How NFTs Are Used in DeFi

By 

Anderson Ezie

 on April 25, 2022. 
Reviewed by 

Joel Taylor

NFT written in silver with dual borders on a blue background

NFTs are a unique representation of ownership of any kind on the blockchain. NFTs are non-fungible because it is impossible to exchange them on a 1:1 basis, unlike other tokens on the blockchain. Their uniqueness also establishes the non-fungibility of NFTs as an asset class and the originality they represent. NFT are crucial in an increasingly digital world because they replicate the enduring qualities of physical items in everyday life, such as uniqueness, scarcity, and proof of ownership.

By being on the blockchain, NFTs are also versatile. Over time, it will be possible to use assets across platforms which are impossible in current systems. NFTs exist as tokens native to the blockchain on which they are deployed and traceable on blockchain explorers. NFTs cannot be divided and are the best way to handle ownership in the digital world without dispute. The ownership of NFTs is maintained using special metadata and ID created through a smart contract.

Minting an NFT involves creating a new block, validating this block, and adding it to the blockchain. The underlying smart contract of an NFT also determines features of NFTs such as fractionalization, which is why the tokens follow any of the standards on Ethereum such as ERC20, ERC721, and ERC 1155. NFTs include digital art, collectibles, documents, domain names, and tickets.

How Can NFTs Be Used in DeFi?

Entire industries are being built around each use case of NFTs, and the movement of funds in these transactions has led to a new class of decentralized financial assets. The two broad use cases of NFTs in DeFi are collateralized loans offered by projects like Arcade, NFTfi, Nexo, and Drops, and Fractionalization offered by Fractional and DAOfi. NFTs are also being used to create liquidity pools and derivatives with projects like NFTures, and Bliv.club. In any of these cases, you can deposit your NFT and borrow against it or open a long or short position against the value of your NFTs. It is now expedient to look at some of these actual use cases of NFTs and budding industries.

Gaming

Gaming represents the biggest use-case for DeFi, with ideas leading to the creation of new blockchains and an industry worth billions of dollars. NFT gaming allows users to earn rewards and unique valuables such as gears, armor, weapons, and shield. Traditional gaming has been unfair to players over the years. If you played Battle-Field Bad Company in 2010, chances are we're at some point frustrated by the sheer fact that you cannot retain ownership of those gears you worked so hard for. Thanks to blockchain technology and NFTs, players can own in-game assets, but they can use them in other games. Developments in NFT gaming have grown so large with the possibility of full-time gaming jobs in the near future. In-game items have sold for billions of dollars, and games like Cryptokitties and Axie Infinity have impacted their original blockchains so that new Web 3.0 projects like Dapper Labs have sprung up to solve scalability issues. The idea behind NFT gaming is simple―you play, you earn. Entire industries like GameFi and Play to Earn (P2E) are also offshoots of NFT gaming.

Digital Art

Owning the original copy of the painting Monalisa by DaVinci will surely put you in the headlines. The thing is, we have been creating so many Monalisas over the years because artists are less motivated, and lots of creative work vanish into the abyss of obscurity. Music artists and video creators, collectively in the category of performance arts, are not exempt from the problem. Piracy and lack of popularity have crippled the brightest creative energies for years. Thanks to NFTs, music files can now be stored as unique assets originally owned on the blockchain. Ownership of digital art can be verified, and creators now have access to a global market, increasing their earning potential without stripping them of any rights to their work.

Real Estate

Real estate NFTs belong to the class of physical assets moving at a breathtaking pace to prominence. Digital real estate refers to lands in the metaverse, with projects like Sandbox and Decentraland taking the lead in this area. Big banks like JP Morgan and Bank of America weigh in on the metaverse's massive potential. The physical representation of real-estate assets like lands and houses is also possible with NFTs. The unique advantage of NFTs in this area comes from the long-standing problem of loss of ownership documents due to compromised databases of centralized institutions or physical damage to offices like fire outbreaks. Ownership data remains forever on the blockchain, and innovations like ERC 1155 enables fractionalization of NFTs such that multiple individuals can lay undisputable claim to pieces of a property. Entire islands have been tokenized, as in the case of Crypto Island in the Bahamas.

Legal Documents

Physical documents can be tokenized and stored on the blockchain forever. Deeds, contracts, invoices, certificates, and signatures can be assigned unique identities and kept free from theft and physical damages as NFTs on Ethereum or other blockchains.

Tickets

Participants at events can get exclusive benefits and prove that they participated using proof-of-attendance NFTs. Entire projects Yellow Heart are now working to connect fans to artists through exclusive and ordinary tickets that provide perks for fans and can be sold anytime.

Royalties

In the case of digital arts mentioned before, royalties enable artists and creators to make some money off any transfer of their work through sales. Some artworks and collectibles attract 10% for every sale, which goes back to the original creator. Creators can live off the rewards from their work and focus on creating the best arts.

Do NFTs Benefit DeFi Projects?

After the DeFi summer of 2020, NFTs quickly led the stage in crypto, especially in the wake of COVID-19. The massive popularity and the voice it gave to a long-time sidelined industry of creators and artists made it massive for the cryptocurrency space. DeFi projects can benefit greatly from issuing NFTs since NFTs are tokens and serve the same purpose of distributing value back to participants. Several projects like Axie Infinity, Gods Unchained, and Bored Ape Yacht Club have moved from token-based to launching NFTs and vice versa. NFTs give participants something of value that they can keep or sell, depending on their choice.

Top DeFi Projects Related to NFTs

Axie Infinity

Axie Infinity is an out-of-the-box combo of Pokémon and Cryptokitties. It is a competitive virtual game that allows players to breed lovely little pets known as Axies. Owners can control and trade them with other players. It is one of the most popular projects on the Ethereum blockchain.

Decentraland

Decentraland is a metaverse-based gaming universe and decentralized ecosystem. Participants can develop, buy, and sell virtual lands visible in the metaverse and customizable according to the user's needs. Participants can interact and monetize activities that mimic real life. Some big companies secured land in Decentraland.

Cryptopunks

Cryptopunks is a collection of the rarest 10,000 degenerate ape NFTs, and it is one of the earliest NFT projects. The punks could be claimed free by anyone with an Ethereum wallet at launch. The price spiked to about $100 in 2018 before mooning to a gut-wrenching 4,200 ETH, around $21,000,000 at the time of writing.

Bored Ape Yacht Club

The Bored Ape Yacht club is a collection of 10,000 unique ape NFTs that can easily be dubbed the cult of cults for its popularity and the sensation around. It also has a token issued recently known as the Apecoin. The valuation of the token alone at the time of writing this article is around $4 billion. It commands respect, attention, and value and is currently on the Ethereum blockchain.

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