NFTFi: how non-fungible tokens can provide liquidity to their owners
NFTFi (Non-Fungible Token Finance) is a new type of financial application that uses non-fungible tokens (NFTs) as collateral for loans, lines of credit, and other forms of financing..
Instead of using traditional assets as collateral, such as property or shares, users can use their NFTs as collateral to obtain loans in cryptocurrency or fiat currency. This allows NFT owners to gain liquidity while maintaining ownership of their digital assets.
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NFTFi can also enable the creation of new types of financial assets, such as “tokenized”, which represent a fraction of the ownership of an assetwhich allows investors to access a part of the benefits of an asset without having to acquire it completely.
Although NFTFi is still a relatively new concept, it is being targeted by investors and developers in the cryptocurrency community as a way to broaden the use and adoption of NFTs in the financial world.
Benefits of this type of finance
In this new category of utility for NFTs, one can highlight the fact of providing liquidity to the owners of these assets, who often have difficulties obtaining liquidity from their digital assets, since they cannot sell them easily and quickly. NFTFi could provide a solution to this problem by allowing owners to use their NFTs as collateral to obtain loans in crypto or fiat currency..
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One use case is staking, which boils down to the fact that NFT owners can use their assets as collateral to participate in NFT staking systems, allowing them to earn rewards for holding their NFTs. Last but not least, the use that can be given to NFTs within the ecosystem is for project financing. NFT creators can use their assets as collateral to obtain funding for projects related to art, games, and other digital products.
Differences between NFTFi and DeFi
Perhaps the language between NFTFi and DeFi can confuse the understanding of how each subsystem works a bit, to avoid this, we will name some of the differences found in both cases that markedly differentiate them.
To start, the first difference that we can find falls on the underlying assets. In the case of NFTFi, the underlying asset is focused on NFTs (non-fungible tokens), while in DeFi, it is focused on crypto assets (such as BTC, ETH, and other tokens).
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Another difference is related to the types of financial products. NFTFi focuses on loans and other financial products that use NFTs as collateral, while DeFi focuses on a wide range of decentralized financial products., such as loans, trading, staking and liquidity. In addition, NFTFi can present technical challenges unique compared to DeFi, such as the need to build NFT-specific smart contracts and develop solutions for NFT value assessment; An additional difference that can be mentioned is that DeFi markets are more liquid due to the wide variety of crypto assets that are used as collateral, while NFTFi markets have more limited liquidity due to the unique nature of NFTs.
In this sense, it is necessary to give some examples of platforms and protocols that have used this new type of finance for NFTs, such as NFTFi, which is a cryptocurrency lending platform that uses NFTs as collateral. The platform focuses on the most popular NFTs, such as CryptoPunks and Bored Ape Yacht Club. Additionally, it is Aavegotchi, which is an online game based on NFT, which uses NFTs as collateral for loans. Users can use their Aavegotchis as collateral to obtain stablecoin loans.
Another example platform for the use of this type of finance derived from NFTs is Niftyx, which is an NFT-based loan and credit line platform which allows NFT owners to use their assets as collateral to obtain cryptocurrency loans. Liquidifty is another cryptocurrency lending platform that uses NFTs as collateral.. Users can use their NFTs to obtain cryptocurrency loans or to participate in NFT staking systems.
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At first glance, this new option may seem attractive to NFT owners, especially those who have seen the value of their digital assets increase. However, it is It is important to note that this type of loan also carries certain risks.
First of all, the value of NFTs is highly volatile and can change rapidly. If the value of the digital assets used as collateral suddenly decreases, the borrower may be forced to provide more collateral or even lose their assets.
Besides, the lack of regulation in this market can create additional risks for borrowers. Although the blockchain technology used by NFTFi provides some security, there are still risks associated with theft and loss of NFTs used as collateral.
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Ultimately, the decision to use NFTFi to obtain a cash loan using digital assets as collateral will depend on each person’s individual financial situation and level of risk aversion. However, It is relevant to remember that any type of investment or loan carries certain risks and it is important to do thorough research and fully understand the terms and conditions before making a decision..
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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