- DeFi and NFTs are industry trends that help normalize the use of cryptocurrencies.
- NFTs are much more than JPEGs, formulating new digital standards for interaction.
- DeFi projects are self-standing, whereas NFTs are built around communities.
The cryptocurrency market is distinguished by yearly epochs where a new trend creates industry hype, extending from retail to high capital investors. In addition, the market is characterized by high volatility, which kickstarts a new investment trend as retail mania kicks in. ICOs, crypto investments, DeFi, and NFTs are all built on blockchain, yet they provide diverse solutions to the digital economy. Thus, investors are navigating new investment challenges as market behaviors shift.
The Underlying Difference
Bitcoin, Ehteruem, and XRP are blue-chip crypto tokens as they’ve been partly accepted at an institutional level. In addition, new blockchain products such as DeFi or NFTs bring speculative investment opportunities as they propose decentralizing amendments to every industry sector.
In 2012, Marc Brule emphasized that Bitcoin’s main flaw is that it is “not backed by anything.” Yet, its value grows as more participants in the industry give meaning to it through transactions and media discourses.
On a similar note, DeFi, ICOs, or NFTs are built on a similar network effect. Their value grows through a supply and demand dynamic. Yet, each has its own attributes and financial values. With DeFi disrupting financial institutions and NFTs empowering cultural artists and adding value to the digital space, their actual value is not yet realized in the grand scheme of things.
Each crypto trend brings with it several catalyzing factors as to why investors are throwing money into projects. DeFi proposed higher financial yields by providing liquidity. NFTs guarantee digital ownership of a unique digital file. Nonetheless, their prices are dependent on market supply and demand.
On The Flipside
- DeFi protocols are fractionalizing NFTs to create other secondary liquid markets for illiquid assets.
- All cryptocurrency investments are risky given their inherent market volatility parameters, which have not changed despite higher transaction volumes.
How’s It Different
Gmoney.eth helped Visa make their $150,000 Crypto Punk purchase. In a private Twitter message to DailyCoin, he gave a short yet effective statement about differences in investing in NFTs and DeFi. He notes:
"DeFi is mercenary. NFTs build more community."
Thus, both investment practices have risks, each creating new behavioral patterns, although the end goal is the same. When asked, gmoney.eth mentioned he had invested in both NFTs and DeFi, whilst there was no mention of ICOs.
Another crypto investor, Friendly Ape, who is one of the creators of Bored Ape Tron Club, a TRON NFT, told Dailycoin that “NFTs do not follow traditional cryptocurrency value structures” because an object’s rarity is what defines it as valuable.
In contrast, crypto investing, including DeFi, relies on the network effect to grow in value as more people give value and use the network. Although here, tokenomics play a role in how token use cases and scarcity are generated. Friendly Ape notes:
"As a collectible, the value of an NFT is not limited by projections or roadmaps but rather by how well the piece connects with a person, group, and community."
Unlike digital tokens, NFTs “are a unique asset that you own” and are part of a collection that, to a certain extent, brings a touch of a young kid’s nostalgia when a “rare” item is found. What’s more, he believes that building trust and “a positive reputation in the community” that they represent is also key for the creators of Bored Ape Tron Club.
Friendly Ape notes that NFTs are here to stay, emphasizing what Crypto Twitter had already concluded: “the market clearly loves NFTs just like DEFI in 2020.” Understanding the market trend is what makes investors switch between blockchain products; however, gmoney.eth notes that NFTs come at a risk:
"NFT's are less liquid, which makes them riskier."
The Bored Ape Tron Club creator emphasizes that “there will certainly be all sorts of people trying to take your tokens or scam you,” which has been much of what was going on during the ICO or meme coin mania. Yet, he argues that if the foundation of a crypto project “crumbles,” so does the value of one’s asset.
However, Dean Eigenmann, co-founder at Dialectic, emphasized that NFTs don’t retain value for too long, which to a certain extent poses the same risks as other crypto projects. If there is no demand, then the transactional value will decrease.
Had a really interesting conversation with @el33th4xor about how collectible NFTs entire value prop is to not retain value for too long, kinda the same way fashion is.— Dean Eigenmann (@DeanEigenmann) September 5, 2021
The only collectibles that can escape this essentially become Veblen goods, see Punks and Apes.
Why You Should Care?
The promise of having a digital asset in return for investing in NFTs does not compensate for the proposed risks. As NFTs are released daily and are driven by supply and demand as well as social media influence, their value can be misleading. Thus, investing in NFTs has the same risks associated with any other type of crypto investment.