How can I use NFT in DeFi
Non-interchangeable tokens are often considered just digital art or collectibles that are sold at huge prices at auctions due to the hype. However, non-interchangeable tokens can make an exceptional contribution to the growth of decentralized finance in the long term.
The following discussion will help you find possible ways to get the most out of using NFT in DeFi.
Non-interchangeable tokens or NFT are simply a unique way of storing value. Just like gold or a dollar bill, they are tied to a specific asset. The assessment of their value varies greatly at the market and individual levels. It is difficult to replace or reproduce non-interchangeable tokens, which means that two NFTs cannot be the same.
Decentralized finance or DeFi is basically a financial system based on blockchain technology. Many public blockchain networks, such as Ethereum, contribute to the development of the DeFi ecosystem. Decentralized finance opens the door for decentralized financial management using various built-in tools, such as cryptocurrencies, oracles and smart contracts.
The definitions of NFT and DeFi clearly indicate the possibility of detecting a connection between them.
So, looking at their definitions, you can clearly see that NFT offers a unique way to store value, and DeFi offers an infrastructure for unlocking value.
How to preserve the value of NFT
To understand the possible connection of decentralized financing of non-interchangeable tokens, it is important to know the type of assets that can be tokenized. Tokens with realistic value propositions, such as real estate, are one of the first examples.
Real estate investments were extremely illiquid and required a large amount of documentation. Placing assets in the blockchain in the form of virtual tokens can help simplify the idea of ownership and flexibility in transfer.
In addition, NFTs can help in the disclosure and mobilization of value in cases where it is difficult to do so. For example, music artists can offer NFT as tokens to participate in sessions of direct interaction with them. The value of the offer is an important factor for determining the value in them, and it needs to be evaluated.
What is the value of unlocking DeFi
Further study of the definition of DeFi can help in the implementation of a promising idea of the basis for using non-interchangeable tokens in DeFi. The first thing you need to understand about DeFi is that they can effectively work with various types of financial solutions, tools and processes. In fact, NFTs would become another asset in the existing DeFi portfolio. However, it is also important to determine the flow that will be most affected by such an implementation in the DeFi space.
Non-interchangeable tokens are basically value-based assets. Therefore, they can provide an opportunity to increase the value of an asset or accumulate income from assets for the owner. DeFi can offer the opportunity to reveal the value of NFT. How?
Integration into the DeFi ecosystem
The combination of decentralized NFT financing is becoming feasible, especially due to the ability of non-interchangeable tokens to represent the commercialization of digital products and services. They have become one of the most promising applications in the DeFi sector.
For example, Ethereum offered ERC-20 tokens to represent digital assets. Thus, NFTs can easily serve as proof of ownership of digital art. Ethereum has become one of the best options for authors who share works of art and interact with an interested community of collectors. Thanks to the flexibility for proof of ownership, NFTs can have exceptional advantages in the field of DeFi.
Let’s look at the various possible ways to use such a symbiosis.
- Solving the security problem
One of the most important aspects of such a combination is the possibility of unlocking the cost. At the same time, it is also difficult to identify specific mechanisms that ensure the determination of the cost of NFT. However, its use can help the lender determine the amount of collateral in DeFi. How?
The borrower will request the loan amount from the NFT, which will serve as collateral. The lender will evaluate the loan amount together with the secured NFT taking into account various factors, such as the owner’s price tag, secondary market value and their individual calculations.
The combined use of NFT and DeFi can help to easily solve the security problem.
- It is also important to note the problems with market liquidity.
The scope of works of art and collectibles is quite subjective from the point of view of liquidity. For example, let’s assume that the painting is valued at almost $1 million. However, the price of a painting is important only when a person is interested in paying for it.
The NFT Decentralized Finance Association could easily solve the issues of securing works of art. The most plausible solutions in this case may focus on using art and collectibles as collateral when lending to DeFi.
Art has traditionally been used as a collateral in the real world. Therefore, the transition of NFT to the sphere of DeFi definitely seems to be a reasonable step into the future. NFTs can also improve the DeFi sector through tokenization. Tokenization can offer the ease and flexibility of preparing an illiquid asset faster than possible.
- Solving issues related to the curve model
The next important point related to the use of NFT in DeFi concerns the work of these two tools to solve the curve model problem. The curve model was mainly adapted for the distribution of liquidity along the while curve. It appeared with one of the latest versions of the DeFi protocols related to liquidity pools. However, the curve model in DeFi also implies a significant increase in liquidity without any profit for suppliers.
The NFT DeFi combination has successfully offered the possibility of choosing the desired individual price sizes for liquidity providers. As a result, liquidity providers can easily assess their capital and solve the problem of increasing liquidity in the curve model. Subsequently, liquidity providers can also increase their exposure to the desired assets again, along with reducing the risk of deterioration of the situation.
Ownership of NFT and its impact on DeFi
Examples of using DeFi platforms in combination with NFT for the music industry clearly imply revolutionary changes in the art world. In addition, non-interchangeable tokens have played a crucial role in granting ownership rights and profits to the actual creators. NFT owners can earn a reliable share of the revenue from streaming or the resale value of their work.
In addition, maintaining verifiable profits through non-interchangeable tokens also offers an effective collateral option. This can facilitate access to under-secured loans, which is impossible without the use of NFT in DeFi.
The monetization of art and collectibles using NFT has become an integral part of the entire narrative of NFT advertising. However, these tokens can become more significant tools for solving problems of royalty distribution, licensing and copyright ownership.
Another important aspect of their joint use is the concept of shared ownership. NFTs also allow you to flexibly create shares. As a result, investors and fans of the creators of NFT could get the opportunity to own non-interchangeable tokens without buying them. However, the application of shared ownership of NFT in the DeFi space is still at the initial stage of implementation.
Conclusion
One of the most important factors associated with the joint application of NFT and DeFi is the ability to verify ownership. The ease of proof of ownership opens up DeFi space for NFT holders to obtain loans with NFT as collateral.
What else is important to know is that NFT can distribute value for almost anything.
Decentralized finance, on the other hand, helps to reveal the value of a particular asset. NFT-backed loans are gradually gaining popularity, and the growth of NFT DeFi means wider horizons of innovation. With the growing number and depth of users of DeFi and NFT, the way we view assets, tokens and financial services may change.