NFT lending is nothing more than NFT owners using their NFTs as collateral for loans; the term simply refers to the act of lending NFTs. The sole purpose of the NFT is to act as collateral.
NFTs were initially just adorable JPEGs with sentimental value, but they have since grown into a thriving industry. A recent development in that industry is NFT lending, which enables NFT owners to utilize their NFT collections as collateral for loans. NFTs are now a practical financial tool for investors who want to communicate with DeFi as a result.
However, using digital assets as collateral isn’t the only aspect of NFT lending. It is a DeFi subsystem whose complexity has increased recently. Despite its complexity, NFT peer-to-peer lending is understandable, and this article makes an effort to do so.
NFT Peer-to-Peer Lending: What Is It?
NFT lending is just NFT owners pledging their NFTs for loans. The NFT lending indicates that NFTs are lent. The NFT solely acts as collateral.
NFT lending is mostly peer-to-peer because market makers and centralized apps rarely offer it.
NFT financing is a new cryptocurrency industry. It could be due to NFTs’ liquidity issues.
Market makers or controlled exchanges can buy cryptocurrencies without a buyer. NFTs are an exception since they must be listed on an exchange before being bought. Centralized exchanges probably don’t offer NFT loans.
NFT lending is growing. This rise is due to NFTs being idle assets. They cannot stake or harvest crops. They must be sold when their value rises. Unlike NFTs, regular cryptocurrencies can make money in your wallet.
NFT financing tackles this idle problem by letting users use their NFT collections as collateral. These loans can be used to buy yield farming tokens or invest in high-yield cryptocurrency projects.
DeFi supports most NFT loans. Smart contracts control peer-to-peer transactions. The NFT owner must refund the loaned bitcoin plus interest when it matures. The smart contract returns the NFT immediately. If the loan and terms aren’t met, the owner loses the NFT.
How Lenders Handle the Volatility of NFTs
NFTs are just as erratic as cryptocurrencies, making it challenging to value them. An appraisal is a crucial step in the lending process since lenders won’t provide a loan unless they are confident that the collateral is worth it.
This is a straightforward self-evaluation system. The borrower posts the NFTs they are willing to use as collateral, and prospective lenders determine their value based on the posted NFTs. The lender won’t accept the offer if the NFT value isn’t sufficient. Therefore, it is the borrower’s responsibility to overcollateralize and provide NFTs that will make the lender’s risk worthwhile.
This exchange is permissionless and decentralized because smart contracts control it. As a result, there is no chance of default, and both parties will always be required to fulfill their duties.
Additional Forms of NFT Lending
Three red dice are combined to form the letters “NFT” on a computer component over a cash pile.
Borrowers have access to a variety of loan options in addition to NFT peer-to-peer lending. They can also use non-fungible debt positions, peer-to-peer protocols, and NFT rents.
Peer-to-Peer Lending using NFT
Borrowers have access to a variety of loan options in addition to NFT peer-to-peer lending. They can also use non-fungible debt positions, peer-to-peer protocols, and NFT rents.
Peer-to-Peer Lending using NFT – Peer-to-peer lending and NFT peer-to-protocol lending are very similar. The only major distinction is that customers that use peer-to-protocol lending obtain credit from a liquidity pool as opposed to a single borrower. The pool functions somewhat like a centralized market maker that manages loans on behalf of others.
Borrowers enter into a smart contract with the liquidity pool when they want to borrow money from it. The pool lists the NFT if the borrower fails on the loan. The pool may give the liquidity provider ownership of the NFT when the collateral is less than the amount borrowed.
Rentals NFT – A peer-to-peer service, NFT rentals. Typically, owners who want to rent out their NFTs to others use these services. Their motivations for lending their NFTs may be related to whatever unique features the NFT may have.
For instance, if an NFT allows entrance to a performance but its owner is unable to go, they can rent it to someone else.
In this scenario, the NFT’s lender determines both the rental cost and the length of the rental. The NFT is obtained by the borrower after they apply, pay the fee, and receive it for the allotted period of time. The smart contracts refund the NFT to its proper owner after that period of time has passed.
Positions in non-fungible debt – MarkerDAO is unique in that it allows for this type of lending by exchanging collateralized NFTs for stablecoins. As a result, NFT holders must lock their NFTs with MarkerDAO in order to receive loans in the stablecoin DAI.
The smart contract automatically issues the DAI token when the requirements are met. Start with 150% of the loan for the NFT asset. If its value falls below 150%, the NFT becomes uncollateralized, incurs a 13% liquidation penalty, and pays a stability fee.
Lending Platforms for NFT
NFT lending has a few trustworthy lending service providers despite being a young business. Before choosing one of these lenders from the one on this list, consumers should conduct more study.
NFTfi – When collateralizing loans, NFTfi enables users to use peer-to-peer and peer-to-protocol models. Utilizing NFTfi, borrowers can either match with those who are willing to make loans or, alternatively, match with liquidity pools.
Arcade – In the crypto ecosystem, Arcade is a top NFT peer-to-peer lending platform. Arcade functions like a marketplace for loans that matches borrowers and lenders. The collateralized assets are held in escrow until the smart contract is executed, and loans made through Arcade are handled on-chain.
Nexo Corporation – One of the most popular NFT lending protocols in DeFi is Nexo. Early in 2022, the business offered around $3 million in NFT-backed loans, with two CryptoPunk Zombies serving as collateral.
On the other hand
- Overcollateralization is still a major issue with both NFT lending and lending for cryptocurrencies. In a downturn market, the pace of liquidation for NFT assets contained in smart contracts may increase, resulting in lenders’ permanent loss of assets.
DeFi and NFTs are separated by NFT lending. Investors now have another way to profit from DeFi risk thanks to NFT lending. Additionally, because it makes NFTs more functional and frees them up as assets, it greatly increases the liquidity in the NFT market. The expansion of the NFT financing market also means that NFT owners won’t be pressured to sell their assets for a bargain in order to meet sudden financial needs. They can just use it as loan collateral.
