can be easily designed to provide their holders with utility and benefits. For example, some DeFi projects offer 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 how many tokens they hold. However, some DeFi projects have seen limitations with this model and are therefore experimenting with adding permanent members or councils to the process.
To facilitate this, these DeFi projects permit the use of NFTs that grant their holders voting rights. These NFTs are often called soulbound tokens (SBTs), meaning that they are non-transferable and will always be held in a specific wallet.
NFT marketplaces that bridge NFTs and DeFi
The continued growth of NFTs has given rise to alternative decentralized NFT marketplaces, one of which is Sudoswap.
Sudoswap recently gained traction for its goal of restructuring NFT trading. To do so, Sudoswap implemented automated market making (AMM) algorithms and liquidity pools, similar to premier Ethereum DEX, Uniswap.
But why is Sudoswap necessary? NFT markets have long been plagued by poor liquidity and slippage. For example, an NFT might sell for $100,000 on a specific day but not attract similar offers for weeks or months. This creates confusion among investors as to its exact worth.
With its own brand of AMM, Sudoswap allows NFT traders to buy and sell NFTs without having to wait for an offer. Furthermore, sellers are able to contribute their crypto as liquidity for smoother automated trades, allowing orders to be settled on-chain and within the pool rather than with an individual.
A seller does not have to wait for a buyer to provide liquidity when they want to sell an NFT. Rather, the ETH is already available in the pool and is unlocked when the NFT is deposited. When a buyer places an order, the same applies – the trade happens immediately if the pool contains enough liquidity and inventory.
DeFi NFTs Are Growing
Once you understand that NFTs can possess value beyond their typical usage in artworks and other collectibles, you'll begin to see their vast potential. Both DeFi and NFTs are incredibly young technologies and still have a long way to go.
However, we're already starting to see their maturation with more advanced and nuanced use cases. What began roughly 10 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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