NFT + DeFi: The road of financializing NFT

Published in

NAMA Finance

7 min readMay 5, 2021

In early 2018, non-fungible tokens (NFT) came into our view, but initially they were only adopted by a niche group of cryptocurrency enthusiasts (such as collecting digital cats). In the past three years, we have witnessed artists, designers, game developers, musicians, and writers rushing to the embrace of NFT technology.

The reason is that NFT, like Bitcoin and Decentralized Finance (DeFi), has set off a financial movement. It gives the possibility of ownership and traceability of digital content, and people can purchase content from creators around the world in an almost instant value transfer method. In other words, NFT technology is still far away from widespread adoption and full potential.

The first stage of this technology involves the tokenization of off-chain and on-chain media assets; in the second stage, the DeFi protocol will be used to financialize assets, improve the value proposition and apply it to new use cases.

This article will discuss the reasons why the DeFi protocol is beneficial to NFTs, outline several financial use cases that use NFTs, and explore the prospects of NFT assets.

1. DeFi is the rocket fuel for NFT

Through the DeFi protocol, the “financialization” of NFT can solve many problems currently NFT is facing:

Accessibility

By definition, NFT is unique. In order for buyers to make wise buying and selling decisions, they usually need to have expertise in specific assets. In addition, the scarcity of unique assets may quickly push up prices beyond the purchaser’s affordability. The superposition of these two factors increases the market entry barriers for new buyers and hinders the accumulation of the value of NFT itself. Given that part of the value of NFT comes from the underlying community, if the access rights of long-tail buyers are restricted, it will be difficult for NFT to penetrate the entire ecosystem. For NFT market participants, the DeFi protocol can reduce the amount of funds and knowledge requirements, opening the door to a new wave of retail users.

Liquidity

A liquid market that brings together buyers and sellers will increase the speed of NFT transactions in the secondary market and better discover the value of NFT assets. The more transactions there are, the more the fair market value of the NFT becomes apparent. In this way, sellers can more easily convert work activities into currency output, lowering the barriers to entry for less experienced buyers.

Utility

Confirmation and traceability are important attributes of NFT. They are completely implemented by encrypted networks without authorization, but their value propositions have not yet fully resonated with retail investors. With the rich and powerful utility of DeFi protocol (such as accessibility to cash flow, content, and experience), it will attract more mainstream audiences to purchase NFT assets.

2. Synergy of DeFi and NFT

In many use cases, DeFi and NFT can work well together.

Collateral

Since the 1980s, banks have been providing loans with traditional artworks as collateral. This is a big deal. According to Deloitte estimates, the value of global art secured loans in 2019 is between 21 billion and 24 billion US dollars. NFT can do this too, by providing non-recourse loans for content such as digital art, collectibles, and virtual land.

Accepting NFT as collateral in the loan agreement can increase the utility of the NFT to the owner and at the same time increase the economic activity of the agreement. This is a win-win situation.

Among them, an important link is pricing. For NFT, this is a broader issue. However, if these assets are to be used in a financial environment, pricing is particularly important. In the traditional art and collectibles market, this link usually requires professional appraisers or informal places such as pawn shops.

Crowdfunding

Ethereum is an ideal choice for global capital formation and distribution. This use case can also be applied to NFT. Users around the world can invest in creative works at different stages of the life cycle, which may trigger a renaissance of digital art and provide new business models for different content creators.

Take the writer Emily Segal as an example. She raised about 25 ETH for the next novel, and the funders jointly obtained the token NOVEL, which represents 70% of the ownership of the work. If the NFT is sold at a higher price on the secondary market, the 104 NOVEL token holders have the right to distribute profits proportionally and enjoy more benefits (for example, appearing in the book’s acknowledgment).

At the same time, ownership of written content may provide a new business model for publishers. For example, the recent <New York Times> column NFT sold for $560,000, which may be much higher than the company’s advertising revenue in this article.

Cooperative Organization

In the traditional business world, cooperatives are companies jointly owned by members and usually require capital contributions to join. Decentralized Autonomous Organization (DAO) can be regarded as a “cooperative organization” in the crypto world, and it has become a standard method for managing DeFi protocols. For NFTs, DAOs will be more important, and the assets and communities formed around them will increase by an order of magnitude.

Collector cooperatives have attracted the attention of the public because they allow groups to invest in NFTs that are costly for individuals. At the end of 2019, DAOSaka conducted an experiment; FlamingoDAO is currently engaged in related activities, that is, pooling personal funds, and then collectively deciding which NFTs to buy and sell. Collector cooperative organizations may form spontaneously and develop organically. For example, PleasrDAO initially raised funds to purchase a specific NFT and later expanded the scope. They purchased the NFT from Edward Snowden for $5.5 million. In both transactions, DAO bid higher than a single wealthy buyer, thus winning the auction.

Decentralized

Split ownership is an effective way to democratize asset acquisition, and it has traditionally been used for high-value assets.

Similarly, NIFTEX engages in similar operations in the NFT industry. It allows specific NFT owners to deposit their NFT into a smart contract, and then issue “shards” (ERC-20s) representing the asset, which can be redeemed by acquiring all “shards” or buy-out terms.

It is also possible to divide the ownership of a package of assets into several parts. Metakovan did this with the B.20 token, which contains 28 assets, including Beeple’s crypto art and Cryptovoxels, Decentraland, and the digital land in Somnium Space.

3. The future of NFT

As time goes by, we will see more unique, complex, and interconnected encryption media, which will use multiple DeFi protocols to achieve value propositions and use cases that cannot be seen in the traditional world, including but not limited to:

Bundling

Index Coop By creating an equally weighted index of AXIE, MASK, and PUNK index funds from NFTX (because they are already ERC-20), it provides users with a convenient way to easily access various NFTs.

Decentralization + Bundling

Subdivide 1 unit of Axie, Catalog record, Cryptopunk, and Sandbox virtual land into 100 ERC-20 tokens, and deposit 25 tokens of each asset into Charged Particles, and cast a representative Diversify the NFT with a basket of dispersed assets.

Synthesis

Multiple NFTs can be synthesized, or additional functions and values can be added to existing NFTs. AlchemyNFT and AutographNFT add signature functions to existing NFTs through digital signatures. Punkbodies allows users to merge their CryptoPunk (ERC-721 token) with PunkBody (ERC-721 token) to create a new Punkster token that can be downloaded or minted, but the original ERC-721 token needs to be locked. Users can destroy the synthesized NFT to unlock the original tokens. The newly synthesized NFT token inherits the traceability and utility of the original token while adding new features or functions.

In the next few years, we will see a series of experiments around these concepts, and it is exciting for developers, creators, and the community to work together to turn the concepts into reality.

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