Liquidity is essential for the creation and growth of all dapps.
NFT growth has taken the spotlight after the long summer of DeFi. But the two categories are far more closely connected than some may be aware.
A true pioneer in the NFT movement was CryptoPunks, which was built on the ERC-20 standard. However, the current NFT standard – ERC-721 – gained popularity with CryptoKitties. CryptoKitties started the first wave of hype around the collectibles category back in late 2017.
Recently, the second wave of NFT hype has begun and it could be argued that DeFi played a major role in NFTs gaining this notoriety.
Within this overview, we will analyze how DeFi dapps are facilitating NFT growth. Yield farming, liquidity pools, NFT collateralization, and insurance options will be taken into consideration.
- Adoption of yield farming by NFT dapps like Rarible and Meme.ltd has driven all-time high daily active wallets by 1,449 in October and 818 in September respectively.
- Another major catalyst for the NFT incentive mechanism is liquidity pools.
- NFTs being used as collateral for lending fungible tokens on DeFi lending platforms might trigger a significant increase in interest in the future.
- Insurance made its mark in the NFT world back in September fueling transaction volumes by $1.4 million.
Yield farming created a precedent for NFTs
In simple worlds yield farming is a way to generate rewards by locking up a particular cryptocurrency. The sudden hype in yield farming in the middle of June 2020 was triggered by Compound which launched their own governance token $COMP to incentivize users.
This scheme immediately captured the attention of the community and resulted in a huge surge in the DeFi ecosystem itself. Of course, other dapps followed suit.
Currently, it’s being observed that the NFT community has adopted yield farming. Rarible with their $RARI token was one of the first dapps to follow the lead. Rewards are sent in the $RARI token weekly to sellers and buyers.
As shown below it can be observed that since the time $RARI was introduced activity within the daily active wallets, and token price of $RARI has experienced fluctuations. The biggest peak was back in October.
Daily active wallets peaked at 1,449 in October, and currently, have dropped to 774 in November. From a token perspective, the $RARI token value decreased to $2.34 which is a 76% drop when compared to the all-time high price of $9.75.
Another project named Meme.ltd enables users to stake their $MEME tokens up to a maximum of five per wallet to mine limited edition NFTs.
As shown below the daily active wallets of Meme.ltd experienced their highest peaks in September with 818 wallets and currently, it has dropped to 56 in November. From a token perspective, the $MEME token value has decreased to $222 which is an 84% drop when compared to the all-time high price of $1,414.
To conclude, DeFi dapps created a precedent for yield farming initiatives that were quickly adopted by other categories. Yield farming has fueled NFT growth and users with a new wave of excitement as it has proposed a way to earn while selling art and collectibles.
DeFi dapps serve as fuel to NFTs liquidity
Decentralized exchanges (DEX) play a vital role not only in the DeFi ecosystem. They are one of the essential elements of the blockchain industry too. One of the most important roles of the DEX is providing liquidity for the ecosystem. Inbound/outbound liquidity is essential for the creation and growth of all dapps.
NFT dapps are not an exception. There are multiple tokens within NFT dapps that serve for dapp growth in a different manner. A few use cases could be explained by looking at the following tokens: $RARI, $MEME, and $MEGA.
The Rarible token $RARI is used to incentivize users within the platform. Each week 75,000 $RARI tokens are airdropped to sellers and buyers. Such a mechanic is used to attract increased attention within the platform.
This is how liquidity on Uniswap for example is essential in order for the artist to swap rewards into ETH and continue creating further. It builds a kind of cycle that is essential for dapp success.
As shown below the liquidity pool $RARI/ETH development from its inception. Currently, there are 299 ETH and 84,821 RARI which means that users can easily exchange weekly airdrops without major price slippage.
What do you get when you mix YAM with CryptoKitties? The Meme Protocol. But instead of farming for yield, DeFi users stake assets to earn limited edition NFT memes from some of the top artists in Ethereum. While the case is different from $RARI, both aim to increase user interest within the platforms through incentivization.
Users can stake $MEME tokens and farm reward points. Points are earned every day based on how many $MEME you stake. When you earn enough points, you can redeem them for a collectible NFT Meme Card. Users can then choose to collect them or sell to others on Open Sea.
As per the chart below, the liquidity pool of $MEME/ETH is around $1.2 million now. Users can easily exchange the 1,100 ETH and 2,803 MEME tokens.
The core idea behind the $MEGA token is enabling value transfer between chains and creating an independent and trustless market with no control from developers. $MEGA token is a utility and a governance token. It’s also an index for all resources produced in the game.
The token has a static supply that will not change over time as no Mint or Burn functions are in the smart contract – that means no new $MEGA tokens will be created.
Users are able to play the game to earn $MEGA as well as lock resources in the vault to get $MEGA and exchange one resource for another on a single chain. In this way, yields are now possible within the virtual world and this has stimulated interest and daily active users.
It is extremely likely that we will see more and more dapps using t to reward users. In that way, DeFi dapps will continue to be an indistinguishable part of NFT dapps.
NFTs used as collateral
In some DeFi dapps, users can receive a loan by collateralizing fungible tokens like ETH. For example, MakerDAO allows you to borrow DAI while locking ETH as collateral.
Recently, a platform called NFTfi made it possible to borrow cryptocurrencies while locking non-fungible tokens as collateral. For example, an NFT such as art, a parcel of land from Axie Infinity, or a CryptoPunks collectible can now be used as collateral to borrow money.
Before such possibilities, NFTs were an illiquid type of financial asset with limited functionality. As such NFT growth was seemingly capped. However, the introduction of NFTfi has changed that in a drastic way. Crypto users can borrow fungible tokens by collateralizing their NFTs rather than selling it. Once the loan is repaid with interest as the conditions implied users can retrieve their NFTs from the escrow contract.
To conclude, the opportunity to borrow using NFTs as collateral serves in creating additional liquidity to NTFs that might serve as fuel for sustained category growth in the future. Furthermore, at this point in time, we are seeing relatively small assets collateralized such as art or collectibles. How will the relationship deepen as NFTs come to represent bigger assets such as a house or car.
NFTs meet DeFi and insurance
Beyond use as collateral, NFT’s have started to incorporate other financial products such as insurance and bonds. Yearn.finance announced a new product on the 17th of August called the yInsure, also referred to as Cover.
The product allows crypto users to take insurance on DeFi dapp smart contracts. For example, crypto users can purchase insurance for a Uniswap V2 smart contract for 152 days. It costs 1.0820 ETH that should be paid in order to proceed with the insurance.
In the event of insured smart contract risk, the wallet will be entitled to receive a fixed amount of 100 ETH as stated in the example below. Interestingly, this particular insurance policy is a unique NFT, also called yNFT, which could be transferred, bought, or sold only on the Rarible platform.
While looking at how insurance products are being adopted, it’s evident that the biggest peak occurred in the middle of September right after the platform was launched. As per the chart below, it is spotted $1.48 million of costs generated within yInsure.
The peak was mostly triggered by the long-term insurance policies taken for 365 days mostly for the RenVM smart contacts. As a result, Rarible transaction volumes were also affected by such a peak.
By analyzing the data, it can be concluded the DeFi smart contract insurance has given birth to insured NFT’s which can be traded only on Rarible and helps to drive dapp growth.
The analyzed cases show that there is an exciting future ahead for the NFT category. While DeFi dapps are one of the major catalysts driving NFT growth to-date.
Firstly, DeFi dapps created a precedent for the yield farming initiative that was quickly adopted. Secondly, DEXs help the NFT dapps with liquidity which basically enforces the incentivization process.
Furthermore, while the projects related to NFT collateralization and insurance are still very experimental and rarely used. These examples indicate that the DeFi and NFT categories are likely to become far more interconnected.