What Are NFTs and How Can They Be Used in Decentralized Finance? DEFI Explained

So what are NFTs all about? And how can they be used in decentralized finance? You’ll find answers to these questions in this video.

So what are nfts all about and how can they be used in decentralized finance you’ll find answers to these questions in this video before we start if you’d like to support our channel we are participating in the gitcoin round 7 where thanks to quadratic funding even the smallest contribution matters the round finishes on the 2nd of october you can find a link to our

Grant in the description box below ok so let’s start with what nft’s actually are nfts stand for non-fungible tokens and they are one of the types of cryptographic tokens that can represent ownership of digitally scarce goods such as pieces of art or collectibles non-fungible is not a very popular word so let’s see what it really means in economics fungibility

Is the characteristic of goods or commodities where each individual unit is interchangeable and indistinguishable from each other like with most concepts fungibility is best explained with an example fiat money such as the us dollar is a good example of something fungible if alice has a five dollar banknote she can replace her banknote with bob’s five dollar

Banknote without this affecting alice or bob on the other hand alice’s favorite limited edition basketball card is a good example of something non-fangible each card is treated as a collectible and has individual properties a card with one player doesn’t usually have the same value as a card with another player on top of that even when considering two exactly

The same cards other factors such as the year of production or how the card is preserved can make a difference an extreme example of something non-fungible is a piece of art a painting for example is usually created as only one original copy now as we know what non-fungible actually means let’s see what the most common properties of nfts are unique each nft has

Different properties that are usually stored in the token’s metadata provably scarce there is usually a limited number of nfts with an extreme example of having only one copy the number of tokens can be verified on the blockchain hence its probability indivisible most nfts cannot be split into smaller denominations so you cannot buy or transfer a fraction of

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Your nft similarly to standard tokens nfts also guarantee the ownership of the asset are easily transferable and are fraud proof although nfts can be implemented on any blockchain that supports smart contract programming the most noticeable examples are erc721 and erc-1155 standards on ethereum before we get into the nft standards let’s quickly recap what erc20

Is as it will be useful for comparison erc20 is a well-known standard for creating tokens on the ethereum blockchain some of the examples are stable coins such as usdt or die or d5 tokens such as land wifi snx and uni erc20 allows for creating fungible tokens so all of the tokens that were just mentioned are completely indistinguishable and it doesn’t matter

If we receive usdt from our friend or from one of their exchanges the value of each token is still the same to simplify this explanation we are skipping the possibility of receiving tainted tokens that would actually make a difference between tokens making them less fungible erc721 is a common standard for creating non-fungible tokens erc721 allows for creating

Contracts that can be used to create distinguishable tokens with different properties a common example of this is the famous cryptokitties a game that allows for collecting and breeding virtual kittens erc 1155 is the next step in creating non-fungible tokens the standard allows for creating contracts that support both fungible and non-fungible tokens and it

Was created by engine a project focusing on blockchain based gaming in many games such as world of warcraft a player can hold both non-fungible items swords shields armors and fungible items such as gold or arrows this standard allows developers to define both fungible and non-fungible tokens and decide how many of these tokens should exist besides the already

Mentioned cryptokitties there are a few other fairly popular games leveraging the power of nfts such as got unchained and decentraland decentraland is an interesting example as the players are able to buy parcels of digital land that can be later resold or even used as advertising space within the game other examples include marketplaces for digital art such

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As variable super rare and even aggregators of marketplaces opencl another example of something scarce that can be represented as nfts are domain names for example ethereum naming service with dot eth extension and unstoppable domains with dot crypto extension some of the nfts can be extremely costly the most expensive cryptokitty dragon was sold for 600 eth

At the end of 2017 worth around one hundred and seventy thousand dollars scarce domain names such as exchange dot ether can be worth upwards of five hundred thousand dollars when it comes to defy nfts can unlock even more potential for decentralized finance currently in d5 the vast majority of d5 lending protocols are collateralized one of the most interesting

Ideas is to use nfts as collateral this means that now you’d be able to supply an nft representing a piece of art digital land or even a tokenized real estate as collateral and borrow money against it this sounds cool but here is the problem in our standard landing and borrowing d5 platforms such as compound or other the value of supplied collateral can be

Easily measured by integrating price oracles these aggregate prices from multiple liquid sources such as centralized and decentralized exchanges when it comes to nfts the markets for particular tokens are very often illiquid which makes the price discovery process tricky to understand this problem better imagine that someone buys a rare cryptokitty for 10 eth

This nft is later used as collateral and the borrower draws 1700 and die assuming that 1080 is worth 3 500 dollars and this particular nft has 50 percent loan to value after this if no one else is willing to buy this particular crypto kitty we can say that the market for this nft is illiquid or even non-existent the only thing we can assume is that the nfc is

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Still worth the same amount as it was last sold for this is of course not a safe assumption as the value of nfts can change quite dramatically this is also why some of the projects that offer nft collateralized loans use a slightly different model of peer-to-peer loans in this marketplace model borrowers can offer app nfts as collateral and lenders can choose

Which nft they are willing to accept before initializing a loan the nft that is used as collateral is kept in an escrow contract and if the borrower defaults on their loan by not repaying the borrowed amount plus interest on time the nft is transferred to the lender this space is really new but one of the companies that use this model is nst5 besides being used

As collateral nfts can also represent more complex financial products such as insurance bonds or options why insure from year in finance is a good example of nft usage in the insurance space in why insurer each insurance contract is represented as an nft that can be also traded on a secondary market such as variable speaking about variable we have also recently

Started seeing defined native concepts such as liquidity mining being used by the nfd projects variable for example started rewarding its users with rari governance tokens for creating buying and selling nfts on their platform with over 100 million dollars worth of nfd traded and 6 million dollars just this month the nft space is one of the fastest growing

Niches in crypto and has huge potential ranging from digital kittens to complex financial products so what do you think about the future potential of nfts do you know any other good examples where nfts can be used in defy comment down below and as always if you enjoyed this video smash the like button subscribe to my channel and don’t forget to check out our

Grant on git coin thanks for watching

Transcribed from video
What Are NFTs and How Can They Be Used in Decentralized Finance? DEFI Explained By Finematics