Most Convincing DeFi NFT Use Cases: Here to Stay?
If you paid attention to the last bull market, at some point you came across Non-Fungible Tokens (NFTs). Are they just serial numbers loosely related to jpegs, or are there actually real-world NFT Use cases?
From pictures of cats and dogs to digital real estate, this post will explore everything you need to know about NFT use cases.
What Are NFTs?
Simply put, non-fungible tokens (NFTs) are blockchain tokens (like cryptocurrencies) with different properties. Non-fungible means they’re unique tokens, and because of that, they can’t be replaced. For example, any of the 21 million Bitcoins are exchangeable for the same price, but if only 1 BTC existed instead of 21M, Bitcoin would be non-fungible.
So far, our only way to value and trade NFTs is with network-native tokens. In the Ethereum blockchain, NFTs are called ERC-721 tokens. NFT owners can set any price in ETH they want, and if other users are happy with the offer, they buy. Trading NFTs is essentially peer-to-peer (P2P) trading, and P2P marketplaces are less liquid than crypto exchanges.
While that’s what NFTs technically are, the way we interact with NFTs gives them a different meaning. In the Ethereum blockchain, NFTs are just contract addresses like any other token. In Ethereum NFT marketplaces, they can represent music, digital art, blockchain game assets, and other collectibles.
Because NFTs are unique, we call them blockchain digital assets (as opposed to blockchain currencies like Bitcoin).
As you can imagine, it’s hard to keep track of thousands of unique addresses. That’s why creators often group them in NFT collections. When creating a collection, you can decide how many there will be and what each NFT represents.
When you buy an NFT, the token appears in your WEB3 crypto wallet along with your other cryptocurrencies. If you bought NFT art, you can see your image on any NFT marketplace that supports that blockchain (generally Ethereum Mainnet).
Note: The underlying address is what makes the NFT unique and valid, not the digital asset it represents. In fact, you can buy smart NFTs that change digital art over time.
How Do NFTs and DeFi relate?
The same way DeFi creates services around crypto, it can be done for NFTs. Because NFTs and cryptocurrencies aren’t the same, this would lead to new financial services that weren’t possible before. NFT use cases on DeFi, DeFi use cases on NFTs, and use cases resulting from NFTs and cryptocurrencies combined.
The main relationship between NFTs and DeFi is liquidity. NFTs allow the easy transfer of digital-asset ownership, and DeFi can increase the yields and liquidity of those assets. As for today, NFTs are illiquid marketplaces, but that can change with the integration of DeFi.
NFTs also make decentralized finance more accessible. Not everyone can design a utility token, but anyone can create an NFT collection.
Examples of NFT Use Cases in the Real World
The best way to see how NFTs and DeFi relate is by looking at their nft use cases:
Digital Asset Tokenization
Blockchain tokenization is converting digital assets into tradeable tokens.
It’s not as simple as it sounds, because digital assets involve ownership. You can create your own collection with copied digital art from Bored Ape Yacht Club (BAYC) or Axie Infinity. But you can’t prove it belongs to the original collection if you haven’t bought it.
Tokenization uses smart contracts and NFTs to make ownership transferable. For example, website domains could be NFTs. All you need to prove your ownership is to connect your Web3 wallet with the NFT in it.
NFTs For Lending
While you can always sell your crypto, you can’t sell NFTs unless someone wants to buy them. One way to monetize this illiquidity is DeFi lending services. You could offer your NFT as collateral the same way you offer valuables in a pawn shop.
Even though NFTs have dispersed prices, illiquidity keeps them in a stable range. A lender could appraise your NFT based on rarity and market floor prices to estimate your collateral value. Depending on whether it goes up or down, you might get liquidated or increase the safety margin. Lenders might also agree on the fixed original value.
Since NFTs involve ownership, NFT collaterals would require smart contracts and possibly oracles. That way the NFT would go back to the right person at the end of the contract.
NFT marketplaces allow users to explore, buy, and sell NFTs on a specific blockchain. They’re different from block explorers because they also show the digital assets linked to every NFT. If you connect your wallet to different marketplaces in Ethereum, your wallet will show the same assets (no matter where you bought them).
The most popular NFT marketplaces are Opensea, Rarible, and SuperRare.
Because NFTs rely on cryptocurrencies, prices can be volatile and expensive. The network fees you pay might be as much as the NFT offer. That’s why marketplaces eventually add newer, more efficient blockchains like Polygon, Solana, or Binance Chain. While a platform can support multiple, your NFT doesn’t exist on different networks (with today’s blockchain technology).
NFT Yield Farming
The 2021 NFT hype has shown there are more speculators than buyers. There’s a lot of selling pressure, especially during airdrops and launch days. This makes it hard for new projects to build communities.
The solution is to apply DeFi to NFTs. If owners keep getting value from collections, they won’t want to sell. This helps solidify floor prices, create devoted communities, and attract new buyers.
- The NFT project also has a complementary ERC-20 token. You stake the NFT to ERC-20 rewards.
- The NFT is an upgrade or event ticket to qualify for the better NFT airdrop. For example, BAYC owners had to buy Serum NFTs to convert their apes into (rarer) mutant apes
- Utility NFTs that allows you to re-roll picture properties or guarantee a rarer accessory
- NFTs that create other NFTs (AKA breeding). e.g., Own two NFTs and lock them for 60 days to get the 3rd one.
- Virtual land NFTs that you can rent to users or advertisers
- NFTs that give you a competitive edge on video games with tradable assets
Play-to-Earn (P2E) Games
DeFi and NFTs allow users to get paid for playing the video games they love. Some require buying NFTs, some are free. They often involve skill-based competition, randomness, teamwork, and a rewarding in-game marketplace.
P2E games are controversial. Some say they’re pay-to-win, or at least prioritize money over gameplay. The truth is, game NFTs are only valuable when players intrinsically like the game. While some P2E games are fun, their user bases aren’t large enough to guarantee liquidity.
The biggest P2E challenge besides engagement is economies. The NFTs that players win in-game need to have high gameplay value, otherwise everyone will sell and crash the marketplace. But how do you make it rewarding enough without making your game pay-to-win?
Let’s look at some applications that are already doing it right.
Examples of Real World Applications for NFTs
While there are more NFT use cases for DeFi, the mentioned five are the most successful. Here are some projects you may know by category:
- Asset tokenization: Unstoppable Domains offers domain NFTs that replace yearly fees with a one-time payment. By trading the NFT, you can transfer domain admin rights.
- NFT lending: The Sandbox is a game and virtual space with a virtual-land marketplace (called LAND NFTs). Users can buy LAND and rent it to others.
- NFT marketplaces: The Opensea marketplace supports collections in Ethereum, Polygon, and Solana. There are also marketplace aggregators like NFTrade that show NFTs across 10+ networks.
- NFT yield farming: DeRace is a horse-race betting platform. You can breed two horses for a fee to get a new one with mixed and randomized stats. You can also rent your horses and someone else’s.
- P2E games: Gods Unchained is a free-to-play magic card game based on strategy. You can build your deck with free NFT cards or bought ones, and you win by tactically outsmarting your rivals. That way you gain ranks, increase XP rewards and get new cards faster.
Without real-world applications and utility, NFTs are just tokens that will one day go to zero. That’s why many believe many NFT collections will disappear, most of which appeared in the 2021 bubble. Assuming there’s intrinsic value, the 2nd most important factor is the community size and activity.
Industries Affected by NFTs
Nearly any industry involving digital assets may eventually interact with NFTs:
- NFT use cases in art can help creators protect ownership and monetize media
- NFTs might associate with existing collectibles/antiques to increase their value
- Pro athletes might use NFTs for fan clubs, VIP tickets, card collectibles, and betting prizes
- Music bands can sell concert tickets as NFTs that after the event turn into collectibles
- Local businesses can create loyalty programs where NFT owners gain lifetime perks
- Gaming studios can add NFTs so that players can monetize their skills
- Virtual land NFTs might one day interact with real estate with augmented-reality (AR)
And DeFi can support NFTs with the infrastructure to make marketplaces liquid and accessible to everyone. DeFi makes cryptocurrencies so valuable that we never have to sell them. If DeFi can do the same with NFTs, NFTs can change these industries sooner than you think.
Disclaimer: Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Originally published at https://learn.liquidloans.io on September 12, 2022.