Photo by Vincent van Zalinge from Unsplash 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 . What is an NFT?
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 . What is DeFi?
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. Should you invest in NFTs or DeFi?
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 […]
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