How to use NFTs in DeFi
With decentralized finance and nonfungible tokens seeing a meteoric rise, it’s easy to believe crypto apps are finally breaking through. But is there actually real user growth, or is it just the same influencers moving from one hyped market to the next? We sought to answer this puzzle and identify what it means for the future of innovation. So, let’s take a closer look at the growth of DeFi and NFTs.
Not surprisingly, DeFi has matured to a point where fungibility is no longer enough. Asset ownership can become so personal, or optimized to such a granular extent, that it would make more sense to use NFTs instead. Uniswap v3 has led the charge, allowing users to customize their price range for liquidity positions in a new automated market maker design.
The design patterns in the world of decentralized finance or DeFi are gradually intermingling with NFTs and NFT marketplaces. Just like many other DeFi projects, Rarible, offers an NFT marketplace focused solely on creators. It offers a governance token known as RARI and also implemented the necessary mechanisms for regulation under a Decentralized Autonomous Organization (DAO).
The RARI token holders, including creators and collectors, could vote for the platform upgrades alongside participating actively in moderation of the marketplace. RARI has also featured an NFT index, which serves as a portfolio for NFTs to help all collectors view the artworks and choose the right one for investment.
Using NFTs in Decentralized Finance
The NFT decentralized finance combination becomes instantly feasible, especially with the capability of NFTs to represent the commercialization of digital products and services. NFTs have become one of the promising applications in the DeFi sector. For example, Ethereum has introduced ERC-20 tokens for offering representation for digital assets. So, NFTs could easily serve as proof of ownership rights for digital art. Ethereum has become one of the top choices for creators to share art and interact with an engaged community of collectors. With the flexibility for proving ownership, NFTs could serve exceptional value advantages in the domain of DeFi. Let us take a look at the different possible ways for NFT use in DeFi.
The world of NFTs is also rapidly converging into DeFi. Led by protocols such as NFT20 and NFTX, NFTs are gaining financial utility by fractionalization and representation as tokens linked to DEX-based liquidity pools. Users can now gain exposure to digital art collections without buying individual pieces. The fusion of NFTs and DeFi is disrupting the very definition of nonfungible. What comes next?
Solving the issue of collateralization
In the art market, an issue regarding the liquidity of the market is a real bug. Everything is subjective here.
Suppose a painting is worth $1million, yet it doesn’t remain very worthy unless somebody is willing to pay for it. In this situation, DeFi and NFTs do combined work to solve this issue. The workings may involve looking for ways to use NFT collectibles and art as collateral against DeFi lending. As traditional arts have been used as collateral in the real world since the beginning, moving it to the crypto world and NFT art, appears to be a logical step forward.
The other way that NFT helps in resolving liquidity issues in DeFi is by applying tokenization of those NFTs. The tokenization will quickly prepare an illiquid asset. For example, a piece of art that is easily tradable.
NFT Ownership and DeFi
Let’s take the music industry for example. Here, the monetization of digital content It’s hard to imagine finance and music but then that’s the beauty of blockchain. So when an artist earns ownership rights and subsequent profits from tokenization, they can monetize the value stored in NFT. Besides yielding lifelong returns from the NFT’s popularity, artists could use it in staking pools, use it as collateral to seek loans, or as a custodial asset to lend, the possibilities are limitless. Needless to say, users purchasing the tokens enjoy similar perks.
The monetization of creative works using NFTs will proceed to be a considerable part of the NFT space. Still, it will more likely take the form of licensing, copyright ownership, and royalty sharing.
Solving the issue of curve model
Another prominent example where NFT ownership plays a significant role in DeFi space is how they work together to resolve the curve model issue. One of the updated versions of Defi protocols introduced the curve model concerning liquidity pools. The curve model was created to distribute liquidity all across the entire curve, meaning that a large build-up of liquidity was not producing payments for providers.
With the assistance of NFT space, they introduced a facility to select desired custom price sizes for liquidity providers to evaluate their capital to resolve this issue. This boosts their exposure to needed assets and reduces their downside risk.
Since NFTs (non-fungible tokens) depict the financialization of digital products and services, NFT setups and marketplaces have come to be an undeniable thriving sector of DeFi. Like Ethereum has employed ERC-20s to embody digital assets, NFTs can be comprehended as provable ownership rights for digital art. Due to the closing of art galleries worldwide because of COVID-19 and other cultural occurrences in the online world, Ethereum established a growing place for creators to share their art and interact successfully with an interested community of collectors. Due to this quality of NFTs, they play important roles in DeFi.
Products combining DeFi and NFTs will be the winners
NFTs and DeFi appear destined to collide. Axie Infinity is an exemplary case study. Possibly the biggest revenue-generating blockchain product, Axie combines a play-to-earn game based on scarce NFTs with liquidity pools for in-game items — a true NFT-DeFi hybrid.
A network perspective of Ethereum transactions demonstrates Axie’s ability to bridge DeFi and NFT communities. The success of future crypto products will depend on their ability to engage both NFT and DeFi users. Based on Ethereum transactions over a seven-day period, Axie’s pools manage to successfully bridge DeFi and NFT subgroups.
