Two of the most prolific technologies to come out of blockchain are Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs), both of which have seen massive investment from retail and institutional investors. According to DeFiPulse the total value locked (TVL) in DeFi protocols at the moment stands at $92.36 billion, nearing the $100 billion mark for the third time since August 2021.
Similarly, the NFT space has also exploded, with some of the most renowned celebrities jumping on the bandwagon and spending millions of Dollars on digital art pieces and the like. In 2021 alone, the NFT industry generated an estimated $40 billion, a near 40 x increase to that of 2020 according to a report from Chainalysis.
Both these industries have a lot of promise and value, but what happens when the two of them meet? When considering the main function of an NFT, it acts as a digital certificate that can prove ownership of any digital item on the blockchain. Allowing an NFT to be almost anything from a ticket to an instrument that can be used as collateral by some protocols, thanks to DeFi. When looking at decentralized finance, it is the use of trustless blockchain technology to conduct financial services like lending, borrowing, gaining interest etc. over a decentralized peer to peer network. And when using the two together there are opportunities to solve a few problems, the main point which is usually overlooked is the fact that NFTs now have marketplaces where creators can buy and sell, which is in essence the decentralized financing of NFTs and distribution of value over a network.
NFTs could help in unlocking and mobilizing value in cases where it was difficult to do so. Recently, NFTs have gained a bit of an edge by having the ability to be programmed to add royalties, to give the users’ governance rights or access to exclusive content.
According to 101 Blockchains, the world’s leading online independent research-based network, “The NFT decentralized finance combination becomes instantly feasible, especially with the capability of NFTs to represent the commercialization of digital products and services.”
By doing this, NFTs become another asset in the DeFi portfolio where they function as value-based assets, accruing income from the asset to the owner. In the case of RealBig, a crypto lottery platform where in addition to traditional lottery guess games, there are 70 players, each of which is represented as an NFT asset. In the RealBig ecosystem, an NFT can be purchased by an investor or community member. By owning an NFT the owner can market their players, they don’t have to join the lottery or attend any of RealBig lottery games. Meaning that users join the contest and guess the winning NFT player. The contest prize is shared among winning users and NFT owners. An NFT owner can transfer, donate or sell their NFT to another person or entity without affecting the operation of lottery games in the system.
Speaking of just holding, NFTs at the moment are most popular as art pieces that can be bought and sold, however at the intersection of NFTs and DeFi they can be used as collateral to
take out a loan. This is one of the more recent applications where the market value of an NFT is determined to put it up for a loan, many protocols like NFTFI and NFT 20 allow the owner to put up their NFT assets as collateral to borrow crypto against it. If the owner can’t pay back the loan, the smart contract simply transfers ownership to the lender.
NFTs are also becoming a game-changer for creators in the music and art industry, where the owners of NFTs can earn a reliable share of the streaming revenue or resale value of their works, that’s besides what NFTs can do for royalty sharing, licensing, and copyright ownership. Besides the ability to provide lifelong returns from the NFT’s popularity (if it stays popular), 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. At the end of the day, it seems that there are myriad possibilities at the intersection of NFTs and DeFi.