Decentralized Finance (DeFi) has had a promising yet sluggish start in its mission to disrupt the traditional financial system.
However, all that is set to change as collateralized loans against NFTs (non-fungible tokens) become the preferred gateway for DeFi loans. NFT collectors are now finally able to leverage their digital collectibles.
This emerging NFT-DeFi link has the potential to alter the DeFi market in the long term. Instead of selling their NFTs, collectors can unlock their value via collateralized loans against NFTs.
Let’s dive in and discover more about the incredible potential of this NFT / DeFi partnership.
The Emerging DeFi-NFT Link
Few people would understand how someone could make 400 ETH or $1.3 million from an image of a cartoon rock they bought at 1.7 ETH or $5340 19 days earlier.
The new craze with celebrities and digital artists has ignited the crypto sphere and changed people’s lives, but many still don’t understand the NFT phenomenon.
Fungible assets are possessions (like fiat currency) that can be exchanged with similar items. If, for instance, you lend someone a $100 bill; the person can return it in the form of a different $100 bill or a combination of various denominations, and the value remains the same.
Non-fungible assets on the other hand (like real estate and cars) are different as they’re not mutually interchangeable. In the crypto sphere, non-fungible assets are being tokenized into NFTs. The tokens then act as blockchain-based deeds or certificates representing unique collectibles, artwork, or real estate.
DeFi lenders and entrepreneurs are noticing the paradigm shift where people are turning valuables into NFTs, which they can convert from expensive acquisitions to a source of liquidity. Tokenizing valuables like real estate, music, or classical artwork and using them, as collateral, is making NFT lending a reality.
The Emergence of Collateralized Loans against NFTs
Peer-to-peer lending platforms now accept NFTs as collateral for DeFi loans, and collectors are already drawing substantial collateralized loans against NFTs. Like traditional DeFi loans, NFT loan products are over-collateralized to guard the lender against volatile market swings, which can go either way.
Take the recent case of a trader who borrowed 3.5 ETH (worth $12,000) and offered an NFT worth 11 ETH as collateral on the NFTfi platform. By the time the loan period expired three months later, the borrower could not repay and forfeited their collateralized NFT, worth a whopping $340,000 at the time.
NFTfi is only one among several other companies offering NFT loan products. Among the trailblazers are Stater.co and Pawn.fi. Others with projects in the pipeline are Rarible, which co-founder Alex Salnikov says is creating partnerships with NFT lending. Taker Protocol, C.R.E.A.M. Finance and Money Market Aave are also working on NFT loan products.
How Collateralized NFTs will Change DeFi
NFTs became a buzzword following the eye-watering figures collectors were paying after the $69 million fee for Beeple’s First 5000 days artwork made headlines. Russia’s Hermitage Museum spoke of tokenizing valuable art pieces into NFTs. Buyers of classical art pieces lying dormant in museums and galleries could soon ensure they turn into more productive use.
NFT loan products are an excellent avenue for NFT owners to unlock the inherent value within them. Offering collateralized loans against NFTs is a new venture. Nonetheless, the ability of NFTs to unlock their value to their owners is already creating ripples of exponential wealth from NFT lending. This, in a sense, makes NFTs a fungible store of value that will far supersede classical art.
The liquidity of NFTs will open a world of fresh opportunities that could define the future of DeFi. By accessing the DeFi marketplace with the value of their digital collectibles, owners can earn an impressive yield by putting their NFTs to work through further lending, staking, or simply investing in faster rising digital assets.
The Future of NFTs in DeFi
It seems like conventional banks and financial institutions may have missed the train by working too hard to squeeze the dynamic blockchain technology into traditional economic systems. The steady growth of DeFi and NFTs into an $80 billion and $10.7 billion market is sufficient evidence of this.
There is every chance that the collateralized NFT loans industry could morph and become the launching pad of many more potential use cases. Whereas the existing use cases are centered on gaming and digital art, future use cases could include investments, loan agreements with banks, insurance policies, bonds, and debt management.
There’s no telling how long it will take for NFTs to progress from being sold at NFT auctions and funding DeFi protocols. NFTs are bound to create a more significant impact in the fintech world by tokenizing more assets and connecting DeFi markets and real-world financial markets.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.