Decentralized finance (DeFi) and non-fungible tokens (NFTs) are the latest crazes shaping the blockchain world. The two are increasingly transforming various industries and giving rise to unique investment opportunities beyond cryptocurrencies.
What are NFTs?
Non-fungible tokens are simply blockchain innovations that act as a digital representation of real-world objects such as art and other collectibles. The invention has revolutionized buying and owning various paintings, music art, or even sculptures.
Instead of buying the physical object, NFTs allow people to own a digital object representation. By purchasing an NFT, one would simply assume ownership and copyright information of the underlying object digitized into a token.
The digital representations enable the trading of NFTs online through cryptocurrencies allowing people to accrue some value from their holdings. Every item that is sold in this case comes with a unique signature.
How NFTs work
Non-fungible tokens work by simply enhancing the uniqueness of an underlying asset, be it music, art, or even a painting. The blockchain innovation works by tokenizing the item, thus creating a digital ownership certificate. The certificate, in return, enables the owner to retain ownership rights while ensuring the underlying object cannot be duplicated, let alone be used online without an owner’s consent.
The digital ownership certificate also plays an important role in enabling the selling and buying of the underlying asset online. Given that everything takes place on the blockchain, transactions, in this case, are registered on a public ledger that is available to anyone but whose contents cannot be changed at any given time. The ledger makes it easy to know the ownership history of an asset.
NFTS investment opportunities
Non-fungible tokens have given rise to some of the biggest investment opportunities around various arts, paintings, music, and other collectibles. While the focus has always been on their ability to enhance ownership, they can give rise to investment opportunities shaking the blockchain world.
For instance, NFTs have enabled easy buying and selling of real-world objects, which in return have allowed owners to get some high bids for their valuable assets. The buying and selling of NFTs representing real-world objects has led to increased speculation. The result has been people selling their items at a much higher price than initially bought, all but affirming their investment thesis.
Likewise, NFT’s growing popularity has seen arts and digital assets fetch millions of dollars. For instance, Twitter CEO Jack Dorsey tokenized one of his tweets and ended up selling it for a cool $2.9 million.
While buying and selling of NFTs give rise to investment breaks, caution is of utmost importance when looking to invest in such instruments. Just because something is powered by blockchain technology does not mean it will always accrue value or is valuable.
Therefore it is important to carry out due diligence on the underlying object digitized into an NFT. The value of the art digitized into an NFT should be such that it can increase over time to allow one to generate some returns from the investment.
It is important to note that NFTs share almost all the same attributes as cryptocurrencies. Consequently, there will always be a boom period where people accrue significant value for their NFT holdings upon which a burst could come into play.
Like any other investment, whenever there is more supply amid low demand, the value of the NFTs will always tank. The value of the NFTs and investment will always grow when there is limited supply amid strong demand.
Decentralized Finance (DeFi)
The buying and selling of non-fungible tokens take place in a marketplace. While in most cases, it takes place in traditional centralized exchanges, decentralized exchanges are increasingly cropping up and offering support.
Decentralized finance is essentially an emerging financial technology offering an alternative to centralized exchanges or apps. The system differs from traditional frameworks because it eliminates intermediaries in transactions such as banks and other institutions.
Banks and other financial institutions act as custodians of people’s money. Such systems are filled with third parties tasked with enabling the movement of money, which ends up triggering high transaction costs.
On the other hand, decentralized finance eliminates all the intermediaries allowing common people, merchants, and businesses to interact directly. The same is achieved through peer-to-peer financial networks and the use of security protocols.
DeFi investment opportunities
While DeFi broadly describes financial services that operate on open-source blockchains, it has also given rise to unique investment opportunities, as is the case with non-fungible tokens.
Some of the biggest opportunities around DeFi have come from the products that have come into being. For instance, it has given rise to decentralized exchanges such as Aave, where people can lend and borrow a wide range of cryptocurrencies. The peer-to-peer lending platform enables lending via smart contracts.
By investing in decentralized exchanges, one can generate some value as such platforms make money. For every transaction processed on a DeFi platform, some fees are usually charged, which can always be distributed to investors.
In addition, most decentralized finance platforms come with underlying tokens powering the network. For instance, Aave comes with two native tokens, AAVE and aTokens. While AAVE acts as the governance token, aTokens acts as an interest-bearing token. The lenders on the platform use the tokens to collect interest on deposits.
As a direct competitor to centralized exchanges, DeFi platforms are turning out to be a hit with people who want anonymity when it comes to buying and selling cryptocurrencies. PancakeSwap is one such platform that is proving to be a hit among coin holders. On this platform, people can trade cryptocurrencies without intermediaries while being accorded the opportunity to keep custody of their tokens.
The platform, in return, makes money by charging some fees or commissions on trades which in return is distributed to investors. Other high-profile DeFi platforms include Uniswap and Sushi swap.
The evolution of blockchain technology continues to give rise to unique products and solutions that, in return, are giving rise to investment prospects. NFTs and DeFi are perfect examples of blockchain-powered solutions with tremendous potential in the digital world. However, given that the sector is still in the early stages of development, it is important to be extremely cautious when such blockchain crazes as investments.