“When Lambo?” became the meme phrase of the ICO boom, symbolic of the sky-high expectations that the next big coin drop would be the one to make wide-eyed investors rich. Lamborghinis had become the status symbol of choice for Bitcoin’s earliest adopters, who had suddenly become the new generation of millionaires and billionaires. At the 2018 Consensus event, the streets of Manhattan were temporarily packed with luxury cars, paid for with profits from crypto.
And why not? For centuries, wealthy people have been happy to splash their excess cash on status symbols, spawning a luxury goods market worth over $300 billion at its 2019 peak. From Rolex watches to Birkin handbags, high-end cars, and fine art – it’s a lucrative business indeed.
However, one of the biggest issues with these goods is their lack of liquidity. It’s ironic considering that many people justify such purchases as an investment, but the reality is that they often involve a large initial outlay with little to no hope of generating any returns.
Hollywood movies use a trope that illustrates it well – the “riches to rags” story invariably involves a super-rich character having to pawn off their beloved luxury possessions for a fraction of their worth. Another well-used scenario is that the goods get seized by bailiffs with a similar result.
Movie tropes often mirror reality, and the fact is that it can be challenging to find active markets of buyers and sellers for niche items. Status symbols tend to be just that – a symbol of wealth rather than a meaningful investment.
Are NFTs the New Lambos?
NFTs have become the latest must-have assets among affluent crypto enthusiasts. Owning one of the CryptoPunks collection or a piece by Beeple has become the new Lambo. But so far, NFTs have suffered from many of the same liquidity issues as other luxury goods. They sit idly in wallets, and if the owner wants to recover some of the value from their purchase, they have to find a buyer willing to pay the same or more as they paid.
This problem creates a compelling case for the role of DeFi in the burgeoning NFT space. What if it were possible to put NFT-based assets to work in the same way that users already stake and lend their cryptocurrencies? Now, projects such as Drops and NFTfi are making it possible for users to generate passive returns on their NFT investments.
Rather than owning a piece of digital art or an in-game asset as a mere collectible, someone can supply their NFT to a Drops pool as collateral for a loan, which they can then in turn use to generate returns from other DeFi applications by lending or staking the borrowed tokens.
It works in a similar way to other lending pools based on fungible assets, such as Compound. A user who wants to unlock some of the value in their NFT investments deposits the NFT into the Drops protocol, where it’s held by the underlying smart contracts. The user can borrow up to 80% of the value of their NFT, which they’re then free to put to work elsewhere. NFTfi operates using the same principles.
Leveling Up Global Markets
The net effect on the value of the NFT markets, and perhaps even the broader luxury goods markets, cannot be overstated. Not only do platforms like Drops and NFTfi make owning NFTs more attractive for the initial investors, but they also make them more compelling assets on secondary markets, thus making NFT markets as a whole more liquid. Buyers on secondary markets will have less leverage to push prices down when there’s an ability to generate income on the investment.
Furthermore, when we consider the vast array of assets that could be tokenized as NFTs, then the potential multiplies. Consider that one of the use cases for NFTs is to serve as a digital representation for real-world assets such as physical art, real estate, or even luxury goods traditionally used as status symbols. By combining NFTs and DeFi, anyone holding these assets backed by an NFT can begin generating revenue from them.
As such, Drops and NFTfi offer significant opportunities to inject fresh liquidity into the markets for real-world NFT-backed assets. Someone selling an NFT-backed Rolex or piece of haute couture could command a higher price with the promise that the buyer could earn a continuous stream of revenue just from owning it.
It’s still early days, but perhaps the marriage of NFTs and DeFi could eventually make the Hollywood “riches to rags” trope seem like an antiquated concept from a bygone era.