Wednesday, September 28

This time it’s different: when DeFi meets NFT


With decentralized finance and non-fungible tokens experiencing a meteoric rise, it’s easy to believe that crypto apps are finally making their way. But is there really real user growth, or are they the same influencers moving from one advertised market to the next? We seek to answer this puzzle and identify what it means for the future of innovation. So, let’s take a closer look at the growth of DeFi and NFT.

DeFi is possibly the most prevalent smart contract application today. Automated market makers, algorithmic stablecoins, and yield farming strategies are the talk of the town. The frenzy took off in early and late 2020, a period that the media would fondly remember as the “DeFi Summer.” Then, SushiSwap carried out its liquidity mining attack, Yearn.finance instantiated the first “yield farm” and Uniswap implemented a retroactive airdrop.

Related: The DeFi Madness of 2020: The Best, Worst, and Most Suspicious Projects in Crypto

We saw the strongest communities forming around protocol token ownership, creating a positive feedback loop that made DeFi asset valuations rise higher and higher.

Popularized by the now iconic CryptoPunks, NFTs have gained an increasing share of Ethereum network activity. With accelerated development, NFTs now span a range of active market segments, such as avatar-based projects, on-chain generated art, sports collectibles, virtual land, and money-making games. In addition, public figures such as Andy Murray and Ashton Kutcher, along with contemporary artists such as Damien Hirst, have wanted to establish themselves in the NFT market.

Related: British artist Damien Hirst uses NFT to blur the lines between art and money

The growth of NFT applications and increased activity on the chain make it difficult to dismiss them as an emerging asset class.

NFT and DeFi Users

We tell you about active wallets in the DeFi and NFT space through our tagging system. A “Legendary NFT Collector”, for example, is in the top 0.1% in number of NFT transactions, while a “Trader Elite DEX” is in the top 1% of decentralized exchange (DEX) transactions.

Looking at the overlap of users on these tags, it shows that the NFT collectors and DEX merchants are different user bases. It also identifies a new type of user: the NFT-DEX Power User. Currently, there are 23 power users who are both Legendary NFT Collectors and Elite DEX Traders. If we consider the distribution of these tags, another trend is evident: the more active a user is trading DeFi, the more likely they are to be an NFT collector.

DeFi needs NFT and NFT needs DeFi

Not surprisingly, DeFi has matured to a point where fungibility is no longer sufficient. Asset ownership can become so personal or optimized to the point that it would make more sense to use NFT instead. Uniswap v3 has led the charge, allowing users to customize their price range for liquidity positions in a new automated market maker design.

Related: Automated market makers are dead

The world of NFTs is also rapidly converging towards DeFi. Led by protocols such as NFT20 and NFTX, NFTs are gaining financial profit through fractioning and representation as tokens tied to DEX-based pools of liquidity. Users can now be exposed to digital art collections without purchasing individual pieces. The merger of NFT and DeFi is altering the very definition of non-expendable. What comes next?

Products that combine DeFi and NFT will be the winners

The NFTs and DeFi seem destined to collide. Axie Infinity is an exemplary case study. Possibly the largest revenue generating blockchain product, Axie combines a meager NFT-based gambling game to win with liquidity funds for in-game items – a true NFT-DeFi hybrid.

Related: Play-to-win games are the catalyst for this bull period in the markets

A network perspective of Ethereum transactions demonstrates Axie’s ability to bring the DeFi and NFT communities together. The success of future crypto products will depend on their ability to engage NFT and DeFi users. Based on Ethereum transactions over a seven-day period, the Axie pools successfully bring together the DeFi and NFT subgroups.

The future

The growth of the DeFi and NFT user pools suggests a long-term innovation bias for Ethereum and the broader crypto ecosystem. The tokens, applications and products that can attract new and experienced users in these markets will be the first to reap the rewards.

If you subscribe to the assumption that diverse users add resistance to value, then you can speculate that markets are poised for a solid phase of growth. The abundance of use cases for both DeFi and NFT has made cryptocurrencies poised to support both megaprojects and niche applications. The depth of user growth suggests that new value creation in crypto will continue to outpace legacy finance and art holders going forward.

This article was a co-author of this article. Young Loon and Paul Harwood.

This article does not contain investment advice or recommendations. Every trade and investment move involves risk, and readers should do their own research when making a decision.

The views, thoughts and opinions expressed here belong solely to the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Young Loon is a research analyst at Nansen, a blockchain analytics platform. Young is an incoming university student at the London School of Economics. He is an avid economics reader and Nansen’s resident expert on decentralized finance.

Paul Harwood is a research analyst at Nansen, a blockchain analytics platform. Paul is a professor, consultant and PhD candidate in the South West of England. He specializes in NFT, crypto, and equity.