Understanding the differences between NFTs and DeFi will be key to the future of finance

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As entrepreneurs and tech industry pros continue to find new ways of using the blockchain, novel applications of the decentralized and secure ledger technology inevitably find their ways into the news cycle. The role of cryptocurrency in the upcoming Metaverse, for instance, has generated plenty of discussion and speculation. So, too, has the possibility of bringing smart, blockchain-enabled contracts to a variety of industries, including real estate and pharmaceuticals.

With so many blockchain-enabled technologies making headlines, it can be difficult to keep all of your acronyms straight. This is especially true when it comes to NFTs (or non-fungible tokens) and DeFi (decentralized finance), which share certain similarities and interact in a variety of ways. These two technologies are fundamental to the way we will use blockchain going forward, so it’s crucial to gain a firm understanding of the distinctions. Fortunately, when it comes down to it, the distinctions are fairly easy to grasp.

“Though many parts of the blockchain serve different needs, they also tend to share certain commonalities. Similarly, many of them are used in conjunction—using cryptocurrency to pay for an NFT, for instance,” says Zain Jaffer, founder of Zain Ventures. “The field is growing at a rapid pace, so it’s essential for entrepreneurs, professionals, and lay enthusiasts to keep track of new developments.”

Beyond the Headlines

By now, most people are familiar with NFTs. At its most basic level, an NFT is a non-divisible token that can denote ownership of everything from pieces of artwork and contracts to tweets or digital perfumes. NFTs operate on a blockchain, which is a decentralized ledger that exists simultaneously across all of the computers that use it. The blockchain keeps a record of who owns what NFT and updates each time an NFT changes hands.

DeFi is much broader in scope. The term simply refers to any financial services offered over blockchains. These services operate much like traditional banks, allowing users to borrow or lend money. There are a few key differences, however. For one, because they are digital, DeFi platforms are always “open”. They also allow users to conduct transactions —including buying, depositing, investing, and earning interest—without having to disclose their identities to other entities or users. They also eliminate the need for the third parties and intermediaries found at regular banks, instead taking a small service charge with each transaction.

DeFi and NFTs can easily be used in tandem. When an asset—anything ranging from a piece of music to a piece of property—is minted into an NFT, DeFi users can purchase it right there on the blockchain.

NFTs: Risks and Rewards

Both NFTs and DeFi have received praise and criticism, and investing in them comes with both risks and rewards. A principal benefit to investing in NFTs is its simplicity: anyone with a computer can do it, and it’s easy to get started. It’s also safe because, in theory, NFT ownership can be stored and accessed securely on the blockchain, making it difficult to steal the asset and easy to track malicious actors should anything go awry. Finally, getting involved in the NFT space gives users firsthand experience navigating the blockchain, which will be invaluable as the technology grows in sophistication and popularity.

There are, however, a few cons to consider. For one, NFTs are not an asset class, but a way to denote ownership. Because of this common misunderstanding, their value can be volatile. Moreover, there are currently no government regulations protecting people from unfair practices or scams, so it’s important to exercise caution in the NFT space.

Will DeFi Redefine Finance?

DeFi’s greatest benefit is its transparency, as users can easily access and view every transaction they conduct. On top of this, the secure transmission of data over the decentralized blockchain helps protect transactions from fraudsters. DeFi also supports smart contracts, which use a special kind of code that causes the contract’s stipulations to occur automatically at certain times and when certain conditions are met, removing the hassle and inefficiency of traditional contracts. 

At this point, it’s impossible to tell exactly how quickly the DeFi market will grow and whether it will run into any issues as these services attempt to scale. There is also the risk of cyber-attacks, as DeFi services are being increasingly targeted for crypto thefts. According to Jaffer, the call of whether or not to invest comes down to a person or company’s confidence, experience, skills, and existing cybersecurity infrastructure. “Like every new technology, DeFi and NFTs offer equal parts risk and reward. However, not engaging with these aspects of the blockchain poses its own risks as well,” he says. “As we move towards Web 3.0, technologies like these will become increasingly integral to our everyday experience on the internet. Even if you don’t invest today, it’s time to start learning about what the blockchain has to offer.”