How are NFTs, DeFi, and Web 3.0 intertwined?

This article was published on Cointelegraph Chinese, author: NITIN GAUR, translator: Maya.

While blockchain itself provides the technical constructs to facilitate exchange, ownership, and trust within a network, asset tokenization is crucial in the digitization of value elements. Tokenization refers to the process of converting property assets and rights into digital representations, or tokens, on a blockchain network.

Distinguishing between cryptocurrencies and tokenized assets is essential for understanding the interchangeability of exchange tools, valuation models, and interoperability challenges in the emerging value networks. These are not only technical challenges but also business challenges surrounding fair exchange.

Asset tokenization can create a business model that boosts fractional ownership, which is the ability to own a part of a large asset.

With the emergence of digital assets and their substitutability in the blockchain ecosystem, various value drivers have appeared. These drivers include 1) tokens based on crypto-economic models, driven by supply and demand dynamics and the utility of the network; 2) non-fungible tokens, or NFTs, which have intrinsic value, such as identification cards, diplomas, and medical records—essentially, tokens serve as simple proof of existence, authenticity, and ownership of digital assets; 3) fungible tokens, whose value is based on various fundamentals, such as the total economic activity within the network (cryptocurrencies), their utility (smart contracts and transaction network processing), and valuation (stablecoins and security tokens), among others.

This article discusses the complex issues surrounding the hyperbolic and rapid rise of NFTs, which, following the meteoric rise of decentralized finance (or DeFi), has created astonishing innovations—promising a global market with democratization, new business models, and global access—all driven by the fundamental premise of decentralization and the basic constructs of tokenization and wallets. While NFTs can be qualitatively described as unique crypto tokens with certain intrinsic value to holders or markets (artworks, collectibles), the NFT movement signifies a larger token revolution that will not only drive massive innovation and growth in Web 3.0 protocols but also test the resolve of the DeFi movement and its ability to cross and provide platforms and exchange tools for all types of tokens.

Development of Web 3.0 Protocols

The first two generations of web protocols were primarily designed for disseminating information and connecting people. They drove massive growth in information and collaboration, creating wonders in connecting the world. However, these network protocols were never designed to transfer valuable things. Moreover, as the potential of the Web 2.0 era has been fully realized, vulnerabilities such as "fake news" and "mass forwarding" of asset flows through a series of intermediaries have emerged. Threats to the commercial and financial infrastructure of the system could undermine its stability.

Web 3.0 promises to protect everything we value: information, truth, and digital assets—including both fungible and non-fungible ones. Web 2.0 was driven by the emergence of social, mobile, and cloud computing, while Web 3.0 is primarily built on three new layers of technological innovation: edge computing, decentralized data networks, and artificial intelligence.

The development of NFTs not only empowers artists, professionals, and entrepreneurs to encapsulate innovation in tokenized form but also promotes the democratization of platforms as one of the promises of blockchain technology. The underlying infrastructure includes decentralized storage technologies, efficient consensus protocols, off-chain computation, and oracle networks, providing connectivity and verification for existing systems.

Overall, this set of technologies in Web 3.0 envisions a connected, trustless, and accountable network that efficiently delivers value, thereby creating an infrastructure for valuable things. NFTs represent both transferable entities and the non-transferable tokens we value. The latter includes items such as our identification, medical records, and passports, which represent us and enable us to participate in the digital economy with our unique digital identities.

As we dare to envision a shift towards a world where control is decentralized, governance is based on distributed technologies, and every business model is challenged, with governance structures built on centralized commercial frameworks, we indeed have to contemplate some questions. Not just the transformation itself, but also the motivations, incentives, and monetization elements that drive and propel the economic infrastructure to move valuable things—keeping pace with our evolving perceptions and subsequent realizations of value.

Intersecting with Finance—DeFi

DeFi is a movement in the realm of blockchain applications that utilizes decentralized network technologies to disrupt and force old financial products to transform into trustless, transparent protocols, facilitating the creation and dissemination of digital value with little to no intermediaries. It is widely understood and accepted that—due to new digital interactions and value exchange mechanisms achieving new synergies and co-creation—blockchain technology lays the foundation for a trusted digital transaction network. As a non-intermediated platform, blockchain technology powers the development of markets and secondary markets.

DeFi aims to realize the promise of financial democratization, while NFTs test this belief by providing a competitive yet inclusive asset class, along with pathways for exchanging with other fungible asset classes, thereby providing liquidity to traditionally illiquid markets.

The asset classes generated by DeFi protocols and NFTs leverage the advantages of fractional ownership of assets, blurring the boundaries between asset classes and using structures like digital wallets as their containers. All of this is supported by the underlying principles of Web 3.0, which provide security and availability through decentralization, as well as trust and immutability through consensus, extending these principles to fundamental computing infrastructures such as storage and interconnectivity.

The commercialization of Web 3.0 protocols, manifested as interchangeable utility tokens, further blurs the lines with the diverse financial innovation products launched by DeFi (such as underlying assets and derivatives), which are also tokenized. Therefore, while decentralization is the fundamental theme—wallets and tokens are the basic constructs—the blurred boundaries are quite profound.