Why DeFi needs NFTs

Note: This article was originally published in Lendroid’s blog site on Nov 28, 2020.

From that elusive mainstream bridge to governance, NFTs are the answer to DeFi’s biggest impediments.

The mood was euphoric at the TokenSummit in December 2017. Those who were around know what this is about. For those who came in late, here’s why crypto thought it was invincible — the bull run of the decade was well and truly under way; NFTs made heads turn when Cryptokitties broke Ethereum; but most importantly, the green shoots of decentralised finance were visible. For context, the 0x protocol was the blue-eyed boy of the ecosystem, and Kyber was a couple of months away from mainnet.

Then everything went t*ts up. Visionaries of DeFi had seriously underestimated the technological, regulatory and practical limitations of their ecosystem and the next three years were spent in navigating this minefield. Some projects shut shop, others took a hard left, and a few reinvented the ‘Fi’ without having to completely give up on the ‘De’.

The Problem with DeFi

What was thought to be a platter of secure, stable, decentralised financial instruments became a melting pot of furious, often reckless and exhilarating experimentation. This has been both good (re-capturing public attention) and bad (normalising chaos and fragility).

The bottomline is this — the vulnerability and limitations of DeFi which hobbled growth in 2017 are intact. Instead of being solved, they have simply been normalised.

The problems in DeFi are three-fold:

1. Fragility is the new normal: It’s not just ‘DeFi Degen’ stuff like Yam or Sushi. The overall risk threshold seemed to have spiked. For instance, in early 2020, there were a series of flash crashes, exploits and straightforward hacks across the spectrum of DeFi projects — from MakerDAO to BZx. Ordinarily, this would have crumbled investor confidence and slowed down trading, but the pendulum swung the other way and the experiments only intensified.
2. An airtight echo chamber: For a non-crypto person, DeFi is bewildering and near inaccessible. For one, there are simply too many tokens, with little in the way of differentiation. Figuring out which tokens to invest in is a real challenge. Index instruments like DPI are promising in this kind of a set up — if you own DPI, you are exposed to the upside of DeFi. But is it complete? Not really. You are protected from the more volatile, potentially more profitable DeFi tokens which are kept away from the mix. So either you research tokens individually, or invest in DPI, with a steady, albeit conventional, upside.
3. Governance is unevolved: Coin voting. That’s pretty much it when it comes to governance. While it has its uses, the limitations are undeniable. It makes progress slow, skewed and still demands hands-on attention from the core team of a project. In other words, not decentralised, and far from effective. Meta governance will be huge for the future of this space.

How NFTs Can Help

The appeal of NFTs — digital collectibles — is undeniable. From in-game assets to art, from utility to uniqueness, a wide range of NFT projects have experienced a boom over the last few months. Many of these projects have also launched their own in-game ERC-20 tokens, opening up a world of opportunity for financial instruments to blossom around NFTs.

1. NFTs infuse stability: NFTs are notoriously difficult to value. This makes them far less volatile as a store of value than a homogenous set of ERC-20 tokens. Interestingly, the more collaboration an NFT class represents, the greater its value. Projects like $Meme or $Aavegotchi recognise and leverage this.
2. NFTs are cool: They just are. Let’s admit it. A trip to Decentraland where you can ride a dragon or a hot air balloon, or attend a virtual meet-up as your avatar in cryptovoxels, or play a game of Axies — these are far more fun as ports of entry to crypto than yield farming. It is only logical for DeFi to become part of this fabric rather than bury its head in the sand.
3. NFTs speak to governance: What if we told you NFTs can solve the governance problem? Not some piecemeal solution but a real, practicable idea? At WhaleStreet, we simply built on what powers NFTs can be given. Just like a legendary ‘Gods Unchained’ card can topple a carefully built counter-collection, NFTs in WhaleStreet endow the holder with enough power to call the shots in the system. How one gets their hands on the card, and how exactly they solve governance, are another story.

WhaleStreet, powered by Lendroid, is the substrate on which the DeFi-NFT revolution will take place. For detailed information about this experiment join their discord and follow them on twitter.

Note: This article was originally published in Lendroid’s blog site on Nov 28, 2020.