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2020 brought us DeFi, and DeFi is elevating the status of NFTs. Non-fungible tokens (NFTs) are assets that cannot be divided or they lose their value. For example, a piece of artwork could be represented as an NFT (if you shredded a Monet painting, it would be worthless). CryptoKitties, digital art, domain names and anything that connotes rights of ownership can be an NFT. As you might imagine, these types of assets, like art and other collectibles, have very specific markets, often making them difficult to buy and sell. DeFi changed all of that, bringing much needed liquidity to NFTs.
How DeFi gave NFTs the liquidity these markets needed
DeFi has been booming because of its ability to democratize access to financial services, like lending, borrowing, savings and insurance, but also because of the extraordinary amount of value being poured into these ecosystems. In short, there is a fundamental shift going on in finance, and bigger financial players are taking notice and getting involved.
Just six months ago, there was less than $1 billion locked into DeFi protocols. That number has now climbed to about $14 billion. Mirroring DeFi’s explosion, NFT sales have also skyrocketed with $1 million in sales in the first week of September, doubling a month later to $2 million. DeFi made NFTs more accessible and affordable via fractionalized ownership, which has increased liquidity and market size.
Most interesting NFTs on the market today
Between digital art, game pieces, collectibles and rights to operate within DeFi ecosystems, there are many forms NFTs can take.
In December, the digital artist Beeple broke records when he sold $3.5 million in NFTs linked to his hybrid digital-to-physical collection. Digital art seems to be a growing trend bound to continue gaining steam in 2021, with total crypto art now valued at more than $30.5 million.
Decentraland’s Museum District is a rather intriguing digital space for collectors to display and share their digital art a welcome alternative to admiring the artwork once in a blue moon on a personal device.
Wildcards gamifies wildlife conservation by enabling ownership of NFTs representing guardianship of endangered species. The owner of a card is required to pay a small tax to maintain it, which goes towards conservation groups. In a unique twist, cards are always for sale, so another user could swipe guardianship at any time, which adds to the amount being donated.
In the blockchain-powered video game, The Six Dragons, players collect NFT “ingredients” to craft into weapons. The created weapon’s stats, rarity and probability of destruction are determined from an amalgamation of player experience and input randomness. This incorporation of randomness adds another layer of excitement and surprise to the game. Smart contracts can be deployed to determine distribution, appearance and various attributes of an NFT.
Given explosive growth, what does the future hold for NFTs
Beeple’s digital art, Decentraland’s Museum District, Wildcards, and the Six Dragons provide foundational ideas upon which new NFT applications can be envisioned. NFTs can give rise to fractional ownership opportunities, for example. Imagine owning a piece of an exotic car, a Georgia O’Keeffe painting or an ancient artifact. NIFTEX launched fractional ownership of its rare Axie Infinity card, Almace, which saw over 1,000 ETH transacted in its first week after release.
NFTs could help to support content creators in sustaining their livelihoods. As Priyanka Desai, VP of operations at OpenLaw, expressed,
“When you start talking about how content creators are paid, that’s where DeFi comes in; and when you start talking about property of creators, that’s all NFTs.”
Music, visual art, films and other unique creations all have the potential to be represented as NFTs.
The NFT-DeFi bond is strong
At least for the time being, NFT growth appears to be tied to the success of DeFi. There are many DeFi protocols that could deploy NFTs to grant a type of “franchise rights,” for lack of a better word, to acquire certain benefits within an ecosystem.
In another demonstration of the bond between NFTs and DeFi, when Yearn.Finance “created Y.Insure, a way to do KYC-free insurance on any crypto asset, it used NFTs to represent the policy with insurers.” NFTs can also now be used as collateral to acquire loans, expanding the usage possibilities for these unique assets.
Given the potential gamification enabled by NFTs and other “fun” elements not currently manifested elsewhere in crypto, it’s been predicted that NFTs will be the on-ramp into crypto for as many as four in 10 new users. If 2020 was the year of DeFi, 2021 could be the year of NFTs.