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Decentralized finance and non-fungible tokens offer different ways for investors to use their crypto. Here’s what to consider before you invest.
The cryptosphere continues to expand, and investors now have several options in addition to holding bitcoin, ethereum and other digital coins directly.
You may be familiar with crypto exchange-traded funds (ETFs) and mutual funds, which have gained a foothold in Canada in recent years. Investors are also looking for opportunities in two growing areas of the cryptocurrency market: non-fungible tokens (NFTs) and decentralized finance (DeFi). They offer very different approaches for what you can do with your crypto—let’s take a closer look at both NFTs and DeFi, and where to buy related crypto coins.
Non-fungible tokens (NFTs) are unique digital tokens that represent proof of ownership and authenticity for real and digital assets. That can include art, songs, photos, video clips and more—even tweets. Virtually anything with economic value can be turned into a digital asset. NFTs can also be “fractionalized,” allowing multiple people to buy a piece.
“Non-fungible” means the tokens are not interchangeable, unlike fungible assets such as government-issued currencies or bitcoin. Like other digital assets, though, NFTs can be bought and sold, and there is an active secondary market for these investments. Examples of popular NFT marketplaces include OpenSea, Rarible and LooksRare.
NFTs first garnered global attention in March 2021 when a digital collage by artist Beeple sold for a whopping $69 million (all figures in U.S. dollars, unless otherwise noted). NFTs have since grown into a multi-billion-dollar industry fuelled by collectors buying up digital creations and souvenirs in music, art, movies, sports, real estate and more. It’s little surprise that the global NFT market is projected to balloon to $80 billion by 2025.
The NFT market is on pace for substantial year-over-year growth, having generated $25 billion in trading volume for 2021, per DappRadar. The NFT market topped $12.13 billion in trading volume in the first quarter of 2022 alone. Some of the largest NFT projects by trading volume include Bored Ape, CryptoPunks, NBA Top Shot and Azuki.
Until recently, most NFTs were part of the Ethereum blockchain, but hundreds of projects are now being developed on smaller, newer blockchains, including Solana (currently the second-largest platform for NFT sales), Polygon, Avalanche and Cardano. Their low cost and faster transaction speeds have attracted developers to their ecosystems. Check out MoneySense’s deep dive on NFTs.
DeFi is an umbrella term for smart-contract-based financial services. Smart contracts are self-executing agreements that live on the blockchain. They’re used to verify and record transactions between buyers and sellers without an intermediary.
DeFi’s applications are designed to replicate and replace conventional financial instruments for borrowing, lending, banking and investing, but with cryptocurrency instead of government-issued money. They have decentralized, public, open ecosystems where everyone can participate without red tape. Since it’s a decentralized and blockchain-based system, DeFi doesn’t require intermediaries, such as banks or brokerages, to approve or execute transactions.
The growing appeal and acceptance of DeFi is evidenced by the attention and dollars it has been attracting from tech pioneers, crypto entrepreneurs and investors. As of mid-May, over $139 billion is locked into DeFi-related contracts, a jump of almost 900% from $18 billion in January 2021, per Defi Llama.
DeFi platforms come in many forms, including crypto exchanges (for example, Uniswap), decentralized protocols (Maker), decentralized lending protocols (Compound) and decentralized autonomous organizations (Aragon).
Some of the popular DeFi platforms include Ethereum, Avalanche and Polygon blockchains, among others. Leading DeFi protocols that facilitate staking include Lido Finance, Aave and MakerDAO, among others. If crypto experts are to be believed, DeFi is still in its early stages and has a long growth runway, and it’s well positioned to become a dominant force in the digital assets economy. If you wish to explore DeFi further, MoneySense’s definitive guide has you covered.
If you want to invest in crypto beyond holding digital coins, NFTs and DeFi could play a role in your portfolio.
Both offer good investment opportunities, says Nigel Green, chief executive officer and founder of deVere Group, one of the largest independent financial advisory firms. “Currently, one of the most common ways investors can make a profit is by leveraging their crypto capital. By staking the assets they own into DeFi protocols, they can earn profit—typically called ‘yield’—allowing them to grow their crypto assets without risking it through trading,” he says. “However, for those wanting to seriously build wealth over the long term, NFTs are more likely to offer better returns due to their value and potential use cases in various sectors, including art, sport, music, medical records and identity verification, supply chain, gaming and ticketing.”
Various high-profile companies—including Time, ESPN and Anheuser-Busch and celebrities like Paris Hilton, Katy Perry, Snoop Dogg and Ellen DeGeneres have embraced NFTs by launching their own collections. Other celebs are avid NFT collectors, including Justin Bieber, Heidi Klum and Reese Witherspoon. (Bieber reportedly owns upwards of 2,000 NFTs.)
Others, however, say DeFi is where it’s at.
“As investment vehicles, NFTs are largely only used as a store of value, meaning you buy an NFT and hope that the value goes up,” says David Malka, the founder of YieldFarming.com, which teaches investors how to earn income from their cryptocurrency. “DeFi, on the other hand, offers you the ability to put your crypto holdings to work to earn passive income through staking or yield farming.”
Yield farming is a DeFi investment strategy where investors lend their cryptocurrencies to earn interest. Investors provide liquidity to a particular token pair by locking up the tokens in a smart contract; in exchange, they receive rewards. Moreover, “yield farming doesn’t require you to sell your cryptocurrencies in order to profit from them,” Malka argues.
While deciding between NFTs and DeFi, a key factor to consider is your investment horizon. “I do believe that NFTs have a longer time horizon than DeFi, but the potential for NFTs to surpass DeFi in the long term is quite high,” says Yubo Ruan, chief executive officer and founder of Parallel Finance, a decentralized lending and staking platform.
Investors who like aspects of NFTs and DeFi have an option that combines the best of both worlds: NFT staking. It’s a novel way for NFT collectors to earn passive income by locking their assets on DeFi platforms to receive rewards. Some gaming platforms, for instance, allow NFTs to be used as utility tokens: owners can stake their NFTs to boost their game character’s abilities and earn extra rewards. Ruan’s Parallel Finance platform, for example, fuses NFTs and DeFi, “giving users the ability to borrow against their NFTs or stake them,” he says.
If you want to dip your toe into NFTs and DeFi, the easiest way is to buy the native crypto coins of the blockchains on which these projects are built. For instance, you need ETH (the native coin of the Ethereum blockchain) and SOL (Solana blockchain) to buy NFTs in their respective marketplaces. Other coins and their blockchains in the NFT ecosystem include MATIC (Polygon), AVAX (Avalanche) and ADA (Cardano).
If you want to yield-farm or interact with any DeFi app, you need to own the corresponding platform coin. Your options for the DeFi play include such decentralized autonomous organization (DAO) platforms as Aave (AAVE), Uniswap (UNI), Aragon (ANT) and Maker (MKR), among others.
Investors can purchase many of these tokens in Canadian dollars on CoinSmart (ticker symbol SMRT), a fully regulated Canadian crypto trading platform. It offers an easy-to-use interface, a transparent fee structure and 24/7 customer support.
CoinSmart’s two-factor authentication and offline cold storage provide investors security and peace of mind. Setting up an account is simple, and investors can access their funds the same day they make a deposit. Sign up for an account* with the code money30 and receive CAD$30 in bitcoin when you deposit a minimum of CAD$100.
Both DeFi and NFTs are subject to market volatility, technical vulnerabilities and regulatory policies. The risks of yield farming and staking are similar: dramatic price drops, bugs in the code, scams that exploit tech vulnerabilities, pump-and-dump schemes and other ploys.
Investors can mitigate their level of risk by choosing reputable projects that thoroughly audit their code and by choosing less volatile assets.
And, as for any investment, Malka cautions that beginners should take the time to “do their own research and not invest anything they cannot afford to lose.”
This is a paid post that is informative but also may feature a client’s product or service. These posts are written, edited and produced by MoneySense with assigned freelancers.
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