NFT lending – A new way for NFT holders to maximize benefits

Over the past year, NFT has strongly exploded in the world, hence becoming always on top of investors’ minds regarding the crypto market. With this boom, the NFT market is witnessing a new wave of NFT use cases. And just like other assets, NFT is not only for buying, selling, and holding but also lending. So, what is NFT lending and its advantages over others? Whether there’s any risk to it? What are recommended NFT lending platforms? Find out in this article on News Coincu.

About NFT lending

What is NFT lending

NFT lending is the procedure through which borrowers pledge NFT assets as collateral for a loan and then lenders will invest in NFT-backed loans to earn larger returns than typical crypto-backed loans or peer-to-peer (P2P) loans. 

NFT lending provides a few centralized financing (CeFi) platforms that function like traditional lenders by determining rates and conditions, such as BlockFi or Nexo.

Most NFT loans, on the other hand, are only available on decentralized finance (DeFi) platforms, which leverage smart contracts on the Ethereum network to enable loan agreements and guarantee contractual responsibilities are satisfied.

How does it work

For borrowers

If you need money, you may get an NFT loan by putting an NFT you possess as collateral. To qualify for an NFT loan, you must have sufficient assets to pledge as collateral and be prepared to accept the platform’s lending criteria and lender requirements. 

For lenders 

If you want to invest and earn returns on NFT loans, NFT lending works by allowing you to fund a loan and receive returns on the interest paid by the borrower. If the borrower fails to pay the loan, you will be compensated with the pledged NFT.

You must first sign up on an NFT lending platform to invest in a loan. Following that, you may browse a list of debtors searching for a loan and select which loan contracts to finance. You can also specify the forms of collateral that you are ready to take.

NFT lending – An innovative approach to revalue NFTs

On a broad scale, NFT lending is a one-of-a-kind and creative service offering a definite way to enhance and further develop the NFT ecosystem and, consequently, increase the value of those digital properties. In the meantime, from a more personal point of view, the fact that NFT combined with the loan and mortgage concepts enables NFT holders to have sufficient financial assistance without selling their digital assets. This service is appropriate for people who hold NFTs but do not intend to sell them which are foreseen to generate a long-term prosperous revenue after time. . In other words, these services enable NFT holders to optimize the value of their NFT holdings.

The risks of NFT lending

For borrowers

First of all, because NFT lending is such a new business that has been recently introduced to the field, determining the credibility of newly-born borrowers, lenders, or platforms that have no tracking records can be challenging. It makes users more vulnerable to fraudsters and hackers. The scammers will find it easier to prey on new market participants.

Besides, NFTs are notoriously volatile, where their pricing is strongly influenced by customer demand and other market variables that are difficult to anticipate. Therefore, it is hard to evaluate the exact value of NFTs and reflect on the amount of money for loans. It can be challenging for service consumers if the loans are too high for the NFTs to be worthwhile it can also depreciate the exorbitant-to-be NFTs.

For lenders

Unlike deposits at a typical financial institution, the assets you place on an NFT platform are not FDIC-insured. As a result, it is not secure if the platform is hacked or goes out of business. In addition, the fact that NFTs “live” on smart contracts also threatens NFT’s security. Even though there is Securities Investor Protection Corporation (SIPC) insurance intended to safeguard assets, cash in a brokerage account, and NFTs, the pledged digital properties are not 100% safe. Smart contracts are a novel technology that is still in its early stages. Therefore, once NFT lending platforms experience hack attacks or organizational breakdowns, lenders’ assets are unprotected.

Besides, similar to the risks of borrowers, lenders also have to face the fluctuating price of NFT. It will cause a big loss if its price goes down.

Top recommended NFT lending platforms.

To some people, NFT lending might be a new norm and bring about threats to their properties, however, we cannot deny that it is being discussed very often and big names are developing the service to the masses. Here are the top recommended NFT lending platforms you might want to refer to.

Arcade NFT lending

Arcade is a Web 3.0 platform that enables NFT liquid loan marketplaces. In simple terms, this platform is a peer-to-peer marketplace that allows users to use an escrow system to receive fixed-rate loans collateralized by their Ethereum-based NFTs. It focuses on developing primitives, infrastructure, and applications to help NFT flourish as an asset class. 

Arcade enables trustless off-chain order matching by validating loan term attestations from borrowers and lenders with structured digital signatures. Loans are paid on-chain and stored in decentralized escrow, leveraging Ethereum’s cryptographic security guarantees.

Arcade’s initial product is an Ethereum-based peer-to-peer lending platform that has three distinct features, including:

• Asset Vault: Arcade provides an NFT-wrapped smart contract. Users can deposit hybrid assets (ERC20, ERC721, and ERC1155) to mint an NFT representing the entire basket.
• Borrowing: Borrowers can make loan requests for loans of at least one-day length, collateralized by their NFT, specifying parameters such as financing amount, duration, and interest rate. Borrowers must wait for lenders to accept their loan requests once they have been created. When borrowers file a loan request on Arcade, they can choose “open to offers” to allow lenders to submit loan bids against this collateral.
• Lending: On Arcade, lenders can investigate new loan proposals that require funding. ERC20 tokens, generally wETH or stablecoins like USDC, are used to fund the project. In terms of liquidation, Arcade presently lacks auto-liquidation and marginal features. Borrowers can continue to pay off their loans when they default as long as the lender has not seized the collateral.

One of the main advantages of Arcade is its low risk. Because Arcade, being a peer-to-peer lending network, simply serves as a mediator. The danger is substantially minimized because the ability of P2P lending loan requests to be satisfied is dependent on the will of the borrower and the lender. Arcade NFT lending just takes a little part of each purchase. 

Besides, instead of charging a 2% fee like in the past, Arcade now allows users who borrow against their assets to pay a 0% charge on the loan’s principal. 

However, P2P lending may not be as efficient as it appears. Borrowers cannot be funded if no lenders are willing to accept their requests. 

NFTfi NFT lending

NFTfi is another well-known NFT lending platform that has been marking impressive performance in lending and borrowing digital assets. NFTfi has handled over $165 million in NFT-backed loans so far in 2022 and a total loan volume of $207 million across 12,119 loans since its beginning in 2020. NFTfi enables NFT owners to get the liquidity they require by receiving secured wETH and DAI loans from peer-to-peer liquidity providers in a fully trustworthy way. NFT liquidity providers utilize NFTfi to generate lucrative returns or, in the case of loan defaults, obtain NFTs at a significant discount to market value.

Unlike Arcade NFT lending, the NFTfi service fee is 5% of the interest solely generated by lenders on successful loans (Arcade charges borrowers 2%). There is no service charge in the event of loan default.

NFTfi is the platform that gathers a lot of NFT collections that can be used to borrow crypto, such as Bored Ape Yacht Club, Mutant Ape Yacht Club, Art Blocks 1 and 2, Wrapped, Cryptopunks, World of Women, and more. It makes NFTfi become a popular choice among both borrowers and lenders. 

In terms of lending limits, the platform provides 20-80% returns on lent funds, with borrowers able to borrow up to 50% of their asset worth (LTV).

Nexo.io NFT lending

On the list of well-recommended NFT lending platforms, Nexo, originally a centralized  Bitcoin loan platform, has recently participated in this thriving NFT segment.

Nexo provides an NFT lending OTC service, with each loan requiring a simple KYC and application form. Currently, only BAYC and CryptoPunks are accepted as collateral, and the NFT must be worth more than $500,000 with an APR of around 15% and a loan-to-value ratio ranging from 10% to 20%.

The centralized NFT lending method is appropriate for institutional clients. Nexo is less hazardous than the decentralized mode. 

Drops NFT lending

The last must-mentioned NFT lending platform is Drops DAO. Drops DAO makes loans to NFT and DeFi assets, providing them with much-needed liquidity. The protocol employs lending pools that allow any form of NFT asset from collectibles and metaverse objects to financial NFTs. 

The loan has no maturity date in this platform, and the interest rate is determined depending on the use of the NFT pool. An oracle is used to calculate the real-time pricing of NFT. So far, only CryptoPunks have had enough liquidity to utilize the oracle.

Verdict

However, the pooling method of NFT lending also has problems, such as unfair offers and high risk. In detail, because they are all identical, this type of pool mode is obviously appropriate for FT lending. Because in the NFT market, we always know that NFT, which is rarer, has a higher value. Thus, this model will dilute NFTs with high rarity, making the loan-to-value ratio for this fraction of NFTs unfair. Besides, in general, the pool mode in smart contract logic is relatively difficult, with the possibility of malevolent price manipulation and serial liquidation. The present low liquidity of the NFT market poses a significant systemic risk.

If you have any questions, comments, suggestions, or ideas about the project, please email ventures@coincu.com.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your research before investing.

Issac

Coincu Ventures