Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs) are two parts of the crypto industry, which have seen an enormous rise in the last couple of months and years, not only in terms of transaction volume or Total Value Locked but also in the number of specialized applications built for DeFi or NFT services.
There has not been one single day without some exciting DeFi or NFT news for months! (Make sure to listen to our DeFi Times Daily Podcast to stay on top of everything important!)
Both niches have immense potential to revolutionize their sector and, if you dive deeper, even our general perception of finance and value creation. And the ceiling appears to be even higher, with the possibility of combining both niches into a whole.
This article will discuss the potential of Fractionalizing NFTs in the world of DeFi and how it could influence the way we think of decentralized finance today.
Restrictions of NFTs
Non-Fungible Tokens are a beautiful way of creating unique, exclusive, and scarce digital assets. Almost everything can be tokenized as an NFT; it doesn’t matter if it is a piece of art, a contract, or a specific type of certificate. The possibilities are truly endless.
But until now, there was one specific problem existing: NFTs are illiquid! Just like a precious painting in real life, NFTs are a good store of value for some people, but you can not earn yield on them! It basically means that the only possible way to make money with NFTs is to sell them, simple as that.
Does this mean that Non-Fungible Tokens have the same limitations as plenty of existing stores of value in reality? No, because this is where NFTs play their massive advantage against real-world assets: Fractionalization!
Fractionalizing an NFT essentially means taking a unique digital asset and splitting it into a bunch of pieces, usually in the form of ERC-20 tokens.
To put it in plain English: Imagine owning a skyscraper with hundreds of apartments inside and selling some of those apartments to other people. Even though these people will from now on own some apartments inside your skyscraper, you will still be the owner of the skyscraper.
On the one hand, this will allow users to hold a percentage of an NFT, which otherwise possibly could have been too expensive to afford as a whole, while on the other hand, it gives NFT owners the ability to see some liquidity from the digital asset they own without selling their ownership.
NFT utilization in DeFi
Suddenly there is an actual use case for NFTs in the world of DeFi! It enables users to trade fractions of an NFT on exchanges like Uniswap or list them on DeFi protocols like Aave to earn yield (not possible yet, but it’s coming). Imagine taking collateralized loans with the Crypto Punk you own or the fractions of an exclusive digital painting you hold. Isn’t that beautiful? The best from both worlds gets combined! And this is just the beginning of the usage of NFTs in DeFi services. More possibilities are yet to get adopted!