While NFTs are currently trending in the crypto space, many do not know that the idea dates back to 2012 when developers launched colored coins on the Bitcoin network. Since then, the idea has been refined, leading up to what we have today. Nowadays, NFTs are gradually gaining popularity because of the opportunities it provides to buy and sell digital artwork.
To get a better understanding of financial NFT, it would be really helpful to get a clearer understanding of what an NFT is.
What are NFTs?
NFTs are a type of crypto token that has the “non-fungible” prefix on its name to mean something that is unique. While fungible tokens like fiat, Bitcoin, and other digital currencies can be replaced or exchanged with another identical object, the same is not true for non-fungible tokens.
They are one-of-a-kind digital assets that cannot be replaced or exchanged by another.
NFTs are blockchain-based smart contracts, they can come in the form of digital assets and real-world objects such as online game items and videos, art, music, etc. These items can be bought and sold online with the record of transactions written into the blockchain.
The first NFTs were transacted only on the Ethereum blockchain, and this is still the case with most NFTs today. At the same time, there are now other blockchain networks where anyone can create an NFT. The popular ones include Solana, Binance Smart Chain, Tezos, Tron, Polkadot, and NEO.
There are different applications of NFTs. Some of them involve digital collectibles, gaming, fashion, sports, arts, music, GIFs, certificates and licenses etc. As noted earlier, however, the rest of this article will focus on financial NFTs.
Financial NFTs – What Are They?
Financial NFTs refer to the application of NFT in the decentralized finance (DeFi) sector. This covers financial items like insurance and bonds, unique baskets of tokens, and tokenized real-world assets.
NFTs can play important roles in DeFi. Some of those roles include:
- NFTs can be used to solve the curve model issue and increase the liquidity in DeFi. This can be done by tokenizing the tokens and thus trading assets on DeFi becomes easier and faster.
- Just as a physical artwork can be used as collateral to borrow money in the real world, NFT items and collectibles can also be used as collateral against DeFi lending in the crypto space.
For instance, a rare CryptoPunk NFT worth $1000 can be used as collateral to borrow DAI and when you don’t pay back the DAI, the CryptoPunk you deposited at first will be sent to the lender as collateral.
- With NFTs, creators can present investors and fans with the opportunity to own a part of an NFT without going through the process of buying the token. They can do this by creating “shares” for their NFT. These NFTs are known as fractional NFTs, and they can be traded on DEXs like Uniswap.
To successfully benefit the DeFi space with NFTs, there are some projects that have been created. Below are financial NFTs projects.
Drops is a new non-fungible token (NFT) project based on the blockchain platform. The project aims to increase liquidity and utility. It launched its private initial DEX offering (IDO) on Polkastarter on May 21.
The purpose of the project is to help convert NFTs to fungible ERC-20 tokens and enable users to borrow liquidity provider (LP) tokens that can be staked to earn more tokens on Uniswap and Gate.io.
Like most NFTs, Drops runs on an Ethereum-based second-layer scaling protocol known as Polygon.
NFTify is an NFT project that provides avenues for small businesses to create their own NFT store without coding. Due to the growth in the NFT space, individuals decide to utilize the opportunity to open NFT stores.
With the help of NFTify, these individuals can open a NFT store, issue NFT items, and trade them in the market. The platform also helps users to identify collectibles that are not unique, in that it “helps NFT authors issue NFT easily and detect fake/similar content for copyright protection purposes, (and) provides NFT collectors with a platform to transact at a much lower cost”.
Polkarare is a web3 NFT platform that provides NFT-collateralized loans. It also helps users to create, trade, and discover other NFT projects. The program runs on PolkaDot, Polygon, Ethereum, Binance Smart Chain and was launched in the first quarter of 2021.
PawnSpace is an NFT collateralized lending platform built on Polygon that allows users to borrow, lend, and their NFTs as collateral in a decentralized and peer-to-peer way.
Like every other investment, choosing to invest in financial NFTs is a personal decision for the investor to make. However, some NFT creators have made fortunes by selling some items. During the NFT boom earlier this year, digital artist Beeple made $69 million after selling his collage “Everydays” at Christie’s.
Over $232 million worth of NFTs have been sold according to data from Nonfungible.com. At the same time, the entire DeFi sector is worth over $100 billion across the multiple blockchains where these protocols exist.
The continued adoption of NFTs within the DeFi space is inarguably an exciting use case and has already given rise to what we now refer to as financial NFTs. The untapped potential of these new applications will likely lead the space to experience another boom in the near future, although one can’t say exactly when!