Discovering the Connection Between NFTs and DeFi: The Solution is on the Horizon! No Need to Sell Your Bored Ape for Liquidity!
While non-fungible tokens (NFTs) are undoubtedly an intriguing new technology, one of their primary strengths in the world of cryptocurrencies is that they are not considered securities under regulatory frameworks. This liberates marketplaces like OpenSea from the onerous task of registering as broker-dealers, among other limitations. The absence of this regulatory burden is a significant structural factor contributing to the current NFT craze.
However, the gravitational pull of financialization is strong, particularly in the realm of crypto. I’ve previously discussed how some NFTs are being transformed into securities at the design level by incorporating features like dividends and governance rights.
Despite not being considered securities, NFTs have the potential to be integrated into complex financial products due to their code structure, which resembles that of a cryptocurrency token. This has led to the fractionalization of high-value NFTs, allowing investors to purchase more affordable portions, a process monitored by the U.S. Securities and Exchange Commission. While NFTs could also serve as collateral for decentralized finance loans, the market’s volatility poses a significant technical challenge. In addition, determining the value of a one-of-a-kind object, whether digital or not, remains a fundamental issue.
Non-fungible tokens (NFTs) have gained attention for their unique features, one of which is their exemption from being considered securities under current regulations. This has allowed marketplaces such as OpenSea to avoid registering as broker-dealers, removing a significant hurdle and contributing to the current NFT frenzy. However, the financialization of NFTs is becoming more prevalent, as some are designed to include features like dividends and governance rights, essentially turning them into securities. The underlying code of NFTs is similar to that of cryptocurrency tokens, making it easy to integrate them into complex financial products. The most valuable NFTs are being fractionally divided into more affordable pieces, overseen by the US Securities and Exchange Commission.
NFTs could potentially be used as collateral for decentralized finance loans, but this poses a technical challenge. Since the value of NFTs is highly volatile, a stable price must be determined to use them as collateral, which is difficult to ascertain. Additionally, it is unclear how to value a unique digital or physical object. Philipp Pieper, the co-founder of Swarm Markets, suggests that the issue of determining NFT value can be addressed by creating an NFT basket to ETH pair in a liquidity pool. This would unlock the price discovery problem by aggregating the market value of a basket of NFTs, with some NFTs acting as a price oracle for the others. However, since there are often large price spreads between items in a series of NFTs, some rebalancing, possibly through algorithmic means, may be necessary to maintain the accuracy of the pool.
