The Implications of NFT and DeFi
It is an understatement to say that the Non Fungible Tokens(NFT) trend is on the rise. The crypto-based digital tokenization has expanded the preexisting conceptions of assets, all the while transforming transaction processes. Especially for previously excluded non-traditional assets such as games, certificates, and art, this new form of digital ownership has been a game changer. The transaction between various assets with unique characteristics has been enabled through decentralization. Given that regulatory services are provided, assets previously regarded as ‘difficult to trade’ can and will expand the boundaries of what classifies as an asset(which has formerly been heavily focused on real estate) and provide equal investment opportunities for everyone.
For the traditionally heavily regulated financial sector in particular, perceptual changes are underway as new types of collateral are being accepted through a trust-based expansion. Decentralized Finance(DeFi) denotes a world in which all existing services such as loans, investments, and remittances are possible without the involvement of financial institutions. A new blockchain-based system of trust that enables P2P transactions without the intervention of legal trustees is settling in place.
However, since DeFi assets are excessively volatile, trade volumes are built through dollar-pegged stablecoins and other over-collateralized cryptocurrencies. The reason behind why the DeFi space strays away from utilizing legal currency despite the difficulty of using their own collateral is the difficult of applying the principles of decentralization to centralized assets. The conflict between value creation, security, and interoperability is what we call the blockchain trilemma, and solutions to this trilemma are being sought after from various angles.
What is at the crux of the friction between the legacy and the DeFi market is the difference in what each market recognizes as collateral. The existing market has a firm belief in the dollar and real estate; hence, the valuation of real estate collateral is a key factor in most investments or risk management. On the other hand, the existing infinite trust towards the real estate market has been serving as a background to the asset bubble and has been a significant actor in the market volatility. Upon an economic shock, a centralized authorities’ efforts to regain stability can only lead to printing money, ultimately resulting in polarization and anxiety. Meanwhile, in the DeFi space, which is trying to overcome these limitations, there is a lack of a suitable collateral. Given this situation, the DeFi industry is requiring over-collateralization or reviewing the possibility of using NFT as collateral. In this case, there is a burden of facing massive regulation. However, since there is a lack of trust between the two worlds, the newly forming market has been persistently lacking in sustainability and strengthening only the connections that are vulnerable to shocks are being strengthened.
If NFT is applicable in the expanded legislation and system, the DeFi world’s development will be massively accelerated. In order to achieve that goal, there needs to be a clear standardized guideline of NFT development. Furthermore, there needs to be a thorough preparation process including not only the proof of authenticity, tax, and inheritance, but also an international consensus and the coordination of the ERC721 and ERC1515. Only when those necessary measures have taken place can there be staking or appropriate compensation for providing liquidity. Conclusively, through the improvement of the recognition of NFT and its use cases, a comprehensive enhancement of collateral in the DeFi world can be anticipated. Hence, through the rationalization of the collateralization system, the flow of funds can be diversified, and shocks mitigated. Perhaps, NFT is a solution to the passive response of the cryptocurrency field to the expansion of the existing collateral system. Simultaneously, inclusion in the heavily regulated and vertical centralized system is limited. Therefore, the message of NFT and DeFi needs to include the necessity of a fundamental change of paradigm. For all participants of society to be able to participate in economic activity freely, a consensus of an extensive recognition of value needs to be formed. In other words, instead of sticking to past patterns of success or unrealistic imagination, efforts need to be made to establish collaborative guidelines and connect the shattered trust between the two worlds in preparation of the new world.
