How NFTs Can Empower The DeFi Ecosystem

With Decentralised Finance (DeFi) offering great potential for financial instruments, products and processes, adding NFTs into this ecosystem is proving to be even more useful and opening up more doors for innovation. A common factor connecting both the worlds is ownership. We all know NFTs have the capability of allocating value to almost anything, be it physical or digital. DeFi can further unlock the value of a specific asset. So in simple terms, you are creating a new asset which has some value, then you can use that value to gain additional value. In this article, we will look at a couple of trending applications. Borrowing with On-Chain NFT Collaterisation

NFTs can help people borrow money by serving as a collateral. For example, the lender can assess the loan against the collateralised NFT by checking the NFT’s value in a secondary marketplace (like OpenSea, Rarible, Nifty Gateway, Sorare, etc) and the value for which the latest owner bought it for. She/ He can also see the previous history of all transactions and what the previous buyers paid for the NFT.

Liquidity of the market is extremely important as well. For example, the price of an NFT holds value only when an individual is interested in paying for it. At the time of this article (April 2022) we see NFT art and collectibles being used as the most popular collateral in DeFi lending. A good example of this is NFTfi, which allows owners to lend their NFTs to other users. NFT gets transferred into a double-audited escrow smart contract for the loan duration. If users repay the loan before it expires, they the NFT back. If they default, the lender can foreclose and receives the NFT.

Most of these NFTs though, tend to be digital artworks. Even in the physcial world, art has been used as collateral for borrowing. Therefore, borrowing on digital art does not seem like a distant cry anymore. In fact, NFTs actually improve the DeFi sector by resolving liquidity issues with the help of tokenization.

DeFi-Staked Crypto Collectibles One notable project to mention is Aavegotchi, a popular growing decentralised game with a unique approach to the NFT metaverse and runs on the Aave protocol. It is part of the growing world of NFT gaming and combines various aspects of crypto and DeFi with a fresh blockchain gaming experience. Players can create unique “Gotchis'' that can be exchanged, used to earn interest or used as collateral for a user’s Gotchi collection. They can upgrade their avatars by playing minigames – adding rare items and taking care of them. The more time a player spends on upgrading Gotchis, the more valuable their NFT becomes.

Similar to CryptoKitties, GHST tokens have different qualities such as body colour and personality. Since it’s a staked asset, the asset owner can liquidate tokens at any point, which means liquidating the NFT and losing your Gotchi. In fact, their value is not solely dependent on the “gaming” prospects alone. In order to interact with a Gotchi, users stake so-called aTokens such as LINK and USDC into Gotchi. This allows for interest to accrue natively in your wallet, in real time. Besides earning yield on staking, GHST holders can “win high-end items”, which are also tradeable on OpenSea and other marketplaces that support NFT trading activity.

By combining NFTs and the rising usefulness of DeFi with blockchain gaming, Aavegochi is attempting to bring niche crypto sectors together under one roof.

Looking Forward

As we can see, these business models are already innovative and diverse. But, the possibilities for combining DeFi and NFTs are far from exhausted. A particularly interesting future endeavour would be the use of DeFi and NFTs in in-game worlds like Decentraland or Axie Infinity, or even for the administration of real assets such as land and houses. Although we are still (relatively) early to see widespread use of NFT-DeFi applications, we can expect to see such innovative models coming into the world!