Our financial world seems to always have something new evolving, and lately, everyone is talking about NFTs and DeFis, both of which are gaining popularity in the financial world. But what are the two digital items, and what are the differences between DeFi and NFTs?
NFTs are digital assets you trade on a blockchain, whereas a DeFi is an actual financial institution accessible through the internet. NFTs can be traded and stored within a DeFi, and there are other relations, such as the possibility of using the NFT as collateral for other assets within the DeFi.
This article explains what NFTs and DeFi are. Then, we go over the differences between the two. Finally, we detail how Defi and NFTs are related and what future possibilities exist for how you can use the two together.
NFTs, which stands for non-fungible tokens, is a type of digital assets that represent artwork, sports items, and other digital things that people want to own.
They are secure, and only the person who owns the NFT has the rights to the asset. NFTs are sold from the original owner to a buyer. The buyer can hold onto the NFT or resell it, and it can be sold as often as the demand is there.
They are similar to cryptocurrency in that they are digital assets that you trade on a blockchain.
If someone wants to buy or sell an NFT or crypto, they need to join a market where the assets are being sold, and they can purchase one from a seller. NFTs are more difficult to buy since each one is unique, but there is plenty of each cryptocurrency being sold.
However, unlike cryptocurrency, you cannot trade NFTs on a one-to-one basis. You can trade one bitcoin for one bitcoin, and both traders would still have the same value after the trade as they did before.
But, if you trade one NFT for another, the values are different, so one trader would lose value, and the other would gain value. No two NFTs are the same, and their value fluctuates, so trading them is different from trading currency.
There is only one unique copy of an NFT, and the person who owns it has the sole right to that asset. On the other hand, cryptocurrency has many versions of the same asset. For example, multiple people can own a Bitcoin since so many of them are being bought and sold on the market.
This Youtube video from Finematics explains what NFTs are and how they work with DeFis, which we will also detail later.
DeFi is the slang term for decentralized finance and is a technology that allows people to use financial services and make transactions with their money and assets without a bank or other institution.
DeFis are online networks, and all you need to use them is the internet. You can make financial transactions, trade assets, and borrow money.
They are similar to how we use banks and other financial institutions today. We store our money in banks, our assets earn interest from savings accounts, and you can move money between accounts and institutions.
But, DeFis have a lot of differences from centralized banking, which is what makes them appealing as a new form of financial technology. One benefit of DeFis is that there are no fees or costs associated with using them. Banks are for-profit institutions that make money off your money and charge you service fees that keep them running.
DeFis, on the other hand, do not need money for buildings or employers, so they do not have to charge you fees.
Another benefit of DeFis is that they are made to handle cryptocurrencies. Many banks cannot hold and transact cryptocurrency, but DeFis can, in addition to normal currency. So, you don’t have to worry about having your money in multiple places.
However, there is one current downside to DeFis. They are new, which means the technology is constantly changing, and there are still some issues that need to be resolved. Centralized financial institutions have existed for so long that there is a low-security risk and nothing about them is unknown.
DeFis, on the other hand, are so new that they are still being developed, and there are a lot of security risks in place if anything goes wrong.
The Difference Between DeFi and NFTs
DeFi and NFTs may be used in the same context, and many people see them as similar, but they are not the same.
NFTs are the actual assets being traded or held among people.
Each NFT is unique, and it can be bought and sold as many times as the traders are willing to do so. But the asset, whether it is digital art or something else, can only be owned by one person, and the NFT proves that ownership.
Conversely, DeFi is the actual financial institution where assets are being bought, sold, and stored. Multiple people use a DeFi, and there is no limit to the number of trades or assets you can hold within a DeFi.
You can trade NFTs within a DeFi, but you cannot trade a DeFi. And the asset within an NFT remains the same and cannot be duplicated or added to, whereas DeFis can have new currencies added or removed at the users’ discretion.
How Are Defi and NFTs Related?
Just because there are differences between DeFis and NFTs does not mean that they are not related. This section explains the relationship between the two.
DeFi and NFTs both operate on a blockchain, and since they both use a Blockchain, the NFTs you buy and sell can be done within a DeFi.
Furthermore, DeFi and NFTs can be used with other assets on a blockchain. For example, cryptocurrency also operates on a blockchain. So you can trade both crypto and NFTs within the same DeFi. Using both within one blockchain is convenient since other financial institutions like banks cannot trade either asset and much less in the same system.
You can also use standard currency within a DeFi, so everything is conveniently in one place.
Now, that is just the beginning. The most important thing about NFTs and DeFis is that NFTs can be used within a DeFi as collateral. So if you need to borrow money, you can borrow against an NFT instead of common collateral like your home or car.
But, using NFTs as collateral within Defis is not official yet. It is just an idea that many experts and creators seem to like. If this does become common, Defis will become a lot more useful, and more people will have a reason to use them.
And, NFTs would be more valuable since they have another purpose.
NFTs are digital assets that you can trade within a DeFi, which is an internet version of a financial institution.
In the future, NFTs may be able to be used as collateral within a DeFi, which would raise the appeal of both of them and ideally bring more people over to using them in conjunction with one another.
But, DeFis are not traded like NFTs, and the contents of an NFT do not change.