It makes sense to contemplate how NFTs are evolving as an instrument for DeFi — two dominant trends in the crypto market. It is often thought that NFTs are only digital art or collectibles whose prices are inflated by the hype. However, NFTs provide a unique contribution to improving DeFis. So, let’s take this discussion further.
Modern internet applications are building on communications and informational flows, which made blockchain technology the logical next step.
Blockchain applications, such as NFTs and DeFi, are already beginning to revolutionize how we interact with the digital world. NFTs are transforming how art and other media are stored, shared, and owned online.
Besides, DeFi seeks to alter the financial sector by removing the increasing expenses of services that third parties add to normal banking transactions.
However, while these two applications of blockchain technology are certainly innovative, it is
when they come together that one can truly appreciate their potential.
It is a common myth that NFTs are only useful to buy and sell digital media. In this regard, it is important to understand how the underlying mechanisms of an NFT can extend its uses to a variety of scenarios.
All NFTs come with a Smart Contract that acts as a record of the token’s transactional history, its original minting history, and its current estimated value. The last of these attributes is relevant to the application of NFTs in DeFi.
Defi’s value to NFTs can allow the token to serve a variety of roles in the supply chain between a borrower and lender or between a buyer and seller of goods or services that require payment.
NFTs in DeFi systems, can act as:
DeFi, is in its early stages, set to change the way the modern individual thinks about their finances. It uses blockchain technology to maintain a decentralised ledger of transactions between users on a blockchain network.
DeFi directly connects borrowers to lenders on the network and empowers both parties to set the terms of their contract and structure payments seamlessly.
The main advantage is that there is no scope for third-party parties whom banks commonly employ and whose services are chargeable.
NFTs and Defi are excellent examples of how various intersectional applications of blockchain technology can be. They can be
integrated into DeFi services in various ways, with further uses being discovered as the technology continues to improve and streamline.
For instance, valuable artwork is often used as collateral for loans in traditional financial services. Carrying those over to the DeFi space can be a challenge, given that the technology can work across borders and within various regulatory environments.
NFTs are a great way to address these limitations for DeFi, acting as digital collaterals. They are not considered securities in current regulatory definitions. A formula as such frees popular platforms such as OpenSea from being licensed as a dealer or broker of financial services.
Thus, allowing users of DeFi platforms to freely put up their NFTs as collaterals for any loans irrespective of the lender’s location and regulatory limitations that may arise from it. The value of an NFT is an essential factor to consider, as both the borrower and lender must verify its ownership and transaction history.
Another application of NFTs in DeFi comes up in real estate. When it comes to accessing property ownership records, it is quite difficult. Performing such transactions without the involvement of traditional banks is a challenge when using DeFi.
However, the Smart Contracts that are embedded with NFTs make them a perfect solution to this problem. The blockchain is designed to provide all users with easy access to information regarding transactions on the network.
So, it is not surprising that NFTs can be used as a record of ownership for land or plots, making them highly accessible records of ownership. There are already platforms such as Propy, which seek to automate homeownership and buying experience by integrating NFTs and DeFi services.
Increasingly, businesses are considering the possibility of using DeFi as a long-term alternative to centralised finance or at the very least as an addition. Globally, financial services firms invest approximately$1.7 billion annually in blockchain services, but regulatory restrictions and low liquidity limit this.
While DeFi has its challenges, its benefits outweigh them. As a result of implementing DeFi, people and institutions can now access financial applications they could not before. Its decentralised nature also makes it unnecessary to rely on a trusted third party, making banking processes more efficient.
Furthermore, DeFi can help traditional finance models overcome some of their challenges. As an example, it benefits emerging economies without established financial institutions, thus enabling them to support small and medium-sized enterprises (SMEs).
NFTs can be used to extend their existing utility in DeFi. NFTs are a great way for artists to monetize their content. Integrating this with DeFi platforms can allow them to seamlessly set up royalties and payment plans for their work on digital platforms.
It can help artists circumvent the expense of paying a streaming platform to host their content, instead choosing to self-publish and monetize their work online through NFT platforms and DeFi.
NFTs can also assist DeFi services by solving the issue of liquidity. They are gradually extending their monetizing functions by
fractionalizing NFTs, already a practice that the Securities Exchange Commission oversees in America.
The underlying code of an NFT makes it easy to integrate into complex financial products and services at the design level. Important terms, conditions, payment dates and plans can be integrated into the Smart Contract, allowing the NFT to automatically update its status on the platform based on the conditions baked into its code.
Finally, integrating NFTs into DeFi services can open a host of possibilities and applications as both technologies continue to expand and improve. Thus, creating transparency and accuracy in the financial services that DeFi platforms offer. Furthermore, it can add a lot of functionality to how users can design and implement flexible loan structures and payments.
While there are certainly challenges to the integration of NFTs into DeFi, such as wash trading, spoofing or value inflation, they can be offset with the right tools, allowing a more secure and safe experience for the end-user.
In this regard, several useful solutions have been developed. For example, bitsCrunch, a Munich-based startup offers the UnleashNFT platform, which offers a suite of applications for assessing the value and legitimacy of an NFT.
With the use of such tools and a measure of caution and critical awareness, there is no reason that NFTs cannot be integrated into DeFi services. The two technologies augment each other quite well. The future looks promising indeed, and further innovations can only help their cause rather than hinder it.
Where do you stand now with NFTs and DeFi? Why not take a little quiz to check?