As cryptocurrencies and NFTs share the same underlying technology, significant overlap in utility exists between the two. These two classes of blockchain-based tokens can be used in conjunction with one another in inventive ways to offer more complex financial offerings to DeFi users.
One such use of NFTs is a way to represent more complex investment positions. Uniswap V3’s concentrated liquidity LP tokens are an example of this, representing liquidity that is offered only over a certain range of prices, defined within the token’s metadata. Another example is as a vault or locker to hold tokens under a timelock, or other customisable conditions. This can be used as a trustless way to distribute tokens to team members or early investors, or for the creation of derivatives (such as options) that can be traded without affecting the price of the underlying asset.
High-value NFTs representing artwork or which form part of a collection can also be used as assets within DeFi, for example by using their value as collateral for a loan. Non-fungible artworks can also be “fractionalised” whereby they are locked into a smart contract and divided into many pieces (fungible ERC-20 tokens) to be traded and speculated upon like cryptocurrencies.
Finally, NFTs can act as an access token to premium strategies or boosted yields, such as on Stake DAO. As well as being bought and sold on the secondary market, the NFTs can be earned by staking governance tokens on the Stake DAO platform, in the DeFi equivalent of a loyalty programme. Depending on the class and rarity of the token in question, holding a Stake DAO NFT gives the owner a share of bonus weekly rewards on top of any regular yield generated on the platform. Holders may also access a sophisticated and high-yield arbitrage strategy not open to the general public.
As blockchain-based finance grows in complexity and sophistication, the use of NFTs as tokenised financial instruments will expand to fill many novel use-cases. Just as transferable contracts and agreements exist in traditional finance, NFTs will fill many similar roles within DeFi as a way to trade ever more intricate financial products.