Non-Fungible Tokens (NFTs), DeFi tokens, and cryptocurrencies are diversifying investors’ outlook because of the high volatility of the blockchain markets.
From Satoshi Nakamoto’s groundbreaking invention in 2008, when he published the Bitcoin whitepaper, to Ethereum’s second-generation leap in 2014, the remarkable rise of blockchain markets is riding the wave of the future digital markets.
Decentralized Financial Assets (DeFis) and Non-Fungible Tokens (NFTs) have a market value of $192 billion and $13 million, respectively, as of November 10, 2021, which has piqued the interest of investors, legislators, regulatory authorities, and portfolio managers.
NFTs are predicted to see a huge increase in value in 2021. It is thanks to NFTs that Mark Zuckerberg’s Meta has grown its social media presence.
Because of the rise in NFT, investors aren’t sure if this is a bull market or a bubble they’re seeing. Their concerns about bullish, bearish, and normal market conditions emphasize the importance of looking at all interconnected markets in this line of reasoning.
The Roles Of DeFi And NFT In The Finance World
Decentralized Finance (DeFi)
Decentralized finance (DeFi) is a modern financial system that uses distributed ledgers like those used in cryptocurrencies. Banks and other institutions no longer have control over money, financial goods, and financial services.
Centralization did not exist in the early forms of money. Agents accepted a variety of items in exchange for their products, such as stones or shells.
Specie money eventually evolved into a form of money that could be measured. Non-collateralized (fiat) money is now controlled by central banks. Even though the nature of money has changed, the fundamental architecture of financial institutions has remained the same.
Despite this, the groundwork is already being laid for a major financial infrastructure breakdown. Financial building blocks can be developed and integrated into complex solutions with minimal friction and maximum value for customers using blockchain technology, known as decentralized finance (DeFi).
According to a survey in 2021, DeFi had assets worth about $100 billion. The bedrock of DeFi was the Ethereum blockchain of smart contracts in 2017. However, about two-third of the crypto market is considered to be made up of DeFi.
We believe that DeFi will eventually replace any significant centralized financial infrastructure because providing services to consumers with $100 or $100 million in assets costs the same.
DeFi’s inventions can be used and profited from by anyone willing to pay a flat fee. Tokenization, trading, saving, lending, and other financial “primitives” are all part of DeFi’s competitive marketplace.
DeFi goods are combined and recombined in these applications to gain market share in the traditional financial ecosystem.
Roles Of DeFi In Finance
1. DeFi could give billions of people around the world more financial power by getting rid of the need for third parties in financial transactions.
2. People who want to get the most out of their money can use DeFi lending pools to either lend or borrow money.
3. DeFi threatens the centralized financial system by taking power away from middlemen and gatekeepers and giving it to regular people through peer-to-peer trades.
4. The DeFi system is self-regulatory, so you can keep track of and control your own money with it.
5. DeFi allows people to lend their savings directly to other people, so there are no profit/loss ratios and they can get back 100% of what they put in.
Non Fungible Tokens (NFTs)
NFTs are blockchain-based assets that can be traded on NFT marketplaces like OpenSea, in a way similar to how cryptocurrencies are exchanged.
It is important to note, however, that NFTs are non-transferable, unique, and cannot be exchanged for the same value as other blockchain-based assets such as cryptocurrency.
Fiat currencies rely on interchangeability features, just as it applies to cryptocurrencies like Bitcoin and Ethereum. To begin an NFT, a digital asset’s owner must prove ownership on a blockchain, most commonly the Ethereum network.
An item purchased with Bitcoin can then be sold, resulting in the transfer of ownership as well as any Bitcoin payments that were recorded on a blockchain.
NFTs have primarily been used in the art, gaming, collectibles, metaverse, utility, and, more recently, decentralized finance industries to monetize digital items (DeFi).
The first and best known of NFTs is CryptoKitties, a collection that allows players to buy, collect and trade images of virtual cats on Ethereum. CryptoKitties is one of the earliest examples of NFTs.
The Ethereum network was shut down by CryptoKitties in December 2017. Until recently, CryptoKitties was the only popular example of NFTs, which was widely considered a great example of the irrationality that propelled the cryptocurrency market in 2017.
Roles Of NFTs In Finance
1. The US Securities and Exchange Commission (SEC) is keeping a close eye on how NFTs are used as collateral for loans or other instruments that are backed by decentralized financing.
2. NFTs can be “tokenized” to make them easier to buy, sell, and trade and to reduce the risk of financial fraud.
3. Since fungibility means that the assets have the same value, NFTs make it easier to exchange and trade them.
4. NFTs can be used as a medium of exchange or as a digital certificate of authenticity that can’t be copied. The ownership record is always available, can’t be changed, and makes sure that there is only one owner at any given time.
Major Differences Between DeFi And NFT
1. DeFi is a financial system on the internet While NFT is a unique digital asset.
2. DeFi is a platform on which several processes and transactions can be performed While NFT can store specific unique values.
3. DeFi has its protocols called decentralized apps (dApps) While NFT neither has an application nor protocol.
4. DeFi makes services on a decentralized platform accessible While NFT helps in assets tokenization.
DeFi and NFT can’t be left out of discussions about money because they are already changing the financial world.
In this article, we’ve talked about some of the ways DeFi and NFT are used in finance. There is no clear answer to the question of whether DeFi or NFT is the future of finance.
Both NFTs and DeFis are important to the modern portfolio theory because they give investors ways to spread their investments around. But the problem of regulation and the risks of investing in NFTs and DeFis have not been solved.