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Non-fungible tokens are undoubtedly one of Web3’s most popular and successful sub-products. For community members, they remain a great cryptocurrency asset class. While NFTs are broadly considered collectibles in the form of art, sports memorabilia and the like, they can also be used as more than just a fancy digital term for your name.
NFTs tend to be relatively illiquid compared to cryptocurrencies like Bitcoin, Ethereum, etc. and can take months to sell at an attractive price. Additionally, if you are selling your NFT, it must be sold as a whole and cannot be sold in parts (unless fractional ownership is offered). NFT owners looking to make quick profits while retaining ownership of their digital assets can now do so through NFT lending.
What is NFT lending?
NFT lending is a practice whereby one can borrow or lend digital assets for a set period of time, typically against interest or collateral. There are four structures in the system: peer-to-peer NFT lending, peer-to-protocol NFT lending, non-fungible debt positions, and NFT leasing. According to Grand View Research, a market research firm, the global market size for non-fungible tokens is estimated at US$20.44 billion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 34.2% from 2023 to 2030. According to Paraspace, an NFT money market protocol, and Bitkeep, a multi-chain wallet, the current amount of NFT lending and lending has exceeded $430 million.
Types of NFT lending
Peer-to-Peer NFT Lending – This model does the traditional thing and connects lenders and borrowers. A user can deposit his NFT as collateral for a loan and evaluate its loan value based on the market value. They receive loan offers from potential borrowers and once they accept an offer, they receive the cryptocurrency from the user’s wallet. The NFT is automatically transferred to a digital escrow vault for the life of the loan. Once the term expires, the NFT owner must repay the loan to get their NFT back into your wallet while the borrower receives their investment plus interest. Should the NFT owner default, the borrower obtains ownership of the NFT at a huge discount. Fortunately, the volatile change in the minimum price does not affect the credit conditions. Both parties can mutually negotiate the terms and there is no self-liquidation. However, interest rates tend to be higher as there is no liquidation during periods of falling floor prices.
Peer-to-Protocol NFT Lending – This form of lending is inherently more liquid and faster. In peer-to-protocol (aka peer-to-pool NFT lending), users borrow directly from a liquidity pool, where liquidity providers deposit tokens into pools. This is where owners list their collateral and deposit it in a smart contract against which they receive funds. Typically, the term is not monitored in this model, but the health factor of the NFT loan is. If the health score falls below market value, the digital asset is transferred to the protocol where the NFT owner can be given a grace period to repay the amount to reclaim the asset.
Non-Fungible Debt Positions – This is a loan agreement that is secured and stored on a blockchain. In this model, NFT owners lock their digital assets for lending in stablecoins like DAI. In doing so, they will overcollateralize ETH (a volatile and risky asset) to obtain a loan in DAI (a stablecoin allegedly backed by fiat currency). On other platforms, users can collateralize whitelisted blue-chip NFTs and borrow a synthetic stablecoin. Once the borrower repays the loan amount, they regain ownership of their NFT. NFDP can be traded on a secondary market, making it a more flexible way for users to exit the investment.
NFT Rentals – It is a permit-free market that allows prospective renters and renters with different rental conditions to engage. This is slightly different from others as the main objective of leasing is not to generate income, but rather the benefits and benefits that come with the digital asset. Since the benefits are not monetary, the contracts can be entered into without repayment terms, interest or liquidation. The secured NFT is not transferred to a digital vault, but to another wallet for a fixed period of time against a crypto fund. The renter has access to associated benefits such as freebies, community, etc. while the NFT owner gets the asset back at the end of the period.
Jump.trade, an NFT marketplace with a wide range of games, offers its users the opportunity to rent NFTs for its MCL game.
“The thrill of a game lies in the limited supply of game NFTs. However, we also understood that there might be some customers who want to buy NFTs only to return them because they look forward to high growth potential.” To bridge the gap and expand the number of users that we believe should be independent of the number of NFTs, we have introduced rental devices. We thought loaners could also help maximize the reach of the game and platform,” shares Kameshwaran Elangovan , Co-Founder and COO, Guardianlink.
ADVANTAGES
So what’s in it for the borrower and the owner? Reduced risk and diversification are the main reasons one should choose to borrow an NFT. Since NFTs usually cost a significant amount, it is not feasible for every budget. By opting for NFT lending, an enthusiast can use digital assets to create an alternative source of income for themselves at an affordable cost.
As an owner, asset liquidity can easily be achieved for NFTs, which have lower liquidity compared to other fungible digital assets such as blue chip tokens. NFT loans can provide quick liquidity for owners who need fiat or crypto liquidity or want access to upfront capital. Capital can be easily raised without having to part with your ownership of the asset.
Typically, not all NFT marketplaces offer NFT lending opportunities. On May 1st, Blur, an NFT marketplace, launched Blend, a peer-to-peer protocol for NFT perpetual borrowing and borrowing, developed in partnership with Paradigm. According to a Nansen report titled Blend: Disrupting NFT Financialization, at the time of publication (May 25), Blend had become one of the leading NFT lending platforms, facilitating over 15.8k loans totaling 123.5k ETH (224th $.4 million). Volume. Around the same time, Binance, a global cryptocurrency exchange, announced the Binance NFT Loan offering.
Rising Concerns
A segment of the industry describes NFT lending as “predatory” in nature. If the value of the borrowed NFT decreases, the borrower may have a digital asset that is worth less than it was when the original loan agreement was entered into. Then there is also the fear of liquidation if the NFT price falls below 30-40 percent.
LOOKING AHEAD
While NFT loans and loans are booming compared to NFT sales, such offers are mainly offered by platforms based in India. However, some players are active in this area. The potential for NFT loans and lending is huge in India. “In 2022, the Indian NFT market was valued at US$3.3 billion and is expected to reach US$27 billion by 2028. As the NFT market in India continues on its growth trajectory, the incorporation of NFT lending services can play a crucial role in improving liquidity and accessibility, giving a significant boost to the overall market,” says Kapil Jain, Co-Founder and Chief Business Officer by Piro Space Metaverse. This belief is echoed by Vikram R Singh, Founder and CEO of Antier: “NFT lending is a promising blockchain application that unlocks the value of digital assets without selling them. Indian NFT marketplaces can increase liquidity by facilitating lending and lending with NFT collateral, creating opportunities for creators and collectors.
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