NFT-based decentralised finance NFTs will be used to tokenise financial assets | OPINION

DeFi and NFTs are the two notable developments in the crypto industry. Decentralised banking and non-fungible tokens are the two prominent blockchain uses. DeFi enables asset tokenisation through decentralised access to financial services, while non-fungible tokens enable asset tokenisation.

However, it is possible to speculate about the evolution of NFTs as a viable tool for DeFi. NFTs as digital art or collectibles command exorbitant prices at auctions. Let’s take a look at the potential advantages of organizations utilizing the NFT-DeFi combination.

What is DeFi?

DeFi, short for Decentralised Finance, provides a blockchain-based platform for accessing financial services such as borrowing, lending, savings, trading, and liquidity. The distinguishing feature of DeFi is the absence of middlemen. Intermediaries play an important role in conventional finance by facilitating transactions, authenticating identities, and offering banking services.

Smart contracts that are self-executing immutable bits of code on a blockchain are the basis on which DeFi functions. Once on the blockchain, no code modification is possible. DeFi projects and apps are decentralised, using token-based governance structures. While decentralised applications (dApps) and services help with the procedures, DeFi users connect to parties that want to trade, lend, or lend to them directly.

Benefits of DeFi

The following are the prominent use cases of DeFi:

❖ Accessibility: Any individual who has a wallet may use DeFi services.

❖ Transparency: All information on the blockchain and all transactions are transparent.

❖ Decentralisation: As the name suggests, there isn't any centralised authority that handles transactions. Traders and users interact with each other directly, which is made possible by transparent smart contracts.

❖ Interoperability: DeFi products are used to build new products across various blockchains.

How can NFTs be used in DeFi

Integrating NFTs with decentralised finance becomes immediately possible, especially given the potential of NFTs to reflect the commercialisation of digital items and services. Some advantages that stem from the combination of NFT and DeFi, include collecting native tokens to unlock additional NFT assets.

Ethereum, for instance, has launched ERC-20 tokens to provide representation for digital assets. As a result, NFTs might prove ownership rights for digital art. Ethereum has emerged as a popular platform for artists to showcase their work and interact with an interested community of collectors. With the ability to prove ownership, NFTs might provide significant value in DeFi.

Let's look at the applications of NFT in DeFi.

Collaterals

The combination of NFTs with DeFi has enormous potential for unlocking significant value. However one difficulty arises, how to evaluate the worth of NFTs? NFTs have an answer to this problem by allowing lenders to calculate the collateralisation amount in DeFi. DeFi and NFTs work together by utilising NFT collectibles and art as collateral against DeFi loans. The lender examines the loan amount in conjunction with the collateral value of the NFT, by considering numerous aspects. Lenders may safely identify the right collateralisation amount by utilising the power of NFTs. Another method, where NFTs aid in resolving liquidity difficulties in DeFi, is by tokenisation of NFTs.

NFT ownership and DeFi

Art commercialised via NFTs is the fundamental aspect of the NFT narrative. NFT-DeFi platforms working in the music industry have shifted the working methodology. NFT owners can earn a consistent portion of streaming income. Furthermore, NFTs grant ownership rights and income to the original authors. NFTs can potentially resolve the challenges of royalty sharing, licensing, and copyright ownership.

Fractional ownership is a result of the confluence of NFTs and DeFi. It presents a notion of producing fractional shares of NFTs, allowing investors and fans to own a part of an NFT without purchasing it entirely. Fractional ownership in the DeFi sphere is still in its early phases, with immense potential waiting to be explored and tapped. As fractional ownership continues to evolve, it will revolutionise how individuals interact with and profit from the NFT ecosystem inside decentralised finance.

NFT Staking benefits

Staking NFT assets over a DeFi protocol in exchange for staking incentives and other perks is what NFT staking entails. Staking allows users to earn income from their NFTs while keeping ownership. It's similar to staking cryptocurrency, in which users keep their money and get incentives for doing so. When users stake their NFTs, they are committing them as collateral in exchange for incentives. The benefits are in the form of a native token connected with the staking platform, although they may also earn tokens from the NFT ecosystem.

To take part in NFT staking, users must own an NFT qualified for staking. Because not all NFTs are eligible for staking, they should verify with the relevant project to see if they support their asset. Once qualified, they may stake it by storing it on a staking platform.

Governance

In DeFi governance, users are granted voting rights to token holders proportionate to their token holdings. However, certain DeFi projects have encountered constraints with this model, leading them to explore alternatives. One method is the incorporation of permanent members or councils into the governance process.

To enable this, these DeFi projects introduce the concept of NFTs that bestow voting rights upon their holders. These tokens are known as soulbound tokens (SBTs) and possess unique qualities as they are non-transferable and forever remain within a designated wallet. By embracing SBTs, these projects aim to enhance the governance structure and empower dedicated participants with unwavering influence.

Final Thoughts

NFTs represent unique cryptographic assets that possess inherent value and security. When combined with decentralised financial products, these tokens have the potential to unlock a multitude of specialised financial services. This technical innovation opens up possibilities, including in-game currencies, investment opportunities, and liquidity mining.

The versatility of NFTs in the DeFi space is boundless, with roles waiting to be explored and embraced. As the industry continues to evolve, we eagerly anticipate the emergence of new and exciting projects that will push the boundaries of what is possible with NFTs, further revolutionising the intersection of finance and technology. Stay tuned for the captivating ventures that lie ahead.