Using NFTs within DeFi protocols
When people mention “NFTs”, most of us think about a bunch of cartoon animal JPEGs being sold for millions of dollars.
Are NFTs just the fun loving art we’ve come to know and love (or for some of us, loathe) or is there something more to them?
Non-Fungible Tokens (NFTs) are interesting to say the least. As unique cryptographic tokens, anyone can easily verify the ownership of an NFT and identify the wallet address that owns the asset.
They are most commonly associated with art, but a number of new innovations and use-cases have been explored throughout the years. In recent times, concepts like “Soulbound NFTs” and “Dynamic NFTs” have created interesting niche opportunities.
I believe that NFTs have a lot more to offer beyond art. Given that Nova is a DeFi protocol, a lot of my thoughts and ideas originate within that domain. In this article, I’ll explore some use cases for NFTs that I’ve seen within the DeFi space, along with what made them successful (or not).
I’ll also share some of the utility I’d like to see NFTs associated with going forward. Stick with me until the end and I’ll give you a sneak preview of something that Nova is working on. Enjoy!
Main NFT usages in DeFi so far
Representation
One of the most significant utilizations of NFTs in DeFi has been purely from a technological perspective, with Uniswap’s V3 AMM. Within V3, Uniswap introduced “concentrated liquidity” that allows you to provide your assets as trade liquidity for the AMM at certain prices.
Previously in V2, everyone provided liquidity at every price. That made it possible to have a broad pool you could deposit into and receive “LP” tokens back, representing your share within the pool.
It was simple and effective (and opened up opportunities for staking rewards) but exposed users to things like “impermanent loss” which wasn’t ideal, especially with volatile tokens.
With everyone providing different quantities of assets for liquidity, then providing that liquidity at certain rates in V3, more unique data was required for each position opened within the pool, hence the use of NFTs.
I thought this was worth highlighting because although the NFTs themselves weren’t necessarily special or desirable, they had utility built in that made them a core part of the Uniswap system.
If other DeFi protocols are going to successfully integrate NFTs, the NFTs will likely have to be desirable rather than purely practical. One way to achieve that is by giving the NFT utility. This could help the adoption and success of their protocol.
Gamification
Zapper were one of the first major DeFi platforms to experiment in a meaningful way with NFTs. Users gained experience (or XP) for carrying out “Quests” within the platform.
Some were as simple as logging in to Zapper every day and others were more complex. Once the user acquired certain XP levels, they were entitled to mint NFT rewards.
Zapper came back with a second season of quests and NFTs a few months after the first drop in May 2021.
In the second wave, you could use existing NFTs to mint cooler and rarer NFTs which was pretty innovative at the time. They added NFTs that represented certain moments and “lore” within DeFi such as “Chad the yield farmer” and the “Uniswap Unicorn”.
Although this system was a great foray for NFTs in DeFi, the incentive within the system were the NFTs themselves. It was a great concept but relied on a community embracing it from a collectible perspective. In the collectible space, it’s often random and unpredictable to know which collectibles will take off.
In the traditional world for example, collectible cards like Pokemon, Magic and Yu-Gi-Oh relied on similar concepts and were some of the few that achieved adoption.
Shortly after this, they paused efforts into this area and you can no longer claim XP and participate in the program. I think if they had better connected the value of the NFT to utility, it could have been a different story.
What does the future of NFTs in DeFi look like?
I think there’s massive potential to incorporate more NFT functionality within DeFi. Users of DeFi are already naturally inclined to participate in game theory mechanisms, because that is essentially how DeFi already works.
Functions like staking, borrowing and compounding all require users to swap, transfer and claim in order to get the best rewards and success. NFTs could open up new and more personalized opportunities to distinguish and reward those who participate in these DeFi economies.
Here are two things I’m interested to see more in:
Gaining Experience
In the GameFi industry, some projects have embraced “leveling up” which can often bring additional “power” to the NFT. One such example is Sorare, where you can use player NFTs that build up “XP”, increasing your points scoring potential.
Although not directly connected to the NFTs, Zapper also used a similar XP mechanism that unlocked certain opportunities for the user as they carried out actions within the protocol. I think this concept could definitely be expanded into a wide range of DeFi functionalities, but with better rewards and utility attached for those who gain the most XP.
Another area I would be interested to see XP experimented with is in governance. As explored above, the technology already exists. What changes is the type of actions you have to carry out to obtain that XP. In the case of governance, you could earn XP for simply voting in the first place or more complex things such as if your decision proved to be right, or you displayed alignment to community values.
Going further on this, your levels of XP could influence your weight within the vote itself. If you are a member that has voted consistently and accurately for many years, you have a proven track record and your opinion should probably be taken more seriously.
Obviously the weighting mechanisms need to be carefully designed to prevent dominance from experienced users. However, the value from a system like this could make DAO governance significantly more dynamic and viable.
Badges
Collecting stuff seems to be deeply rooted in our human psyche and comes to people in many different ways: Pokemon cards, stamps, pickles, anime body pillows etc. Yet, it’s just one of the many drives we have that can be motivated through incentivization.
An example of this in the NFT space recently are POAPs (Proof of Attendance Protocol). POAPs have become popular at events to signify those who attend the physical gathering. I’ve met people who enjoy collecting as many POAP’s as possible. Essentially, its like collecting badges to mark achievements and landmarks.
I’ve seen various platforms across the years attempt to use NFTs as badges or certifications, particularly within education oriented platforms. NFTs are great for badges/certification because of the transparency and security that the blockchain provides. However, it’s worth noting that people aren’t completing the course for the badge, they’re completing the course because of what the badge unlocks for them.
DeFi has lots of things that could be unlocked based on badge ownership: Extra functionality, beta features, better rates, increased shares/bonuses. I’m surprised that more protocols haven’t embraced mechanisms like this, especially with capital in DeFi often being unloyal and jumping around protocols for the best rewards.
The Astronovas
Ahead of Nova’s Beta Launch in Q1 next year, we’re releasing a set of 1000 x unique character NFTs, called Astronovas.
Each Astronova will be free to mint for 1000 of Solana’s top DeFi users. They will give you access to bonuses, drops and exclusive features within the Nova protocol.
They will also play a role in governance weight. Join our Discord community to be in with a chance of becoming an Astronova.
