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What Are NFTs and What Does DeFi Mean?

By Motley Fool Staff - Apr 7, 2021 at 7:03AM

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These are two big investment trends, so what should investors know about them?

Two of the biggest investment trends related to blockchain technology and cryptocurrencies are non-fungible tokens, or NFTs, and decentralized finance, or DeFi. In this Fool Live video clip, recorded on March 18, Aaron Bush, head of The Motley Fool's Extreme Opportunities franchise, asks Pantera Capital CEO Dan Morehead what investors should know about them. 

Aaron Bush: So, could you maybe just take a moment to explain what these two terms are, maybe why they're interesting, and then just how you think about it in the context of Pantera. 

Dan Morehead: Yes, so NFTs are non-fungible tokens. They're essentially buying a digital form of some scarce asset like art or even literature that you essentially own the only version of, the only copy of. We've looked at a handful of investments in NFT space. We haven't really made a big commitment. I know there are some people out there that are very bullish on this. There are some potential things with music, digital art, or digital-related type art that could be very interesting for the NFT market, but we really haven't made a huge commitment there. The place we have made it is DeFi. It stands for decentralized finance. The way to think about it is the other protocols of the internet revolutionize everything else in commerce. How we buy things, how we communicate with people, basically everything in our lives have been changed by the internet. Banking, basically the same as it was from the Medicis of double-entry bookkeeping with 15th century is the same. Visa, MasterCard has been charging the same rate since 1965. Western Union has been around for 40 years. All of those businesses basically weren't touched by the internet. Blockchain is bringing the internet to their businesses and DeFi is one of the sectors. It's decentralized finance and everything about the internet is taking the middleman out of the expense base, like Amazon taking out a billion mom-and-pop stores and making it much cheaper and faster for people to do their shopping. That's basically what DeFi is doing, it's taking the middle man out of borrowing and lending and other applications. The easiest one to think about is borrowing and lending. The way banks work is they take in deposits, typically pay zero on the deposits, then they lend the money out. Most the time they do a good job lending the money out. Every 10 years they blow up and the taxpayers have to bail them out. So it's a pretty wonky and expensive system. In DeFi, you're using code to escrow or custody the funds and borrowers are getting much lower rates to borrow at, and lenders or depositors are getting a much higher rate. You're basically taking the bank or other finance-type company out of the middle, matching borrowers and lenders, and the code takes a tiny spread for providing the service, but it's much lower than it is in the traditional markets. Then the other benefit is there's no taxpayer bailouts all the time, so it's going to be easier on society. The DeFi space exploded over the last nine to 12 months. It's snapped up $40 billion of assets locked up in DeFi. In our world, we're all really excited about that because we've been big investors in that sector for a while, but this is still a microscopic fraction of the $200 trillion worth of bonds and equities out there. I think we still have a decade or two to go on DeFi, but it certainly is, in our opinion, is the most important growth sector.

Bush: It's been pretty crazy to see NFTs in particular blow up [laughs] recently. I think I saw Google Trends chart that was basically showing how DeFi has been steadily on the rise and people are thinking about it and NFTs have just come out of nowhere taking the limelight. I think NFTs are super interesting in how they can play out an art and gains lots of different things. But DeFi, as a concept, feels more disruptive in terms of the good that it can bring, like systemic good that it can bring to financial systems around the world.

Morehead: Also, in the exchange space, we're used to having big, monolithic exchanges that take in a lot of capital and hold people's assets for a few days as things settle. With DeFi exchanges, the buyer and the seller are matched up by code, the code escrows the assets, so there is again, a lot lower cost, a lot lower risk to society. There's exchanges like [inaudible] that are now being a massive decentralized exchange aggregators, so they're matching up lots of different individual decentralized exchanges we're invested in a project with called Acala that's a DeFi layer on Polkadot, and Polkadot itself is one of the most exciting blockchains we see out there. There is a lot going on both on the borrowing and lending side and also on the exchange-trade side.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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