Decentralized Finance (DeFi), which aims to disrupt the traditional financial system, has made a slow but promising start. All that is about to change, as DeFi loans will now be able to be secured against non-fungible tokens using nft collateral loans. NFT collectors now have the ability to use their digital collectibles. The emerging NFT-DeFi link could have a significant impact on the DeFi market over the long term. Collectors don’t have to sell their NFTs. They can instead unlock their value by taking out collateralized loans against their NFTs. Let’s take a look at the amazing potential of this NFT/DeFi partnership. Many people wouldn’t be able to understand how 400 ETH, or $1.3million, could be made from an image of a cartoon-rock they purchased at 1.7ETH or $5340 19 day earlier. While celebrities and digital artists have sparked the crypto sphere, it has also changed lives. However, many people still don’t fully understand NFT. Fungible assets can be possessions, such as fiat currency, that can be exchanged for similar items. For example, if you loan someone $100, they can return it as a new $100 bill, or any combination of different denominations. The value of the money will remain the same. Non-fungible assets, like cars and real estate, are not interchangeable. Non-fungible assets in the crypto world are being tokenized into NFTs. These tokens can then be used to create blockchain-based certificates or deeds that represent unique collectibles, artwork or real estate. Entrepreneurs and DeFi lenders are seeing a paradigm shift in which people turn valuables into NFTs that they can use to convert expensive acquisitions into a source for liquidity. NFT lending is becoming a reality by tokenizing valuables such as music and real estate.
The Future of NFTs in DeFi
Conventional banks and financial institutions might have missed the boat by trying to incorporate the dynamic blockchain technology in traditional economic systems. This is evident by the steady growth in DeFi and NFTs to a $80 billion and $10.7 million market, respectively. The industry of collateralized NFT loans could grow and be the launchpad for many other potential uses. While the current use cases focus on digital art and gaming, future uses could include loans agreements with banks, investments, bonds, insurance policies and debt management. It is not clear how long it will take NFTs to move beyond being sold at NFT auctions or funding DeFi protocols. NFTs will have a greater impact on the fintech industry by tokenizing more assets, connecting DeFi markets with real-world financial markets, and creating more value.
The Emergence of Collateralized loans against NFTs
Peer-to peer lending platforms accept NFTs for collateral for DeFi loans. Collectors have already drawn substantial collateralized loans against NFTs. NFT loans are similar to traditional DeFi loans and have a high level of collateralization to protect the lender from volatile market swings. Consider the recent example of a trader who borrowed $12,000 worth 3.5ETH and offered a NFT for 11ETH as collateral on NFTfi. The loan term had expired three months later and the borrower was unable to repay the loan. They also forfeited the collateralized NFT worth $340,000. NFTfi is just one of many companies that offer NFT loan products. Stater.co, Pawn.fi are two examples of pioneers. Rarible is also working on projects, according to Alex Salnikov, co-founder of Rarible. C.R.E.A.M., Taker Protocol Finance and Money Market Aave also work on NFT loan products.
What Collateralized NFTs Will Do to DeFi
After the eye-watering sums collectors paid for Beeple’s First 5000 days artwork, NFTs became a fadword. Russia’s Hermitage Museum suggested that valuable art could be tokenized into NFTs. The potential buyers of classic art pieces that are lying in galleries and museums could soon make them more useful. NFT loan products offer NFT owners a great way to unlock their inherent value. It is not common to offer collateralized loans against NFTs. NFTs’ ability to unlock their value for their owners has already created ripples of wealth through NFT lending. NFTs are a fungible store that can hold value that is far greater than classical art. NFTs’ liquidity will allow for new opportunities, which could be the key to DeFi’s future. Owners can access the DeFi marketplace and earn a handsome yield by using their NFTs to invest in digital assets, further lending, staking or simply simply putting them to work.