NFTs & DeFi: A good combination?

If you want to know what non-fungible tokens (NFT) are, why they are becoming increasingly popular in the crypto scene, and what they have to do with decentralized finance (DeFi), we must first explore the concept of “value” in depth.

What is value?

Value is the innate quality of a thing which makes it desirable to a certain extent. This value can be related to a number of tangible and intangible characteristics, particularly rarity.

The economic value of something therefore depends on its quality and scarcity.

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.

Since the beginnings of using NFTs on the blockchain, various standards have been created to facilitate the issuance of NFTs. The most popular of these is ERC-721, which is a standard for the issuance and trading of non-fungible assets on the Ethereum blockchain. A more recent, improved standard is ERC-1155, which enables a single contract to contain both fungible and non-fungible tokens.

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 are the possible fields of application?

It is clear that NFTs offer a high level of interoperability and act as representations of non-traditional assets.

This means that NFTs can be used in many areas. This includes video games, digital identity, licensing, certificates, or fine arts. These tokens can and even allow for fractional ownership of objects.

This is precisely where DeFi comes into play.

In all of the fields they are applied to, NFTs serve to represent some sort of value. The administration of these values can be done completely in the blockchain via smart contracts. This perfectly fits the definition of a DeFi project: a financial tool operating along the blockchain.

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.

Furthermore, Tinlake combines NFTs and Defi by offering a service that forms a bridge between real-world assets and DeFi. Its goal is accessing bankless liquidity.

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.

Summary:

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.

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.

PUBLISHED BY– Florian Reike(medium.com)

NFTRADAR

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One thought on “NFTs & DeFi: A good combination?”

  1. Extremely helpful information specially the last part 🙂 I care for such info a lot. I was seeking this particular info for a long time. Thank you and best of luck.

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