Sep 27
DeFi 101

NFT Derivatives: NFT Based Fungible Token

NFT Derivatives: NFT Based Fungible Token

5 min read

No doubt, the NFT market continues to heat up with new NFTs being released by various brands in different sectors. In our previous series on NFTs and the derivatives market, we’ve illustrated different ways the NFT market can be further expanded by allowing prospective traders to participate without necessarily owning an NFT.

Read more: NFTs and the Derivatives Market

Read more: NFT Derivatives: Prediction Markets on NFT Indexes (insert link to medium after publishing)

This piece will be focusing on NFTs tokens as a synthetic derivative for easier trading in the NFT and DeFi markets.

<text-h2>NFT vs ERC-20 Token <text-h2>

NFTs typically are ERC-721 tokens which hold unique properties. Referred to as Non-fungible tokens, these tokens contain unique metadata that are clearly distinguished from others. No two NFTs can be exactly the same even if they look similar at first glance. NFTs can be differentiated by cryptography through their unique hashes that are secured on blockchain networks.

ERC-20 tokens on the other hand can be used interchangeably just like paper bills, hence they are called fungible tokens. These tokens are divisible and represent a single asset. Each token holds the same value and is exactly the same with other tokens of the same specific type. This is why they are commonly used as holders of monetary value. USDC stablecoin is an example of a fungible token from a simplified view.

<text-h2>Enter Synthetic NFT Tokens<text-h2>

Still looking at how NFTs and the derivatives market can be integrated, another possible way is converting NFTs to fungible tokens and trading them in secondary markets. The main reason for doing this is to make the fungible version of the NFT more liquid, and hence easier to buy and sell. This makes the fungible version a synthetic derivative of the underlying NFT itself. The fungible token version represents the non-fungible NFT.

You can also earn passively by lending the ERC-20 version of your NFT to DeFi platforms and pools just the same way you’d earn in ETH. This creates more ways to monetize NFTs.

An example of one of the several platforms already applying the NFT derivatives concept is NFTSwaps. With the platform, users can deposit their NFTs in the required pool and obtain token derivatives that can be used on PancakeSwap and BakerySwap. SwapMarket is also another example. Here, you can easily swap multiple NFTs to fungible tokens and vice versa.

This model makes it easier to trade at better prices, faster transaction processing and gives creators more access to liquidity.

For NFT holders who desire to participate in DeFi trading platforms and pools to earn more passive income, this is one alternative way to participate. Instead of just holding the NFTs which could lose value over time, creating derivatives of them could enhance the way they are monetized.

NFTs are here to stay and we might as well just continue to explore ways to expand the market and increase profitability for all players. Synthetic derivatives are no doubt a new creative avenue to do this.

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