Key Takeaways: What is NFT Lending?
- Using your NFT as collateral to secure a loan provided by a lender looking to make a profit on their investment is known as “NFT lending.”
- NFTs have been dealing with limited liquidity and cash flow generation, just as conventional arts and collectibles.
- By adding additional liquidity to the market, NFT lending modifies this outdated narrative.
Non-Fungible Tokens (NFTs) are no longer just JPEGs used as profile photographs; they are now serious business. NFT financing, the newest fad that lets collectors use their collections as collateral to receive cryptocurrency loans, is exploding. Numerous decentralized finance (DeFi) initiatives have responded to the need to increase NFT liquidity through lending because the majority of them lack appropriate liquidity.
NFTs’ utility is expanding, from fantasy gaming to social clubs, even though NFT floor prices have fallen along with the entire cryptocurrency market. The demand for and acceptance of NFT loans has increased as a result of their usefulness. Since NFTs are blockchain tokens, they may be borrowed against and lent out.
The NFT lending trend is explained in this article. Learn what NFT lending is, how to lend an NFT, different types of NFT lending, and NFT lending platforms by reading through to the conclusion.
What is NFT Lending?
On a website like NFTfi.com, NFTs are pledged as collateral for loans, which is known as NFT lending. An investor or lender who wants to earn interest on their investment offers the loan. Lenders typically use NFT-based loans to earn larger returns compared to conventional and crypto-based loans. Similar to lending on cryptocurrencies, NFT lending uses digital currencies as security. To get loans, however, borrowers must lock their NFT assets as collateral.
Rarely is NFT lending offered through centralized finance (CeFi) programs like Nexo, which operate as conventional lenders by setting the conditions and rates for loans. Instead, DeFi programs that use smart contracts to control the conditions and rates offer the majority of NFT loans. Since NFT lending is a new trend, it is likely to change as more people and money become engaged, regulations are implemented, and so on.
The Demand for NFT Lending
NFTs are special blockchain tokens that signify ownership of the real estate, collectible cards, music, artwork, in-game avatars, tickets, domain names, and other tangible and intangible goods. NFTs’ non-fungibility property—the inability to be easily divided or duplicated—is its key selling point. NFTs are indivisible and irreplaceable due to their unique digital IDs. Additionally, you can quickly validate them by tracing their blockchain provenance.
On the other hand, if you can’t afford to buy a whole bitcoin, you may buy parts of a bitcoin because cryptocurrencies are very divisible.
The most well-known NFT sale that made news in 2021 was Beeple’s EVERY DAYS: THE FIRST 5000 DAYS. In March 2021, an NFT frenzy was sparked when the collection fetched a staggering $69,346,250 at a Christie’s auction. Other significant sales include the first tweet ever sent by former Twitter CEO Jack Dorsey, which went for $2.9 million, and a legendary LeBron James slam that sold in February 2021 for $208,000. The official site for producing and exchanging NBA-based trading cards with NBA players is The NBA Top Shot. NBA fans may purchase these trading cards or sell them for a profit.
The creation of the uniqueness of NFTs depends on their absence of fungibility. Digital collections now fall under a broad asset class that resembles both traditional art and other tangible collectibles like Pokémon cards in certain ways. Non-fungible tokens do, however, have certain drawbacks. For instance, compared to more common crypto tokens and currencies, NFTs tend to be less liquid. You have to advertise it on an NFT marketplace and wait for a buyer to come along, as opposed to exchanging it quickly on an exchange.
This is the point where DeFi lending is useful. The most recent methods for releasing the full financial potential of NFTs are NFT-backed loans and fractionalized NFT ownership through DeFi apps. These faucets build infrastructure so that NFT collectors may lock up their assets as security for cryptocurrency loans.
It is difficult to use NFTs effectively after acquiring or minting them without selling them. Unlike fungible assets, NFTs cannot be staked or farmed for income, therefore they will sit idle until they are sold. However, NFT lending enables you to do so by using your collections as collateral on a lending platform to get loans. Then you may utilize the loan to buy more NFTs (particularly recently created NFTs with lower floor prices), tokens that you can exchange for fiat, or other tokens for DeFi staking and yield farming operations.
How Do You Lend an NFT?
Platforms for NFT lending enable NFT investors to create their conditions and prices for borrowing cryptocurrency. Based on the asset’s worth, as a borrower, you may be able to obtain a loan for up to 50% of the NFT’s value at interest rates ranging from 20 to 80%. Compared to conventional loan platforms, NFT lending protocols are easier to understand, more transparent, and quicker. There is no middleman to check your identification and creditworthiness and spend days or weeks deciding whether to accept or reject your application.
DeFi applications employ smart contracts to give consumers complete control over their assets. In essence, the collateral is secured in an automated smart contract. The floor prices of comparable collections as well as the NFT’s prior transactions are taken into consideration by lenders when determining the collateral’s “fair worth.” Once the borrower and lender have reached an agreement, the borrower transfers the NFT from their wallet to an escrow system, and the protocol takes care of the rest. The NFT will be forfeited if the borrower does not pay back the loan plus interest within the allotted time.
Fixed-period, fixed-rate loans are offered through lending platforms like NFTfi.com and Arcade. They do not have access to the cash or the collateral, and they do not sell the collateral when its value drops. However, if the loan-to-value ratio hits 33% or more, some protocols, including JPEG’d, will liquidate the collateral.
Types of NFT Lending
Peer-to-Peer NFT Lending
The transactions in peer-to-peer NFT lending take place directly between the participants, just like in traditional crypto loans. As an illustration, a borrower with a loan offer offers an NFT on NFTfi as collateral. Under particular terms and circumstances, the collateral will be kept in a digital vault and given to the borrower as wrapped Ether (WETH) or DAI. The borrower receives their NFT when they pay off their loan and interest within the allotted term, just as the lender does when he receives his investment plus interest. An illustration of a peer-to-peer NFT lending platform is NFTfi.
Peer-to-Protocol NFT Lending
Peer-to-Protocol Similar to DeFi lending methods, NFT lending involves borrowing native assets directly from lenders. Liquidity providers (LPs) must deposit tokens into pools on peer-to-peer networks. By putting their NFTs into accessible vaults, the borrowers can have access to liquidity.
This approach is used by GenDAO to provide NFT loans. It obtains floor pricing information from OpenSea using Chainlink oracles.
Non-Fungible Debt Positions
Collateralized debt position lending has been used by MakerDAO to offer cryptocurrency loans; to be eligible for DAI loans, borrowers must lock ETH as collateral. To be eligible for synthetic stablecoin loans like those offered by MakerDAO, borrowers in non-fungible debt positions must lock their NFT assets. Lenders can produce yield on DeFi protocols by offering PUSD liquidity or by exchanging PUSD for other tokens.
One of the NFT lending systems that offer non-fungible debt positions is called reNFT.
NFT Lending Platforms
To provide NFT loans, NFTfi makes use of the peer-to-peer and peer-to-protocol approaches. By securing their NFTs in safes, borrowers may have access to liquidity and obtain wETH or DAI tokens. The LPs, on the other hand, are compensated for supplying liquidity. Three lending techniques are used by the platform:
Lending – In this situation, the borrower is given access to money. A borrower locks their NFT in a vault in exchange for a loan from a lender in the form of wETH.
Lending for profit – In exchange for cash rewards in the form of interest rates, you lend to other cryptocurrency users.
Lending to acquire – This method is frequently employed by users who also serve as significant NFT collectors. Furthermore, it is perfect for customers that wish to accumulate a large number of NFTs cost-effectively over time.
Arcade, previously known as Pawn.fi, is a web3 solution that offers NFT loan services. It focuses on developing primitives, tools, and apps to help NFTs expand. It uses structured digital signatures to certify loan conditions between parties, allowing for trustless off-chain order matching. Loans are handled on-chain and stored in a decentralized escrow, which is protected by Ethereum cryptographic guarantees. Users can exchange NFTs for other NFTs or crypto in addition to lending them.
Drops, unlike NFTfi and Arcade, allow loans for NFTs and DeFi assets, allowing them to earn more value. Lenders may finance liquidity pools with any asset using the Drops DAO. Borrowers can use their idle DeFi assets and NFTs to get trustless loans and create additional income. In general, the community-based protocol permits a broad variety of assets to serve as collateral, ranging from metaverse products to NFTs to DeFi assets.
FAQs – NFTs Lending
NFT lending connects the NFT and DeFi markets. It provides much-needed liquidity to NFT assets by allowing NFT holders’ monies to be utilized in other pursuits. This stops collectors from selling their assets at a loss due to a pressing financial necessity. NFT lending also enables lenders to put their assets to work and earn interest. Though no one can foresee the next NFT trend, it is reasonable to state that NFT lending will continue to produce alternative investment possibilities in 2022 and beyond by providing liquidity choices to a famously illiquid sector.
Please bear in mind that the material in this article is not financial or investment advice. The information in this article is strictly the author’s opinion and should not be interpreted as trading or investment advice. We make no assurances about the completeness, trustworthiness, or accuracy of this content. The cryptocurrency market is notorious for its tremendous volatility and irregular moves. Before investing, any investor, trader, or the regular crypto user should perform comprehensive research and get familiar with any local regulations.
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