NFTs or Non-Fungible Tokens are the new innovation born out of blockchain technology. It’s so innovative that artists and creators around the world are feeling a sense of liberation. The idea not only opens up a whole new world of possibilities and utilization but also of easier accessibility.
With a long journey ahead in terms of development and a better prospect of technology, people can’t help but sample the exhilaration of buying and selling unique items off of NFT marketplaces.
For Novices - What is an NFT?
Every digital piece of work has metadata be it an image or a song. An NFT, in layman’s terms, is a unit or structure of data utilizing the ERC-721 framework of the Ethereum network that allows the transfer of digital ownership. You connect the Metadata of the image or any file with the data structure or NFT, and there you have it.
All you have to do is access any of the NFT platforms to modify your now-ready digital art/NFT in accordance with blockchain’s requirements and list it to sell or auction. Well, it’s definitely not that easy because a lot more goes on behind the scenes when you upload but you know the basics now.
NFTs have been around since the early days of cryptocurrencies. Projects like Cryptopunks and Cryptokitties are the key milestones in the history of NFTs signaling the beginning of a new kind of ownership of items.
But there’s a catch!
What’s the Catch?
Okay, so let’s take Bitcoin for example. You go to any exchange and you place an order to buy BTC at the current price because you want to enter the crypto market as soon as possible. What you’d do is place an order either at market price or a little lower watching the price fluctuations. Since there is loads of supply — people are always selling and buying Bitcoin at any given price — your order gets fulfilled within a matter of minutes. This is also called liquidity because Bitcoin is a fungible token that can be exchanged or traded, and there’s always enough supply and demand for the commodity.
Not the same case with NFTs or non-fungible tokens. All NFTs are unique and can’t be swapped/traded or replaced with another NFT of equivalent value. Making it an illiquid asset. Meaning, finding a seller or buyer would be harder compared to traditional cryptocurrencies.
Even after a meteoric rise in the NFT Market, clocking over 2000% in just a little over a year, the segment still remains highly illiquid. Take a look at the 1-year performance of NFTs.
If we guess, that’s how innovation works. That’s how innovation has always worked. You bring in a piece of technology and people will make various uses of it. The same is happening with NFTs. To solve problems to some extent, a lot of visionaries are combining NFTs with Decentralized Finance applications, and the results are truly splendid.
DeFi for Novices
It is like a system that works on the blockchain network and unlike traditional banks and financial institutions, there are no middlemen or no 3rd party involved. Well, there is 3rd party involvement but it’s merely software-based that we call decentralized exchanges. You use the exchanges to interact directly with the other party for transactions also known as P2P or Peer 2 Peer. For example - If you’re a seller of XYZ coins, you’d match directly with XYZ buyer at a given price point. The exchange acts as a platform of commerce where buyers and sellers trade.
The best part of a DeFi based exchange is you don’t necessarily have to do a complete KYC. However, the authorities in various countries are cracking down on exchanges and as a result, KYC might become more of a norm on DEXs as well in the coming future.
This is an oversimplification of DeFi. If you want to read more about defi and the smart contracts that act as the agreement maker between two parties on DeFi you can check this Investopedia page.
DeFi is nothing new, it’s the second-best usage of cryptocurrency bringing in not only better accessibility but also a way to earn extra money from Staking in Yield Farms. It has come a long way and is getting ready to amalgamate with NFTs.
What Happens When DeFi and NFTs Come Together?
Okay, let’s face it. NFTs don’t have much intrinsic value. Say you bought an NFT at a price of 2 ETH during a specific period. That period also happens to be when that particular NFT was popular. And the crypto market is something where trends change a lot frequently. Now you decided to sell it a year later. The chance of you finding a suitable buyer is highly unlikely let alone selling it for profit. Why? For starters, that NFT is no longer popular. Second, A buyer may not want to meet the asking price. Your only options are either you sell it for a loss to the matched buyer or wait, maybe till eternity, to find a suitable one, because you cannot exchange it for another NFT.
You see the problem, here? That is why a marriage between DeFi and NFT is inevitable. In fact, the change has already started.
It’s the best of DeFi combined with NFTs. So far we all know NFTs can only be bought as a whole. You cannot make pieces of it and sell them to others which is what causes the most problems with liquidity.
With Defi in play, NFT owners can fractionalize the asset so more than one person can own fractions of it — Something a lot of people have been wanting and talking about. It will create a liquid environment for NFTs when you can decide on fractional selling.
It’s like a horse puzzle. There are 100 pieces that when combined together creates a complete picture. But instead of selling it as a whole to one buyer, the seller can sell different puzzle pieces to 100 different buyers. It won’t change the ownership as the whole puzzle picture would still belong to the seller, but it would give the NFT a tradeable space.
Few Use Cases
NFTs with a liquidity pool is something that Axie Infinity managed to achieve with its blockchain game based on rare NFTs blended with a Liquidity pool for in-game items.
Taking this example a step further comes Werewolf Exchange. Although in its initial stage, the project plans to use NFTs in its upcoming blockchain game where Werewolves(NFTs) rule the world.
NFTX is yet another brilliance in the space of DeFi+NFT led protocols. It allows NFT owners to lock their NFTs to mint ERC20 based fungible tokens that can be used to buy other NFTs, trade, stake, or put them in a liquidity pool to earn interest.
Let’s Take a Look at Some of the Most Promising DeFi+NFT Projects at the Moment
It’s a project dedicated to creating a platform that offers liquidity to illiquid assets. NFTX does so by allowing users to lock or put their NFT in the NFTX vault and mint ERC20 token (Fungible token), aka vToken, representing ownership in more than one NFTs. It has different tokens for different NFT categories. By giving fungible attributes to non-fungible tokens, NFTX is opening the door for various options like to trade the minted ERC20 token, Stake the token to earn rewards, or put in a LIquidity pool to earn interest.
Not only that, the token can be used to redeem specific NFTS from the NFTX vault. The whole idea results in far better liquidity on the platform, and faster NFT sales by either Swapping on Sushiswap or by minting ERC20 against the NFT, It also leads to price discovery of vToken.
A DeFi based platform with DApps like Yield Farming, upcoming DEX, decentralized asset management, and upcoming blockchain game. That’s where things get interesting. Werewolf has a dedicated NFT Marketplace and NFTs; Alpha, Beta, and Omega. These NFTs will be playable in the game where Alpha rules the territories followed by a pack of Beta. Alpha holders can fight each other to claim the loser’s territory.
But if you think selling NFT is harder on Werewolf. No! The platform has various methods to sell NFTS. A typical auction system and a Raffle competition pool. An NFT holder can start a competition, deciding the minimal entry price, minimum and maximum number of entrants, and a period to run the pool. The seller sells the NFT faster, and the winner only has to pay a fraction of what the NFT was worth. Also, anyone can list their NFTs to sell it.
Niftex is onto something we all have been talking about in the NFT segment; “I want a piece of it.” You couldn’t earlier but thanks to Niftex idea and push to fractionalize NFT ownership. It’s a little similar to Bitcoin, where you can own Satoshis if you cant buy 1 BTC.
So far, a lot of NFT enthusiasts have returned empty-handed, disappointed because someone outbid them. Not to mock, there’s always someone with more money. What would people with limited bank balances do? They’d go to Niftex. It allows NFT sellers to fractionalize their NFTs, which are also fungible, creating greater liquidity, NFT valuations through trading and price discovery.
A buyer can pay a rather small price to hold a fraction. The ownership would still remain with the NFT owner, the fraction buyers will get the right to hold for as long as they want.
How about keeping your NFT as collateral should you ever need a loan? It’s possible. NFTs are based on ERC721 protocol, with no provision for exchange with another NFT of equal value, but it definitely allows collateralizing. Taking this technology in mind, NFTfi is allowing NFT holders to take a loan against their assets.
It’s quite simple. You put your asset up for collateral for a specific period of time, and users can lend you crypto. Yes, in case you fail to pay, they have the right to claim ownership of the NFT. You have to repay with interest. Similarly, if you want to lend crypto, you can do that in exchange for NFT. Here, you would earn pretty good interest in exchange for lending.
This platform is helpful for people needing funds for a short term time. It can be done within few clicks on NFTfi.
Disclosure: I carry no financial interest in the aforementioned firms. Provided details and brand mention is for informational purposes and is not intended to represent financial and/or legal advice.