The Crypto Evolution Continues as DeFi and NFTS Meet and Merge

The cryptocurrency industry has had numerous trends over the last 12 and a half years of its existence, but out of all of them, only a handful was powerful enough to stick around. Among them are the two most popular and dominant trends of the last two years — the decentralized finance (DeFi) sector, and non-fungible tokens (NFTs).

But, while each of these has been extremely successful on their own, their combination is something even more groundbreaking. So, let’s talk about it.

What is DeFi?

Before we move on to DeFi & NFT combo, let’s first talk about what each of these trends are about, starting with DeFi.

As mentioned, DeFi stands for decentralized finance. It is an area of the cryptocurrency industry that consists of specific projects that aim to offer traditional financial services in a decentralized, crypto way. This includes financial activities like staking, lending/borrowing, liquidity mining, and more. It also includes things like stablecoins, decentralized exchanges (DEXes), and alike.

Basically, the goal of DeFi is to do what the initial crypto industry set out to do with the launch of Bitcoin — allow people to take control over their funds. However, DeFi offers more than Bitcoin alone ever could.

Bitcoin is not a development platform — it is simply a cryptocurrency, meant to be used for decentralized online payments. Ethereum is actually a much better provider of actual financial services thanks to the products that its blockchain can support. Ethereum is where DeFi projects were born, and where they are still at their strongest.

Of course, this might change in time, due to Ethereum’s technical limitations, but it also might not, if Ethereum 2.0 truly brings the promised changes. In any case, DeFi’s goal is to offer financial services like the ones that the banks offer, only to make them decentralized, cheaper, and more accessible.

The best way to understand the difference is on the example of lending. If you wish to get a loan from the bank, you need to go through a ton of paperwork, satisfy certain criteria that the banks have, have the perfect credit score, a reliable source of income, and more. You also often need to pay third parties that might get involved, pay massive interest, provide collateral, etc.

All of these requirements make it impossible for most people to get loans of the needed size, or even any loans at all. If your credit score is not perfect, or your source of income is unreliable or too small, or if there is any other requirement that you can’t meet 100% — the deal is likely not going to happen.

Enter DeFi, which allows users to invest funds into lending pools, from which borrowers get to take the money and use it for their own needs. This is beneficial for everyone for a variety of reasons. Lenders who invested the money will eventually get it back, once the loans are paid, and they get to earn a passive income in the form of interest. Meanwhile, borrowers only need to provide collateral (there are also undercollateralized and uncollateralized loans), and they can get the money they need pretty much immediately.

The lenders get to decide the interest rate, and borrowers can choose from different offers to get the one that fits their needs the most. This is a good way to get the money for achieving a certain goal without spending your entire savings. Instead, you can use those savings as collateral, spend someone else’s money, and then return it to them, step by step, from your regular source of income.

In the end, everybody wins. Meanwhile, activities like staking let you lock up your funds and receive rewards for supporting the project and giving its coins’ value by not spending them. Liquidity providers also receive rewards for investing their funds into liquidity pools, which are the most useful for decentralized exchanges. All of this is available to the global communities, with no fuss, no particular requirements other than internet connections and a few free apps, and some money for an initial investment.

What are NFTs?

On the other hand, we have NFTs — non-fungible tokens. These are tokens that are created by tokenizing assets of value. Each of them is unique, representing a single assets, while some may be a part of a set that, in its entirety, represents one more expensive asset, such as a house, expensive piece of art, and alike.

NFTs have a lot of uses, from allowing users to share ownership of an expensive asset in an easier way (not unlike sharing ownership of a company by owning its stocks), to becoming an owner of collectibles and easily proving ownership of them, displaying collectibles in a digital form, and much more.

While DeFi became the dominant trend of 2020, and is still going just as strong in 2021, this is still considered to be the year of NFTs, as they exploded this year to a point where they drew in countless artists, athletes, celebrities, companies, and many others.

DeFi meets NFTs

So, now that we know what DeFi and NFTs are, what happens when the two meet?

Well, the first thing to note is that DeFi, like the rest of the crypto industry, is maturing with age and involvement from the users. As such, it has come to a point where fungibility is not enough anymore, especially since users have gotten the taste of what it is like for asset ownership to become both personal and optimized to a major extent.

With that said, using NFTs is the optimal next step. Meanwhile, the world of NFTS is also rapidly changing into DeFi, as it is led by a number of protocols that are gaining financial utility through processes of fractionalization, as well as representation, since they are becoming more and more connected to DEX-based liquidity pools.

In other words, for better or worse, DeFi and NFTs are gravitating towards one another, becoming something new — a fusion of the two types of crypto assets, which is disrupting both of these sectors.

This has given birth to DeFi/NFT hybrids, which are trying to bridge the two sectors of crypto, and engage both DeFi and NFT users. Meanwhile, their potential, and the ability to combine their attributes, are attracting new and experienced crypto users alike. Nobody can assess the potential of these assets once they reach maturity, but their fusion opens up an entirely new world of possibilities in the crypto sector, providing users with exposure to traditional assets, works of art, real estate, and much more.

In the end, all of it is still highly uncertain, but the community seems very optimistic, rather than skeptical. With such a mood dominating the industry, the development and combination of trends is likely to continue, and give birth to a whole new line of assets and products that will continue to transform an entire combination of industries as we know them right now.