7 months ago
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Part 1 of a 2-part series | Exploring the possibilities of Web3
Collateral | Decentralised Finance 2.0
DeFi NFTs are the latest chapter in the Web3 odyssey, blending the best of both worlds. And while the road ahead might be bumpy, it’s also brimming with opportunity, the opium of the crypto community.
Please note this article is intended for informational purposes only. All views and opinions expressed are my own, and should not be considered financial advice. Always do your own research, and consult with a financial advisor before making any investment decisions.
Throughout human history, there have been questions posed that have baffled, frustrated, and inspired in equal measure. In the realms of philosophy, mathematics, and science, these types of questions have proved to be some of the most compelling.
Some sought proof of a previously held supposition.
E.g. Fermat’s Last Theorem.
Others sought an explanation of a particular phenomenon.
E.g. What causes disease?
In the world of Web3, specifically non-fungible tokens (NFTs), there was one fundamental conundrum that hadn’t been answered convincingly. One question, whose answer had eluded the industry. One problem, that if left unsolved, would herald the destruction of an evolution of crypto that held so much promise.
“How do we create an NFT, that has intrinsic value outside of what another collector is willing to pay?”
In the context of crypto, the phrase “intrinsic value” is synonymous with “monetary worth”.
There have been many attempts over the years to answer this question.
Until now, all have failed.
The creation and introduction of Liquid NFTs as an industry standard, has provided a definitive solution to the most enduring quandary in blockchain collectibles.
Decentralised Finance (DeFi) and Non-Fungible Tokens (NFTs), are two corners of the blockchain universe governed by the unifying force of the distributed ledger. DeFi breaks away from old-school banking. NFTs bring one-of-a-kind digital collectibles into the spotlight. Together, they create a brand-new frontier that’s lighting up the crypto industry. This evolution of blockchain technology is known as DeFi NFTs.
By merging NFTs with DeFi, entirely new possibilities emerge. Imagine using your NFT as collateral for a loan, or earning yield on your digital art collection. In this 2nd renaissance of DeFi, crypto collectible games like Aavegotchi, decentralised exchanges like Uniswap, and the NFTfi marketplace are among the early trailblazers. They weave gaming, liquidity, and yield mechanics into their platforms, to create an experience that’s part arcade, part investment portal.
The Liquid NFT Marketplace, now adds its name to the list of illustrious DeFi pioneers utilising this new paradigm.
Of course, it’s not all been smooth sailing. Liquidity constraints, interoperability hurdles, and regulatory grey areas lurk around every corner. But this fusion of DeFi and NFTs is too tempting to ignore. It promises to redefine what ownership and value mean in a digital world.
Remember, NFTs are digital assets recorded on a blockchain. They are verifiably scarce, undeniably unique, and provably yours. They can represent anything from digital art to tokenised real estate. Meanwhile, DeFi is all about skipping the middlemen. Letting people lend, borrow, trade, and invest in a trustless environment. Smart contracts power the show, bringing transparency, accessibility, and efficiency to anyone with an internet connection.
The TLDR
DeFi NFTs are the latest chapter in the Web3 odyssey, blending the best of both worlds. And while the road ahead might be bumpy, it’s also brimming with opportunity, the opium of the crypto community.
We will explore two of the use cases of DeFi NFTs by the Liquid NFT Marketplace.
Owning NFTs isn’t just bragging rights anymore. Their use as collateral in DeFi lending is gaining traction. Instead of property deeds or stacks of cash, today you can hand over your prized digital art, or that ultra-rare in-game sword to secure a loan. Platforms like NFTfi specialise in this exact niche, letting you pledge your NFT in exchange for cryptocurrencies. Miss a repayment, and your NFT lands in the lender’s wallet. For collectors who crave liquidity without parting with their most cherished tokens, it’s a game-changer. A glimpse of how Decentralised Finance continues to push boundaries in the world of Web3.
Liquid NFTs have taken the concept of using an NFT as collateral, and provided a more compelling fiscal framework for both the borrower and lender to operate within.
For more information on the finer details of Liquid NFTs, check out my previous article on the subject.
Because Liquid NFTs contain locked liquidity, their base value is easier to ascertain. Asset volatility is non-existent. Its value only ever increases. For the purposes of providing collateral for a loan, the locked liquidity in the form of either the $USDC stablecoin or $FUSD in the near future, serves as a metric from which the value of available collateral can be derived by the lender.
Lending entities can have complete confidence in their ability to retrieve funds on any defaulted loans.
If the borrower defaults on a loan, the lender can immediately redeem the value of that loan from the stablecoin locked as liquidity inside the NFT.
The use of smart contracts negates the need for any such entity, to engage in the creation and/or execution of debt collection infrastructure. This greatly reduces the overhead of running a lending service. While also limiting the borrower’s financial liability, and effectively making margin calls on their loans a thing of the past.
Prior to the creation of Liquid NFTs, if the value of a crypto’s collateral decreased, the borrower would be forced to pay back part of the loan, in an incredibly short period of time.
This is particularly problematic for the borrower when the underlying asset providing the collateral for a loan is extremely volatile. Cryptocurrencies or traditional NFTs have historically been extremely hazardous sources of collateral for loans.
Every Liquid NFT is injected with liquidity upon its mint. This is held in the form of the $USDC, (soon to be $FUSD) stablecoin, and begins as 50% of the mint price.
E.g. an NFT that costs $200 to mint, will have $100 in $USDC/$FUSD locked inside.
The value of any loan when a Liquid NFT is used as collateral, will always be approximately equal to the value of the locked liquidity.
E.g. $100 locked in an NFT’s liquidity = $95 available to be loaned to the borrower.
The length of the loan will be determined by the borrower, depending on the available contracts, e.g. 30-days, 60-days, 90-days, 180-days, etc.
The terms of the loan will be enforced by a smart contract.
If the borrower defaults on their loan, their NFT will be redeemed (destroyed) by the Liquid marketplace, and the locked liquidity immediately be released to the lender.
The lender will be the Liquid NFT Marketplace. Although, I would imagine that in the future this may include third parties.
The use of enforcing the terms of any loan with a smart contract, using the NFTs locked liquidity has 2 benefits:
- Allows the lender to operate with almost zero risk to any monies loaned
- Prevents the borrower from incurring additional charges for late payments; being pursued by debt recovery services; and ultimately having their ability to obtain future credit negatively impacted
- Allows the borrower to apply for loans without the need for any credit checks
It should be noted that while the facility to use a Liquid NFT as collateral to obtain a loan isn’t currently available, it is a feature that will become available in subsequent updates to the platform.
English (US) ·