NFTs have always been very popular in the cryptocurrency world, with billions of dollars in transactions traded monthly. Nowadays, there is more to NFTs than just buying, holding, or setting them up as profile pictures. NFT lending is a new feature from the combination of NFTs and DeFi. This article will talk about what NFT lending is, how it works, as well as, the examples of the platforms that provide NFT lending services.
What is NFT lending?
Short Definition: NFT lending is how borrowers collateralize their NFTs for crypto coin or fiat money loans.
NFT lending is a type of loan that uses NFTs as collateral, stored on the smart contract. The idea originally came from the lack of usage of the staked NFTs, because when NFTs are staked, they cannot be used to generate any more returns.
NFT lending allows users to place the NFTs as collateral, then lock them for crypto coin or fiat money loans while the lenders can lend their money on the platforms and gain their returns.
APR rate and the loan term are used as the loan’s condition. When the term is due, the borrower is required to pay back the capital plus interest and get the locked NFTs returned. In case of late payment, the locked NFTs will become the lender’s asset.
NFTs (Non-fungible tokens): A type of digital assets stored on the blockchain that represent their ownership of unique items.
Types of NFT lending
Peer-to-peer NFT lending
Peer-to-peer NFT lending works similarly to a normal loan; the transactions are done directly between the lenders and the borrowers, for example, a borrower put an NFT as collateral on the NFTfi platform with a loan offer. The borrower will automatically receive WETH coin (wrap Ethereum), or DAI while the NFT will be transferred to the digital vault within the specific time frame. If the borrower pays off the loan on time, the NFT will be returned, while the lender will earn from the interest.
NFTfi platform: It is a lending platform that allows users to access liquidity with their NFTs.
Peer-to-protocol NFT lending
Peer-to-protocol NFT lending is similar to DeFi lending protocol in which protocol coins are borrowed directly from the lenders. Peer-to-protocol NFT platforms require coin deposits into the pools, from liquidity providers. The borrowers then can automatically access their liquidity after locking their NFTs on the digital vault that works on the smart contract.
To illustrate, BenDAO uses peer-to-protocol type of lending. It utilizes Chainlink’s oracles to pull the floor price data from OpenSea, and then the platform will start to liquidate the loan.
OpenSea: OpenSea is one of the most popular NFT marketplaces. Users can buy, sell, and collect their NFTs on the platform.
However, If the value of the collateral NFTs is lower than the loan, the platform will provide 48 hours for the borrower to pay the debt. Otherwise, the NFTs will be transferred to the lenders.
Non-fungible debt positions
In the DeFi world, MakerDAO platform has been utilizing collateralized debt position lending or CDP: borrowers use ETH as collateral for DAI loans. The borrowers use their Blue Chip NFTs, such as CryptoPunks, Bore Ape Yacht Club, as collateral for synthetic stablecoin loans, similar to MakerDAO.
Blue Chip NFTs: Blue Chip NFTs refer to the most well-known and successful NFT collections.
For example, lenders provide PUSd’ liquidity on the protocol or swap PUSd to different tokens to earn returns on a DeFi protocol. Furthermore, this type of platform uses Chainlink’s oracles to update real-time NFT prices directly from the marketplaces.
NFT rentals
reNFT is a highly recommended platform for NFT rental service provided. NFT rentals are peer-to-peer. Lenders are not required to lock their NFTs on the digital vault, but they can directly transfer NFTs to another wallet directly. More importantly, the NFT owners can set the rental timeframe to provide renters with access to the benefits of the NFTs, such as exclusive project activities.
Lenders (NFT owners) can set the rental price, collateral cost, and duration. After the renters pay the rent plus the collateral to the platform, the NFTs will be transferred to the renters.
The collateral will be returned to the renters after the rental duration ends.
Recommended NFT lending platforms
There are several NFT lending service providers nowadays. This article will recommend two of the most popular ones with lending values of over US$ 20 million; NETfi and Arcade.
NETfi
NETfi is a peer-to-peer and peer-to-protocol NFT lending platform. NFT owners can access the liquidity in the vault and earn wETH, and DAI from providing the liquidity, or peer-to-peer lending. Besides, the liquidity providers will also get their returns, or the NFTs in case of late payment.
Recently, an NFT collector used 104 CryptoPunks as collateral for 8.3 million DAI lending which was the most expensive collateral for NFT lending. A lender platform, MetaStreet, provided 10% APR with 90-day lending duration. Apart from CryptoPunk, BAYC is another NFT project that is often used as collateral which has already been used with over 95 loan contracts.
Arcade
Arcade is a peer-to-peer NFT lending platform. Nexo company lent 1,200 ETH with US$ 3.3 million value using 2 CryptoPunk Zimbies as collateral in May 2022, with 60-day lending duration and 21% APR returns.
Nevertheless, NFT price movements depend on the floor price and the value of ETH. If the value of the NFTs is lower than the borrowed coins, lenders might be at the loss, and not be able to sell the NFTs at the market price in case of late payment.
Therefore, Nexo company has prepared risk management due to the market volatility by reaching out to Meta4 Capital’s investment manager who offers to buy the NFTs at specific prices as the firm believes that the NFT market will be in the long-run bullish trend.
The idea of NFT lending is originally from the DeFi protocol lending in which the NFT holders want to expand their returns by using NFTs as collateral for crypto coin loans while lenders earn from providing the liquidity. However, NFT lending can be risky if the collateral NFTs’ value declines lower than the loan, the lenders will be at loss in case of late payment from the borrowers. Lenders might be able to sell the NFTs to partners or firms at a specific price, but if there’s no offer, lenders can lose the opportunity to earn from selling the NFTs.
Disclaimer: The information provided in this article is not intended to provide investment or financial advice. Investment decisions should be based on the individual’s financial needs, objectives, and risk profile. We encourage readers to understand the assets and risks before making any investment entirely.
