Those familiar with how play-to-earn blockchain games work already have some insights into how non-fungible tokens can help unlock different forms of decentralized financial services, or DeFi. NFT staking, guild gaming and winning game tokens as rewards are just some of the ways in which gaming helps create utility for NFTs in DeFi.
However, there are other ways in which NFTs could be deployed in decentralized finance. In this piece, we discuss three lesser-known use cases of NFTs in decentralized finance.
NFTs as loan collateral
Using NFTs as collateral on a loan is generally seen as a risky affair, as loans are taken out in the hope that the underlying NFT will not lose its value during the loan period. Still, there are a growing number of platforms that allow users to obtain loans using non-fungible tokens.
Using an NFT as loan collateral requires a user to deposit their NFT into the smart contract of a platform while requesting a loan from a lender. The NFT is returned only when the debtor returns the amount borrowed. In the event of a default, the borrower receives the NFT as compensation.
Most people think of NFTs as indivisible — you can only transfer an NFT from one owner to another, right? Fractional NFTs are an exception to the rule. By breaking an NFT into component parts, it can be held by many users at the same time.
While it sounds quirky, think about it. If an NFT costs tens or hundreds of thousands of dollars, why not go in with a bunch of your friends or even strangers to buy one together if you all share the same passion or interest?
Fractional NFTs help create liquidity for NFTs whose prices are considered too high for a single individual to afford. In this case, such art is built with a smart contract that enables it to be split into multiple ERC20 tokens where each piece represents a fraction of the entire value of the NFT. This creates liquidity for assets that would otherwise have been hard to trade.
One such platform that supports fractional minting of NFT is Fractional, where NFT owners can mint their NFTs and receive ERC20 tokens in exchange. Owners can then use the ERC20 tokens across different decentralized applications while still holding their NFT in Fractional’s vault.
Be warned, though: The SEC considers any NFT that is fractionalized to be a security, and thus a whole slew of security regulations kick in for you and your co-owners.
Nested NFTs are NFTs that have the capacity to hold other NFTs as well as other fungible tokens. You can picture this type of NFT as a bag that contains different things. The ability to simultaneously hold ERC20 and ERC721 tokens has created new use cases for nested NFTs on the blockchain.
Nested NFTs are finding increased use cases on music NFT platforms that allow artists to share royalties with their communities. The mechanism is that an artist releases her song or album in the form of an NFT, which the community can purchase. Royalties are then shared based on the performance of the song and the value of the token that a community member holds.
The evolution of NFTs is not yet complete. We fully expect that more innovative use cases will emerge as NFT adoption continues to grow across industries and sectors globally.