DeFi
Mar 31, 2021

Beyond Art - What an NFT can achieve in DeFi

NFTs Uniswap Trustology

The NFT space has become all about Art and collectibles. Every headline is about some incredibly overpriced GIF or Photoshop collage and the excitement surrounding non-fungible tokens has become full blown mania. Established and new artists, musicians and animators are flooding the forums and telegram groups shilling their work and there appear to be enough collectors willing to bet on the hype. Everyone wants in but when the hype dies down what will be left? 

Whilst most people associate the NFT with Ethereum's ERC-721 token standard, the very first NFTs were launched on top of Bitcoin using Counterparty, a layer-2 solution for Bitcoin, back in 2015. Games like Spells of Genesis were minting NFT trading cards before it was 'cool'. Why NFTart became such a huge phenomenon is up for debate, but a combination of people being locked up at home and some high profile NFTart sales clearly fed the frenzy.

Recently Gary Vaynerchuk, the CEO of VaynerMedia described the state of NFTs as being "in a very similar place to where we were with internet stocks in 2000," He wasn't saying that NFTs are a bubble but that we are seeing the rapid transformation to industries because of the technology and that once the hype settles down the true value of NFTart and collectibles will become clear and that the most useful and productive use cases for the technology will prevail.

The truth is an NFT can represent so much more than a piece of art and we are already seeing the token standard being used for music rights, access to websites or as a tokenisation of real world assets. In this post we wanted to look at where the worlds of DeFi and NFT collide.

NFTs

The case for collateralisation

The issue with dealing in art is how illiquid a market it really is, everything is subjective. We can say a painting is worth $1million, but unless someone is willing to buy, it may as well be worthless. One of the first places we will see DeFi and NFTs come together will be in solving this issue. Some startups like Nfti are looking at ways to use NFTart and collectibles as collateral against DeFi lending. Traditional Art is already used as collateral in the physical world already so the move to crypto and NFTart seems like a logical step forward.

The other way that DeFi can solve liquidity is through the tokenisation of those NFTs. An example would be if the owner of Beeple's $69million 'First 5000 days' piece was to tokenize the work, splitting it into 69 million tokens at $1 each. That would quickly make an illiquid asset such as a piece of art easily tradeable.

NFT Ownership and DeFi

Stepping away from art and looking at other areas where this technology can be applied, we have seen developers such as Bluebox selling copyright ownership as NFTs for music by rappers Big Zuu and Taylor Bennet, brother to Chance the Rapper. Integration with another platform called Opulous means that those who own the NFTs will receive a share of the streaming revenue generated by the songs. Having a provable income through an NFT also acts as a powerful form of collateral and could open the doors to under-collateralized loans in the #DeFi space, something currently not possible. 

The opportunity to monetize creative works through NFTs will continue to be a large part of the NFT space but will more likely take the form of copyright ownership, royalty sharing and licensing.

NFTs don't have to be creative though to be useful. We've seen Insurance policies being sold as NFTs. Giving buyers the flexibility to sell on their policies in a secondary market. If you bought a good policy that covers your locked Dai on a DEX, for example, when you pull your Dai out you could sell that policy on to someone else and maybe even make a profit from that too. 

An NFT can represent ownership of any digital asset, Unstoppable Domains is a company that sells blockchain domains, websites that can be hosted on the Ethereum network. When you buy a .crypto, or .zil domain name you receive it as an NFT. It's yours forever. No renewal fees. You can then sell your address in the future.

We can find another prominent example of how NFT ownership and DeFi can work together in Uniswap's V3 Update. One issue Uniswap had with liquidity pools was that the curve model meant liquidity had to be distributed along the entire curve, meaning that large swathes of liquidity weren't generating fees for providers.

To resolve this they introduced the ability to choose custom price ranges for liquidity providers to concentrate their capital, increasing their exposure to preferred assets and reducing their downside risk.

Offering this kind of flexibility created an additional problem, however, prior to V3 if you provided liquidity you received LP tokens, a standard interchangeable token. Once you were finished, you could trade your LP tokens back for the underlying assets. Now with custom ranges, each provider has a individualized price curve. Because each liquidity provider has a custom price range, the only way for Uniswap to track them is via Non-Fungible Tokens.

The NFTart bubble could burst, but it will mean that these more quite less flashy use cases for the technology will come to the surface. Like the dotcom bubble of 2000, the stronger projects will emerge as the true winners.

Why Trustology for NFTs and DeFi support?

Trustology has been supporting NFTs for its institutional and individual users since its custom integration with MetaMask back in 2019 and now WalletConnect in 2020. Furthermore, we enable institutions to customise smart contract transaction policies with multisig, whitelists, threshold signing, DeFi and compliance firewalls to meet regulatory requirements. Multisig rules let teams securely share wallets as well, with unique addresses helping to segregate funds per customer, payment etc. in real-time. We help institutions understand and see the risks in DeFi first through our auditable, AML compliant and insured platform that safeguards cryptoassets and handles any financial transaction for over 200 clients across funds, brokers, exchanges and high networth individuals. 

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