In the crypto world, you would be missing out if you have never heard of DeFi yet. DeFi (Decentralized Finance) is the newest and hottest investment trend and it gave a whole lot of meaning to Blockchain as we know it. This includes the rise of AMMs, DApps and of course, our infamous online kitties known as NFTs!
In this article, we will discuss how NFTs can be the next biggest trend in the DeFi world after Yield Farming and Staking, its effects and problems we can face and the notable DeFi projects that uses NFTs.
What are NFTs?
A non-fungible token (NFT) is a special type of cryptocurrency token which represents something unique and rare. Unlike Bitcoin and Ethereum, NFTs are not mutually interchangeable and are indivisible in the sense that you can’t own only half of an NFT. It has to be a whole unique NFT.
To better illustrate that, we know that Bitcoin has a supply of 21 million identical coins and if we trade them, we can’t say to the buyer “Ohhh that bitcoin has a shiny chip in it so better take good care of it.”. But with NFTs, we can even say
“I have a family and a real estate online which is currently worth $100,000!”
Sounds a little complicated but it is simpler than that. Let’s say you are trying to make a website but your desired domain name is taken but then you saw it is being sold at a domain name auction. You bought it as it is one of a kind. It is unique from other domain names. That is actually the same feeling of owning NFTs.
NFTs can be a collectible(CryptoKitties), used for gaming(Axie Infinity), metaverse(Decentraland), tokenized real world assets(UpLand) and domain names such as the Ethereum Naming Service. We can even use NFTs for sports, music, event ticketing and arts.
But NFTs aren’t only all about owning something unique. NFTs also have financial value even greater than most of the tokens out there, with some even selling for over hundred thousand dollars just by owning something like a…cat.
Another popular use case of NFT in 2020 which significantly rose up in sales and volume and has garnered more than $2.2M worth of NFT last September is through Arts. There was even a painting named “Picasso’s Bull” that was sold at $55K and is by far the most expensive art within NFT space.
Will NFTs conquer the DeFi world?
Now we know that NFTs are really worth a lot and is not just something stored in a wallet, we can integrate this into the idea of Decentralized Finance.
NFTs have a lot of potential not only in NFT space but also within DeFi. We know that a lot of DeFi lending protocols are collateralized, meaning that if the borrower defaults on the loan, the lender may seize the asset(collateral) and sell it to offset the loss. One of the most interesting ideas of NFT in DeFi is to make it as a collateral. This means that we can supply an NFT, be it a parcel of land from Sandbox, a tokenized painting, or a meme collectible, as the collateral so we can borrow money from a DeFi platform.
The problem with NFT in DeFi
The problem with this is that the value of supplied collateral can be easily measured by integrating price oracles which is the typical scenario in a standard lending DeFis such as Aave and Flamingo. This means that the prices will be based from multiple liquid sources either from both centralized or DEX. With this, integrating NFTs into DeFi is a little bit difficult as NFTs is not as liquid as cash or tokens.
The only thing we can assume is that the NFT is still worth the same amount as it was last sold for. Also, we have to remember that DeFi is still innovating with this and surely there will be a solution to this such as a dramatical change in the NFT price.
A better solution
Some of the projects such as NFTfi uses a different approach with collaterializing NFTs with loans. In NFTFi, borrowers can offer their NFTs as collateral and lenders may choose which NFT would they accept before they agree to a loan. The NFT collaterals are kept in an Escrow contract and if the borrower can’t pay on their loan + the interest, the NFT will be automatically transferred to the lender.
Aside from collateralization, NFTs can also be used in other financial products such as insurance or bonds. A good example of this is Yearn Finance’s Yinsure which covers Nexus Mutual finances. Another thing that is great with this is that the insurance NFTs can be traded or moved in other DeFi markets such as Aave, dydyx and Rarible.
Recently, some of the DeFi-native applications such as staking, yield(NFT) farming and liquidity mining are now being used in DeFi-NFT ventures. An example of this is Meme Protocol where DeFi users can stake their assets to earn limited edition NFT memes(yeah memes) from renowned Ethereum artists.
By far this is the most popular use of NFTs — the DeFi way. A lot of ERC20 projects are using these concepts to gain more traction from users and increase their liquidity pools. The following are some of the NFT staking projects that I have observed and joined.
- Rarible — get $RARI for creating, selling and buying the NFTs
- RPepe — earn NFTs by staking $rpepe tokens
- CoinArtist — stake $COIN and earn $CRED which can be used to get the limited edition NFT. Having $COIN will also allow users to participate in puzzles.
DeFi x NFT Projects
As NFTs are already being used on DeFi aspects, it is not that far that NFTs will be taking over DeFi and the blockchain community soon.
The following are some of the NFT-DeFi projects that are often the talk of the cryptocommunity. We can see the booming success of NFT in DeFi basing on the increase in prices.
That’s a lot of complex things to intake, right?
But we have to also remember that NFTs have different use cases and it will greatly affect its importance in the DeFi world. Also, we can’t deny the fact that it is not just a great investment but is also very exciting to have one.
So how can we get these NFTs?
The easiest and cheapest way to get NFT is through airdrops, giveaways and puzzles.
Recently, Cryptomonkeys, the NFT and WAX version of Banano, airdropped 415 rare NFT cards which can be claimed on a limited time. Sandbox also did something similar like that through a puzzle hunt in which the prize was a $5000 worth of land in the Sandbox Metaverse. Another one is the rare NFT riddle giveaway from Binance. This is just my speculation but with Binance launching the Binance Smart Chain, it will allow them to also join in with the NFT-DeFi craze.
We can also get NFTs by buying them which denotes a transfer of ownership and all the NFT properties to the buyer. Additionally, with the rise of NFT-DeFi ventures, we can now stake our fungible tokens to get ourselves some rare NFTs which prices may go up.
Have I pique your interest yet? If so, a highly recommended wallet with a combination of DeFi, DApps and NFT in one app is Trust Wallet. It supports popular NFT markets and DeFi platforms such as Uniswap, Pancakeswap, Rarible, Opensea, Yearn Finance, Aave, ENS and a lot more.
With over $132M of NFTs being sold in the market and with its sudden exponential growth and popularity in 2020, it is not impossible that after a boom in the economy of DeFi on Staking, Liquidity and Yield Farming of fungible coins, we can see NFTs on this aspects as well — a way to increase investments, help in liquidating the market and lastly, a way to have some fun!
Learn more >> Beginner’s Guide to DeFi | Binance Academy
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