DeFi and NFT have practically disrupted financial services in ways not seen since the Middle Ages and will certainly have unequivocal impacts on the future of finance.
Is DeFi or NFT the future of finance? We unequivocally write that both of them are the future of finance. Read this article to the end to find out why.
Investors and market participants are focusing their attention on the diversification avenues of NFTs, DeFi Tokens, and Cryptocurrencies due to the high volatility of the blockchain markets.
The remarkable ascent of blockchain markets is riding the wave of the future digital markets, from the groundbreaking invention in 2008 with the publishing of the Bitcoin whitepaper by Satoshi Nakamoto to the second generation jump of Ethereum in 2014.
Investors, legislators, regulatory authorities, and portfolio managers are increasingly interested in Decentralized Financial Assets (DeFis) and Non-Fungible Tokens (NFTs), which have a market valuation of $192 billion and $13 million, respectively, as of November 10, 2021.
In 2021, NFTs, in particular, experienced a tremendous bull run. NFTs have helped Mark Zuckerberg’s Meta expand its digital reach across social media.
NFT was modelled as a remarkable public success of blockchain technology in 2021 by Michael Dowling, a Professor of Finance at Dublin City University, with its unique right-transferring mechanism through digital assets.
The rise in NFT has created a quandary for investors, who are unsure if they are witnessing a bull market in a new asset or a bubble. In this line, addressing investor and portfolio manager concerns about bullish, bearish, and normal market circumstances emphasizes the importance of looking at all interconnected markets.
The roles of DeFi and NFT in Finance
DeFi (Decentralized Finance)
Decentralized finance (DeFi) is a contemporary financial system based on distributed ledgers that are similar to those used in cryptocurrencies. The system decentralizes authority over money, financial goods, and financial services from banks and institutions.
We’ve completed the circle. Peer to peer, commonly known as barter, was the oldest form of commercial transaction. Because supply and demand had to be perfectly matched between peers, barter was inefficient. Money was established as a medium of trade to solve the matching problem.
as well as value storage The first forms of money were decentralized. In return for products, agents accepted a variety of objects such as stones or shells.
Eventually, specie money evolved into a sort of cash with a measurable value. Today, central banks hold power over non-collateralized (fiat) money. The essential architecture of financial institutions has not changed over time, despite the fact that the form of money has changed.
However, the framework is being laid for a major financial infrastructure disruption. Decentralized finance, or DeFi, aims to employ blockchain technology to develop and integrate open-source financial building blocks into complex solutions with little friction and maximum value for customers.
Given that providing services to a consumer with $100 or $100 million in assets costs the same, we believe DeFi will eventually replace any substantial centralized financial infrastructure.
This is an inclusive technology in which anybody may pay a flat cost to utilize and profit from DeFi’s inventions. DeFi is a competitive marketplace of decentralized financial apps that serve as financial “primitives” such as trade, save, lend, and tokenize.
These applications profit from the network effects of combining and recombining DeFi goods, garnering a growing part of the traditional financial ecosystem’s market share.
Roles of DeFi in Finance
The roles of DeFi in finance are stated below
- By disempowering intermediaries and gatekeepers and empowering common people through peer-to-peer trades, DeFi threatens the centralized financial system.
- DeFi has the potential to fiscally empower billions of individuals all over the world by eliminating the need for third parties in financial transactions.
- DeFi system is self-regulatory thus allowing you to keep track of and regulate your own funds.
- DeFi’s 24X7 accessibility allows transactions and trading to be done from anywhere at any time.
- DeFi lending pools are open to individuals who want to either lend or borrow money to maximise the efficiency of their capital.
- DeFi allows people to lend their savings directly to others, eliminating profit/loss ratios and allowing them to earn 100% returns on their money.
NFT (Non-Fungible Tokens)
NFTs are based on blockchain technology and can be traded on exchanges like OpenSea, just like cryptocurrencies.
However, the key difference between NFTs and cryptocurrencies or other assets based on blockchain technology is that NFTs are non-interchangeable, unique, and cannot be replaced with another asset for the same value (NonFungible.com, 2021).
Cryptocurrencies like Bitcoin and Ethereum, as well as traditional money, on the other hand, rely on the interchangeability feature. The certification of ownership of a digital asset on a blockchain, most often the Ethereum network, is the first step in an NFT.
The digital asset that underpins the NFT may then be sold, resulting in a change in ownership as well as any Bitcoin payments recorded on the blockchain if the item was purchased with Bitcoin.
NFTs have mostly been utilized to commodify digital items in the fields of art, gaming, collectables, metaverse, utility, and, more recently, decentralized finance (DeFi).
CryptoKitties, a collection of artistic images of virtual cats used in an Ethereum game that allows players to purchase, collect, breed, and trade them on Ethereum, is the earliest and most well-known example of an NFT.
In December 2017, CryptoKitties shut down the Ethereum network. For nearly two years, CryptoKitties, generally considered a great example of the irrationality that propelled the cryptocurrency market in 2017, was the only popular example of NFTs.
Roles of NFT in Finance
Below are some of the roles of NFT in finance
- Non-Fungible Tokens make exchange and trade procedures easier since fungibility means that the assets are of comparable worth.
- The US Securities and Exchange Commission is actively overseeing the use of NFTs as collateral for decentralized financing loans or other instruments.
- NFTs can be used as a medium of exchange as a digital certificate of authenticity that cannot be replicated, and the ownership record is always available, immutable, and ensures that there is only one owner at any one time.
- NFTs can be “tokenized” to make buying, selling, and trading them more efficient while also lowering the risk of financial fraud.
The difference between DeFi and NFT
The basic difference between DeFi and NFT is that DeFi refers to the internet’s financial system, whereas NFT refers to unique digital assets.
The table below shows the differences between DeFi and NFT
| DeFi | NFT |
| Decentralized finance (DeFi) is a novel financial system based on distributed ledgers that are similar to those used in cryptocurrencies. | Non-fungible tokens (NFTs) are blockchain-based cryptographic assets having unique identifying codes and metadata that separate them from one another. |
| Decentralised finance | Non-fungible/non-reproducible tokens |
| The aim of DeFi is to eliminate all third-party involvement in financial transactions. | NFTs may be used to represent individual identities, property rights, and other things. |
| DeFi is a platform that can carry out several processes and transactions. | NFT can store specific unique value |
| DeFi has its DeFi protocols or smart contracts and applications known as DApps | NFT does not have any application or protocols |
Conclusion
DeFi and NFT cannot be kicked out of financial discussions as they are already revolutionizing the financial sector.
In this article, we’ve been able to mention some of the roles DeFi and NFT play in finance as well as the differences between them. The answer to the question of which of the two (DeFi Vs NFT) is the future of finance is an open answer as
both NFTs and DeFis play a crucial role in supporting the modern portfolio theory by providing strategies of diversification for investors. However, the issue of regulation and the risks associated with investing in NFTs and DeFis remain unaddressed.
