Relationship Between NFTs and DeFi 📲💩

5 min readMar 16, 2022

What’s an NFT?

NFTs are tokens that we can use to represent ownership of unique items. They let us tokenize things like art, collectibles, even real estate. They can only have one official owner at a time and they’re secured by the Ethereum blockchain — no one can modify the record of ownership or copy/paste a new NFT into existence.

NFT stands for non-fungible token. Non-fungible is an economic term that you could use to describe things like your furniture, a song file, or your computer. These things are not interchangeable with other items because they have unique properties.

Fungible items, on the other hand, can be exchanged because their value defines them rather than their unique properties. For example, ETH or dollars are fungible because 1 ETH / $1 USD is exchangeable for another 1 ETH / $1 USD.

NFTs and Ethereum solve some of the problems that exist in the internet today. As everything becomes more digital, there’s a need to replicate the properties of physical items like scarcity, uniqueness, and proof of ownership. Not to mention that digital items often only work in the context of their product. For example, you can’t re-sell an iTunes mp3 you’ve purchased, or you can’t exchange one company’s loyalty points for another platform’s credit even if there’s a market for it.

How do NFTs work?

NFTs are different from ERC-20 tokens, such as DAI or LINK, in that each individual token is completely unique and is not divisible. NFTs give the ability to assign or claim ownership of any unique piece of digital data, trackable by using Ethereum’s blockchain as a public ledger. An NFT is minted from digital objects as a representation of digital or non-digital assets. For example, an NFT could represent:

Digital Art:
GIFs
Collectibles
Music
Videos
Real World Items:
Deeds to a car
Tickets to a real-world event
Tokenized invoices
Legal documents
Signatures

An NFT can only have one owner at a time.

Ownership is managed through the uniqueID and metadata that no other token can replicate. NFTs are minted through smart contracts that assign ownership and manage the transferability of the NFTs. When someone creates or mints an NFT, they execute code stored in smart contracts that conform to different standards, such as ERC-721. This information is added to the blockchain where the NFT is being managed. The minting process, from a high level, has the following steps that it goes through:

Creating a new block
Validating information
Recording information into the blockchain

NFTs have some special properties:

Each token minted has a unique identifier that is directly linked to one Ethereum address.
They’re not directly interchangeable with other tokens 1:1. For example, 1 ETH is exactly the same as another ETH. This isn’t the case with NFTs.
Each token has an owner and this information is easily verifiable.
They live on Ethereum and can be bought and sold on an Ethereum-based NFT market.

In other words, if you own an NFT:

You can easily prove you own it.
Proving you own an NFT is very similar to proving you have ETH in your account.
For example, let’s say you purchase an NFT, and the ownership of the unique token is transferred to your wallet via your public address.
The token proves that your copy of the digital file is the original.
Your private key is proof-of-ownership of the original.
The content creator’s public key serves as a certificate of authenticity for that particular digital artifact.
The creator's public key is essentially a permanent part of the token’s history. The creator’s public key can demonstrate that the token you hold was created by a particular individual, thus contributing to its market value (vs a counterfeit).
Another way to think about proving you own the NFT is by signing messages to prove you own the private key behind the address.
As mentioned above, your private key is proof-of-ownership of the original. This tells us that the private keys behind that address control the NFT.
A signed message can be used as proof that you own your private keys without revealing them to anybody and thus proving you own the NFT as well!
No one can manipulate it in any way.
You can sell it, and in some cases, this will earn the original creator resale royalties.
Or, you can hold it forever, resting comfortably knowing your asset is secured by your wallet on Ethereum.

And if you create an NFT:

You can easily prove you’re the creator.
You determine the scarcity.
You can earn royalties every time it’s sold.
You can sell it on any NFT market or peer-to-peer. You’re not locked into any platform and you don’t need anyone to intermediate.

What are NFTs used for?

The biggest use of NFTs today is in the digital content realm. That’s because that industry today is broken. Content creators see their profits and earning potential swallowed by platforms.

An artist publishing work on a social network makes money for the platform that sells ads to the artist's followers. They get exposure in return, but exposure doesn’t pay the bills.

NFTs power a new creator economy where creators don’t hand ownership of their content over to the platforms they use to publicize it. Ownership is baked into the content itself.

When they sell their content, funds go directly to them. If the new owner then sells the NFT, the original creator can even automatically receive royalties. This is guaranteed every time it’s sold because the creator’s address is part of the token’s metadata — metadata that can’t be modified.

Ethereum and NFTs

Ethereum makes it possible for NFTs to work for a number of reasons:

Transaction history and token metadata are publicly verifiable — it’s simple to prove ownership history.
Once a transaction is confirmed, it’s nearly impossible to manipulate that data to “steal” ownership.
Trading NFTs can happen peer-to-peer without needing platforms that can take large cuts as compensation.
All Ethereum products share the same “backend”. Put another way, all Ethereum products can easily understand each other — this makes NFTs portable across products. You can buy an NFT on one product and sell it on another easily. As a creator you can list your NFTs on multiple products at the same time — every product will have the most up-to-date ownership information.
Ethereum never goes down, meaning your tokens will always be available to sell.

Relationship Between NFTs and DeFi 📲💩

What’s an NFT?

How do NFTs work?

What are NFTs used for?

Ethereum and NFTs

Further reading

Written by Olasupo Hakeem