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Decrypting DeFi is Decrypt’s DeFi email newsletter. (art: Grant Kempster)

Non-fungible tokens (NFTs) gets a major facelift.

“Life was much better when you bought a jpeg, enjoyed the jpeg and didn’t expect anything to come with it,” wrote Robness V2 on Twitter earlier this week.

It is a commentary on NFTs as purely works of art; pico top pet rockness. They were to be admired in all their pixelated glory somewhere on the blockchain.

They were perhaps changed from time to time, with owners announcing the end of an era when ownership changed hands.

Yes, digital pet rocks are a real thing. Source: Twitter.

But there it was: Crypto art without any of the bells and whistles.

These days, however, startup after startup is rolling out a whole package of extras, giving NFTs access to Discord channels, smashing them into fractions, rehypothecating them, and giving them leverage. The list goes on and on.

What is emerging, along with the wider use of NFTs, is a new niche that applies a variety of DeFi technologies to drawings of monkeys and penguins. It’s called NFTFI, and it wants these tokens to evolve into the heralded “money legos,” which can be connected to different protocols to make these pet rocks a little more capital efficient.

Let’s unpack how some of the most common ideas from DeFi are applied to NFTs.

There is an app for that

Finance’s bread and butter has always been lending and borrowing. Crypto is no different.

From OG DeFi platforms like Aave and Compounded for newcomers like Euler and Notional, this market is one of DeFi’s biggest.

Now it comes to the NFT area. BendDAO, ParaSpace, JPEG’d, NFTfi (the brand, not the category), and a whole host of projects have emerged that allow you to post NFT as collateral and borrow another asset in exchange. This allows enthusiasts to raise liquidity without having to sell their precious Doodles in the process.

Lending an illiquid NFT certainly seems risky at first glance – after all, price discovery in such a market can be a highly volatile experience (leaving investors clamoring to re-up collateral lest they be liquidated).

But that hasn’t stopped roughly $23 million in lending activity across relevant projects. Per Dune, pulling data from Bend, NFTfi, Pine, Arcade, JPEG’d, Drops and x2y2, the niche seems to have found something of a captive audience.

NFT loan activity. Source: Dune.

Users across these platforms are also steadily increasing.

That’s a big change compared to users pouring into the DeFi casino, with figures from NFT’s lending and borrowing platform just scraping 200 users per day across all these projects. Still, it certainly seems to be becoming a bit of a trend.

Daily users on NFT lending platforms. Source: Dune.

After lending markets, degener is also turning his attention to trading various NFTs on jpeg-centric decentralized exchanges. Platforms like SwapStation, NFTX, Blur and SudoSwap are all trying to create liquid markets for tokenized art.

It also seems that the niche is getting attention from some DeFi heavyweights as well.

Last summer, Uniswap splashed out and acquired NFT aggregation platform Genie, calling its long-awaited NFT platform a “Google search” for trading.

That’s just the tip of the iceberg. Beneath the surface, there is tons more.

Stay tuned guys. The digital pet stones come to life.

Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails get to read the essay before it goes on the page. Subscribe here.