NFTs describe unique cryptographic tokens which are considered valuable because of their security and scarcity. In combination with decentralized financial products, unique financial services can be created using these tokens. Let’s see how NFTs and DeFi work together.
What are Non Fungible Tokens and how they work is already described in many previous articles.
Potentials of NFTs in the DeFi Ecosystem
The affiliation between NFTs and DeFi is an important collaboration that can be instrumental to more DeFi adoption and adoption of cryptocurrencies in general. Tokenization has the potential of making things more interesting in the DeFi ecosystem. There are several areas where NFTs thrive in DeFi.
CryptoKitties is one of many platforms that use NFTs to create an entirely new breed of collectibles.
The incorporation of NFTs and DeFi in the gaming industry makes gaming profitable alongside entertaining experiences. Users are able to create rare items, anAd monetize their efforts.
Decentraland is a perfect example of a gaming platform that incorporates NFTs and DeFi into its platform.
NFTs can be used to digitalize our unique attributes such as appearances, academic qualifications, medical history and other unique traits.
It is fair to say that this use case of NFTs is still in its early stage, but in the future, many real world assets like property will be tokenized with NFTs serving as certificates of authenticity to prove who is the true owner.
One of the major challenges that bedevils artists is protecting their copyright. This makes it difficult for talented artists and other creators to make a living. NFTs can solve this issue. Tokenized arts or other creations can be bought and proudly showcased in a virtual space, with blockchain offering proof of ownership.
Why is value so important to NFTs?
Non-fungible tokens (NFTs) are cryptographic tokens which are not backed by a traditional asset, and instead are representative of something else, such as an artwork, an event, or a digital item. Thus, many people mistakenly jump to the conclusion that NFTs do not have value.
However, non-fungible tokens are indeed valuable. NFTs represent unique assets, and are rare and cryptographically secure. They are not interchangeable with each other and thus introduce scarcity to the digital world. Each of these tokens acquires value due to this scarcity. This occurs in accordance with the traditional law of supply and demand — parties are willing to pay more for a specific and rare NFT.
NFTs are thus optimally suited for use by decentralized applications (dApps) to allow for the creation and ownership of unique digital items and collectibles.
NFTs can be traded at exchanges that connect buyers with sellers. In these exchanges, every NFT is unique, and therefore gets its own price.
What do NFTs have to do with blockchain?
It all started back in 2016 when Bitcoin-based trading cards were issued as some of the first NFTs. In 2017, these early NFTs were published on the Ethereum blockchain using CryptoPunks, a platform offering NFTs representing artwork. However, the real hype started in December 2017 with the deployment of the blockchain-based game CryptoKitties, which uses NFTs to represent ownership of digital cats on their platform. As of today, more than 131 million USD is bound in these two projects in Ether.
In the years since this initial NFT hype, hundreds of other NFT iterations have become available on the market.
This standardization of NFTs allows a higher degree of interoperability, meaning that unique assets can be transferred between applications with relative ease, ushering in additional use cases.
What Is DeFi?
Short for decentralized finance, DeFi is an umbrella term for a variety of applications and projects in the public blockchain space geared toward disrupting the traditional finance world. Inspired by blockchain technology, DeFi is referred to as financial applications built on blockchain technologies.
The use of technology in financial services is not new. Most transactions at banks or other financial services companies are accomplished with the help of technology nowadays. However, the role of technology is restricted to being a facilitator of such transactions. Companies still have to contend with navigating the legalese of jurisdictions, competing financial markets, and different standards to make a transaction possible. With its stack of common software protocols and public blockchains to build them on, DeFi places technology at the front and center of transactions in the financial services industry.
DeFi is commonly placed in the domain of blockchain and cryptocurrencies. But its scope is much wider. To understand the thought processes that led to the development of decentralized finance, it is important to understand the current state of the finance ecosystem.
Present DeFi NFT offerings
Existing developments in this area are already diverse. For example, there are DeFi projects that describe themselves as a decentralized exchange for NFTs. One of the best known in this area is Rarible.
Another example for the combination of NFTs and DeFi is Aavegotchi, which is a completely decentralized collection game.
NFTfi is an additional player that stands out in this field. They offer a platform on which owners can lend their NFTs to other users.
These companies are already innovative and diverse. But, these are just a few of the many potential applications of these technologies. As described, the possibilities for combining DeFi and NFTs are far from exhausted.
A particularly interesting future endeavor would be the use of DeFi and NFTs in in-game worlds, or even for the administration of real assets such as land and houses.
Potential use cases for this type of technological innovation include investments, liquidity mining, or in-game currencies. There are truly unlimited ideas for combining NFTs and DeFi-it remains to be seen which interesting projects will appear soon.
Read more about NFTs
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.