Have ever imagined how the inception of Bitcoin and blockchain technology could change our lives? Even we didn’t. But, it’s already happening. Blockchain technology and its applications have brought a huge shift in several industries. Two major applications of blockchain, that spurred huge attention are NFTs and decentralized finance (DeFi). Unique digital tokens have already made an impression on the blockchain world as well as on the general public. Primarily for their use in art and other collectibles. However, NFTs are now set to innovate and disrupt one of the oldest industries: Finance.
Non-fungible tokens are merging with DeFi protocols to offer innovative financial services to users. They include loans, liquidity provisioning, and insurance. We can also use them for staking rewards, governance voting, and decentralized lending/borrowing platforms. By combining virtual tokens with DeFi protocols, developers can create a whole new world of NFT-based DeFi applications. Let us explore this innovative intersection of technologies in this blog.
Overview of NFTs
Non-fungible tokens are a new type of asset that allow digital ownership and transfer of unique digital items. Blockchain records all the details of these tokens, which makes them verifiable and immutable. They can represent anything such as artwork, music, collectibles, game items, land titles, and more. NFTs have been gaining traction due to the potential for investment opportunities, digital ownership, and scarcity.
The unique digital tokens also provide a new way of collecting and creating art that was not previously possible in the digital world. They are becoming popular as they offer users a new way to invest, store, and appreciate digital assets. Non-fungible tokens are the future of digital ownership and could revolutionize how we share, collect and create digital items. They provide exciting opportunities for creators, investors, and collectors alike.
Features of NFTs
1. Proof of Ownership – NFTs provide an immutable record of ownership. They also provide authenticity of the item which includes information about its creator and previous owners. They are immutable and secure as blockchain stores their data. As a result, these tokens help creators protect their works as well as receive royalties for every sale.
2. Uniqueness – Non-fungible tokens are one-of-a-kind items that you cannot duplicate or replicate. They contain unique metadata which makes them stand out from all other similar digital items. This feature makes NFTs ideal for collecting rare digital items such as artworks, collectibles, and more.
3. Transparency – NFTs’ metadata is open to anyone. So, it is easy to check on the authenticity of a token at any time by viewing its previous history. All transactions concerning these tokens are visible to anyone interested thanks to blockchain technology. And, users can keep track of their investments with no middlemen involved.
4. Investment Opportunity – Non-fungible tokens have potential investment opportunities due to their scarcity and uniqueness. This makes them attractive assets for investors to diversify their portfolios. Having unique features compared to other fungible assets, NFTs’ value can potentially appreciate over time.
5. Ownership Rights – The owner of an NFT has full control over how they want to use it or transfer it. They don’t have to depend on third parties or government entities like auction houses or galleries. This opens up a world of opportunities for creators who can now make money directly from selling their works.
Decentralized finance (DeFi) is a revolutionary way to manage financial services that run on the blockchain. It uses decentralized applications (dApps) to provide a range of financial services such as payments, lending, borrowing, saving, margin trading, yield aggregation, currency trading, and more. Unlike traditional banking systems (banks or other financial institutions), DeFi eliminates the need for third parties. It allows anyone with a stable internet connection to access these services without depending on any centralized authority.
DeFi offers several notable benefits compared to traditional banking systems.
- It offers increased transparency and immutability as all information concerning transactions is stored on the blockchain ledger.
- It removes the time delays caused by a centralized authority. Users will have instant access to a range of financial services.
- We can access DeFi solutions from anywhere with an internet connection regardless of geographical location.
- DeFi solutions are highly interoperable and customizable. This allows users to tailor them precisely according to users needs. They also allow us to integrate third-party applications when necessary.
The intersection of NFTs and DeFi
Non-fungible tokens provide a unique opportunity for DeFi projects to offer secure and immutable proof of ownership to users. This is an essential feature when dealing with tokenized assets. Non-fungible tokens have become popular in the DeFi sector due to their ability to facilitate faster, more efficient transactions. They also provide an additional layer of security to users.
One way non-fungible tokens can benefit DeFi projects is through the implementation of NFT-based smart contracts. Smart contracts are self-executing agreements that allow two or more parties to interact without the need for any intermediary or third-party verification. These tokens enable DeFi projects to securely execute transactions, automate payments, and track ownership on the blockchain in a transparent manner.
Non-fungible tokens also offer greater control over digital assets. They allow creators to set specific rules for how collectors or buyers should treat or transfer the tokens. This added layer of control helps ensure that any NFT-related activities adhere strictly to predetermined guidelines.
In addition, NFTs can make it easier for DeFi projects to generate revenue from digital assets. Non-fungible tokens act as digital representations of real-world assets such as digital art, music rights, real estate deeds, gaming items, and more. By tokenizing these assets into NFT form, they become tradeable on decentralized exchanges. Here, users can buy or sell them without dealing with traditional financial institutions or brokers. This creates new opportunities for generating revenue in the form of trading fees or commissions paid by asset owners.
5 Major Use Cases of NFTs in DeFi
Let us discuss the 5 major use cases of non-fungible tokens in the DeFi sector.
NFTs are unique digital assets, meaning they are not interchangeable with other tokens like fiat currency and other cryptocurrencies. We can use them as an asset to secure a loan, which helps mitigate the risk to lenders. We can even customize the loan terms with adjustable interest rates and loan-to-value ratios that suit both borrower and lender needs.
When it comes to NFT-secured loans, Arcade is a popular platform that facilitates P2P lending and borrowing. It uses the Pawn protocol which integrates non-fungible tokens with DeFi products. You can use any ERC20 token such as wETH, USDC, or DAI as collateral for a loan on this platform. Borrowers need to specify the desired amount of money, currency, payout amount, repayable period, and interest rate when applying for a loan. All these parameters can help lenders make an informed decision about granting a loan.
As we discussed earlier, we can use NFTs as a form of collateral. This means if a borrower can’t repay their debt, the token automatically goes to the lender as repayment. This eliminates the need for court action and simplifies the process of debt management.
The utilization of NFTs for this purpose also allows for more secure and transparent transactions within the DeFi space. All records of transactions are stored on the blockchain, so lenders can access up-to-date information about a debtor’s repayment status. Moreover, lenders don’t even have to contact them directly.
Non-fungible token smart contracts also allow parties in a transaction to set specific predefined conditions. These conditions are around how debts should be repaid such as interest rates or payment schedules. This helps in ensuring both borrowers and lenders are protected from any unexpected surprises down the line.
Another advantage of using NFTs is their ability to be tokenized. We can trade or exchange tokenized assets on decentralized exchanges. This not only allows for quicker liquidity but also opens up opportunities for further financial possibilities. They include margin trading or lending, which makes the tokens incredibly useful for debt management in the DeFi space.
Non-fungible tokens can represent digital documents such as insurance policies. This allows users to easily verify and transfer ownership of those documents without having to go through a tedious process. In traditional systems, this process would involve collecting all the relevant papers and meeting with bank officers for verification.
Non-fungible token policies don’t have an expiry date, which makes them ideal for insurance policies. We also don’t need to renew these policies regularly. CoverCompared is one of the projects already leveraging NFTs and DeFi to transform the insurance sector. It provides access to multinational insurance providers, allowing users to purchase crypto-related protection, health, life, and travel policies in a secure way.
NFT-based derivative contracts also offer innovative ways for people to hedge against risks without relying on third parties. These contracts can also be used to create smart reinsurance systems that automatically adjust premiums based on changing market conditions or events.
Finally, NFTs can provide better visibility into who owns an insurance policy at any given time. This is possible by storing policyholders’ data such as their name, details about their policy coverage, payment history, and other related information on public ledgers. This will improve transparency within the industry while adding more security against fraudsters.
NFTs have found great applications in the governance of DeFi. They allow permanent voting rights to specific users or wallets, a feature that has been lacking in traditional decentralized autonomous organizations (DAOs). These kinds of tokens are known as soulbound tokens (SBTs), and they are non-transferable. SBTs will always remain in their designated wallet.
The use of NFTs in governance allows DeFi projects to introduce permanent members or councils into the process. They grant their holders voting rights, allowing them to make decisions on important matters related to the DAO. They include how the participants should spend funds, how they should manage assets, and other pertinent topics. Holders can also act as advisors when it comes to strategic planning within the organization.
In addition to providing voting rights, NFTs can also provide additional benefits. They include access to exclusive content or exclusive discounts on products and services offered by DeFi projects. This can help attract new users and increase loyalty from existing ones.
Holders can stake their tokens and earn rewards from NFT staking pools. This is very similar to DeFi yield farming, where the owners can add their tokens to a liquidity pool and then receive interest without giving up their ownership. Staking non-fungible tokens in DeFi pools is beneficial for owners because it can help increase the value of their asset, as well as allows them to generate passive income.
To stake an NFT in a DeFi pool, users must first sign up and then deposit their tokens into a liquidity pool. After depositing, users will set parameters such as how much they want to stake and how long they want to keep it staked. Once these parameters are set, users will start earning rewards through staking their NTFs in DeFi pools. However, potential investors need to do their research when considering investing in this method. Or any other type of investment product or service related to cryptocurrencies and their applications.
Non-fungible tokens allow users to purchase insurance policies without any middleman. They can also create derivative contracts for risk hedging and even introduce governance mechanisms. Additionally, Holders can stake their tokens in liquidity pools and earn rewards from them. While investing in staking is an attractive option, it’s important to do your research before taking any action. All things considered, NFT technology has opened up a world of possibilities that weren’t available previously.