Concept

An NFTfi stands for non-fungible token on decentralized finance/ DeFi (or for short, NFT finance or non-fungible token finance). NFTs (non-fungible tokens) have dramatically changed the digital asset landscape, enabling unique ownership of a unique breed of assets such as digital art, collectibles, and virtual real estate. However, NFTs are often illiquid, that is, no returns will be generated while such tokens are stored in the online or offline wallets. Then the concept of NFTfi (non-fungible token on DeFi) emerged, narrowing and bridging the gap between NFT ownership and decentralized finance (DeFi). On NFTfi platforms, users can avail their holdings by lending their NFTs to others against interest or sort of renting, or can borrow NFTs by providing collateral.

NFT finance represents an ecosystem of decentralized protocols and applications providing financial utility (such as crypto loans) to or against NFTs. NFT holders can take part in initial NFTfi offerings (INOs) by placing their NFTs as collateral, against which fungible tokens (often called NFTfi tokens) are issued to them. The issued tokens can be traded or used within the network (to which these tokens are native – native tokens). For example, a lady owning a rare digital artwork NFT can participate in an INO, placing her NFT as collateral, and in return receiving NFTfi tokens. These token holdings entitle her to have a share of the platform’s revenue or governance rights (in the same manner like a governance token). For the borrowers, tokens can be used in virtual space, gaming, or as additions to profiles. For example, a gentleman may seek to use a well-known virtual land NFT in the virtual world. He can borrow it from the NFTfi platform by placing collateral (often in the form of stablecoins or certain types of NFTs).

Objective

An NFTfi aims to offer decentralized financial services to NFT users or investors in the market. It provides users with a vehicle to earn returns, unlock liquidity, broader market exposure, and generally play a role in the emergent NFT finance ecosystem. NFTfi finances transactions by unleashing the potential of NFTs (as collateral). This means gaining access to more liquid assets capitalizing on the features of DeFi and NFTs in order increase the liquidity of NFTs, and hence expand the options available to NFT holders.

Processes involved

For the NFTfi market to function properly, there are multiple areas or sectors that need to be considered as contributors to the entire process. The main sectors/ areas are NFT fractionalization, NFT lending, NFT renting, and NFT derivatives. NFT fractionalization is the process of fragmenting ownership of an NFT among a collection of fungible tokens (FTs) that are linked to, and collectively form, the original NFT. As mentioned earlier, NFT lending is similar to traditional lending that involves physical assets. However, NFT asset lending uses an NFT as collateral for the loan extended. NFT renting is the time-bound rental of an NFT, where a smart contract functions as an escrow and typically requires a deposit. Finally, NFT derivatives are tradable contracts that allow market participants to take views on the potential prices of NFT collections. These contracts can be used for other purposes such as hedging and risk management.