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NFTs and DeFi: The Connection between both Worlds

Of course, you’ve heard of the craze going on all around Web 3.0, DeFi and the Metaverse. The cryptocurrency world is currently loaded with many trends that keep changing as time goes on. If you have spent enough time in the crypto space, you would’ve noticed that the two top trends in crypto over the last year include Non-Fungible Tokens (NFTs) and Decentralized Finance (DeFi). These two applications are the most popular in the blockchain technology world.

As you probably already know, DeFi is an application in blockchain technology that provides users with decentralized access to the financial services available in the blockchain system. NFTs, on the other hand, offer the unique tokenization of assets, cryptocurrency and non-cryptocurrency alike. As the surge in the popularity of NFTs hasn’t exactly gone any lower, all most people think of NFTs is digital art, game collectables and the likes.

However, NFTs have a lot more potential than being used just for art, video and other collectibles. There are a number of possible ways NFTs and DeFi can be interwoven, serving each other in a symbiotic way. NFTs can provide amazing additions to help decentralized finance to grow in the long and short term. Reading this article, you will find out some of the ways NFTs can be used in DeFi.

NFTs Interwoven with DeFi

Value Storage and Unlocking:

NFTs have a link to the decentralized world. However, this stems from the kinds of assets tokenized on the NFT space. There are many examples of assets that can be tokenized to become NFTs. These assets, however, need to be of real value. This is why real estate, digital art, music, videos, 3D media, photos, and many others are different NFTs in the blockchain world. As a result, NFTs provide a means of ease of transfer and ownership representation for all of these assets with a realistic value. NFTs simply provide a proposition for the value of assets.

At the same time, DeFi is connected to this value of assets in a different way. DeFi works with many types of financial processes, solutions and instruments. This makes it easier for NFTs to become different assets in the DeFi portfolio. Since NFTs are assets based on value, they make it easier to grow the asset’s value. Simply, DeFI helps to unlock the value of the assets that are NFTs.

NFT Ownership and Loans:

NFTs are being used by many industries all over the world, and the music industry is one of them. The use of NFTs in the creative world is bringing about a massive change in this world. At the same time, NFTs also provide credits and ownership to the original owner and creator of a work. With this feature, the owners of these creative properties get the right to earn the proper amount of profit that they ought to.

Many traders and investors try out getting loans on the blockchain platform and the NFT, and DeFi is one of the major ways to make it happen. To effectively get this done, NFTs can be a means to verify the trader/investor’s earnings. However, you can’t do this without using NFTs in the DeFi platform. With this collaboration, NFTs can be a better tool for fixing up royalty sharing, copyright ownership, and licensing problems on the blockchain platform.

Fixing the Problems of Collaterals:

As previously mentioned, the collaboration of the NFT and DeFi platforms aims to unlock the value of crypto assets. However, getting the specific methods to help unveil the true value of NFTs can be very difficult. However, using NFTs can help the person who’s lending out money to decide the amount of the collateral he wants from the borrower via DeFi. To successfully do this, the borrower will have to request a loan that is enough to serve the NFT as a collateral.

Then the lender will use the DeFi platform to evaluate the amount of the loan compared to the NFT that’s used as a collateral. In this process, however, there are a number of factors to be considered, such as individual calculations, the price tag of the owner of the NFTs and also a secondary market value. NFTs can also solve the problem of liquidity in DeFi by providing tokenization as it’ll easily prepare the illiquid version of an asset as fast as possible.

Resolving the Curve Model Issue:

The curve model issue is one that involves the distribution of liquidity along the whole curve in the DeFi platform. This curve model was introduced in one of the newest versions of the DeFi protocols that were associated with the liquidity pools. Nevertheless, the curve model provided a problem as it gives an impression of a considerable build-up of liquidity while it doesn’t give any returns to the providers.

With the NFT and DeFi combination, there is the introduction of a facility that gives a chance for the choosing of a custom price size that the liquidity providers desire. Through this platform, these liquidity providers end up evaluating their capital in an easier method while they are also addressing the build-up of liquidity in the curve model. At the same time, these liquidity providers have the chance to gain more exposure to the assets they want while the downside risks keep decreasing as they go on.

Sometimes, all of this technical information can be complicated as a number of people tend to mix up the use of DeFi and NFTs as they seem to be at opposite sides of the cryptocurrency spectrum. However, these two crypto applications are as important as they are popular. They have a lot of potential on their own because NFTs are ruling the crypto world with their unique ownership and smart contract features. At the same time, DeFi is an important component of the crypto world as it makes access to financial services easier. The collaboration of these two definitely shows a lot of promise, and the sooner they are merged, the better it is for the crypto world.

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