The Complete Guide to NFT Lending & How It Works
NFT Financialization
Non-fungible tokens became an integral part of Web3, with the market expected to reach a size of USD 147.24 billion from 2021 to 2026. Still, you might have questioned if these, until recently illiquid assets, are worth it. Thus, it’s important to know what you can do with NFTs to gain additional benefits and access liquidity. Enter NFT lending, a fairly new and exciting layer of the financialization of NFTs that is allowing users to access liquidity and profit from non-fungible tokens.
In this guide, we will explore how NFT lending works and how you can start to make the most out of NFT collateralized loans. You will learn about the types of lending transactions, as well as example platforms that operate on different models of lending. So, let’s start with the basics.
What Is NFT Lending?
While the industry of NFT lending uses very sophisticated financial technology products to operate, its concept is quite simple. At its core, NFT lending means simply using your NFT as collateral for a loan. As their name implies, NFTs are non-fungible products, meaning they don’t provide much liquidity to their owners. Based on this issue, the community came up with the idea of lending, allowing NFT holders to receive NFT collateralized loans whenever they need liquidity for other investments.
The concept is straightforward: You deposit your NFTs into a smart contract and receive an agreed amount of cryptocurrency (or sometimes FIAT money) in return. This way, the borrower can access liquidity to make other investments, while the lender can gain interest on the exchange.
In case the borrower is not able to pay back the loan according to the agreed terms, the lender will keep the NFT collateral. If the borrower pays back the NFT collateralized loan with interest, they receive their NFT back.
The Importance of NFT Lending
What is the biggest benefit of NFT lending? Providing liquidity to a quite illiquid market. Many investors are afraid to enter the NFT side of the blockchain realm because they think these assets are bought to hold. Before NFT financialization, including lending, that was certainly the case. Selling most NFTs is quite challenging, thus accessing their value is hard. NFT collateralized loans mean easily and at time instantly accessing the liquidity of your NFT without having to sell it.
Not having to sell is another important advantage of NFT lending. It enables owners to keep their assets without losing opportunities. Many people don’t want to sell their NFTs. Thus, NFT collateralized loans enable investors that wish keep their NFTs to still access liquidity and make profits from them.
NFT lending (especially rentals – more on that later) also lowers the entry barrier for people interested in this market. They can get an NFT for some time to become a part of an exclusive community or gain a competitive advantage in video games. Not everyone needs to have NFT forever, but sometimes they are necessary to fulfill other needs.
Basically, NFT lending solves problems that made many crypto enthusiasts question the validity of NFTs. Investors that don’t want to freeze their assets can now enter the market without necessarily compromising their liquidity. They can buy NFTs they are interested in, use them as collateral, and use the tokens they obtain to get higher returns. Thus, NFT collateralized loans opens a set of investment possibilities for NFT holders and liquidity lenders.
Types of NFT Lending
There are four main methods that enable NFT collateral loans. Each of them has pros and cons, so make sure to pick the one that matches your requirements.
Peer-to-Peer NFT Lending
It’s a classic lending mechanism where you enter a platform that matches lenders and borrowers. As the NFT owner, you place your asset in the system and wait for offers. When a particular offer is accepted, you receive tokens – each platform decides which crypto they will provide.
The NFT is held within a smart contract and is sent back to you when you repay the loan. If the loan is not repaid in its designated time, the other party receives a large discount on your NFT, and they can acquire it. It’s worth mentioning that changes in the floor prices of NFTs don’t influence these NFT collateral loans. They are separate transactions that have their prearranged terms.
Peer-to-Pool NFT Lending
Also known as peer-to-protocol, it works similarly to DeFi lending protocols. Instead of borrowing from single users, you get the coins directly from the liquidity pools. Providers add crypto assets to these pools and borrowers get access to liquidity immediately after they lock their NFTs in the smart contracts.
Such lending mechanisms require special infrastructure that connects specific blockchains with data streams that deliver information on the floor prices of NFTs. That indicates that sudden changes in prices can influence the value of transactions. Some platforms fix that by giving the users a certain period to pay the debt when the price significantly drops. It’s best to read the risk policy of a peer-to-protocol platform before using it.
Non-Fungible Debt Position
Some platforms offer collateralized debt position (CDP), which allows borrowers to get DAI loans collateralized with ETH. Non-fungible debt position follows the same model but instead of ETH, users can use whitelisted Blue Chip NFTs (such as CryptoPunks or Bored Ape Yacht Club) as collateral to receive a loan of synthetic stablecoins.
The received tokens can be used in two ways. Either you can provide liquidity for the protocol or use the coins elsewhere (after swapping them for another crypto). In both situations, you can get a return. The rest works similarly to previous types of NFT lending – you have to pay back the debt on time. Protocols that offer non-fungible debt positions also stay updated on NFT prices using the same methods as peer-to-protocol platforms.
NFT Rentals
The final method you can use is NFT rentals, which can be seen as a whole separate vertical of NFT financialization. It works like peer-to-peer lending but instead of locking the NFT in a digital vault (the smart contract), it simply requires the NFT owner to transfer the asset to the borrower’s wallet. This means that they basically “rent” the NFT for a defined time based on arranged rules. The user that becomes the NFT’s “tenant” receives all the perks as the original owner, for example, access to exclusive Discord servers or the possibility to participate in giveaways.
When the NFT collateral due date comes, the NFT is returned to the owner. This particular type of NFT lending is often about the privileges NFTs can offer. For some people, they are a symbol of status and can help their social media presence to grow. If they can’t afford to buy an NFT, rental could be a solution – like with all luxury goods.
Recommended NFT Lending Platforms
There are many NFT lending platforms on the market offering the different types of services mentioned above, from NFT collateralized loans to rentals. Here are the ones we recommend.
· Model of NFT Lending: Peer-to-Peer
· Currency: ETH, DAI
NFTfi is one of the most popular NFT lending platforms. It operates in a peer-to-peer model. When users collateralize their NFT, they receive wrapper ETH (wETH) or a stablecoin DAI. The NFT is transferred to a digital escrow vault and the NFT collateralized loan works according to the arrangements the parties established.
The platform charges an interest fee of 5% only for successful loans. Borrowers are not charged at all. NFTfi provides a lot of offers with 150 collections available within a platform.
· Model of NFT Lending: Algorithmic Lending Pools
· Currency: ETH
Spice Finance is the new protocol on the block with the aim to improve the complicated NFT lending process by aggregating all loans and pools, adding an algorithmic lending layer that leaves users with vaults that help return NFT lending yields.
Spice will start with their yield optimizer described above and liquidity routing protocol for NFT lending markets.
· Model of NFT Lending: Peer-to-Peer
· Currency: wETH, USDC, DAI
Another well-known peer-to-peer NFT lending platform is Arcade, which stands out for a few reasons. For starters, borrowers can set up their own terms for the NFT collateralized loan beforehand. Lenders can then accept the loans or make their own offers and receive ETH for them.
In addition, Arcade offers users the tool to wrap many NFTs into one asset that is then collateralized into a single loan. It is also the only protocol that allows lenders to make a loan offer on whole collections. Currently, there are no fees associated with any transactions done on Arcade.
· Model of NFT Lending: Peer-to-Pool
· Currency: ETH
BendDAO is a peer-to-protocol platform for NFT lending that provides NFT collateralized loans of ETH. Their website is very transparent with all the information about current APRs, the number of collaterals in particular NFT collections, and data on the liquidity of reserves. BendDAO enables its users to support their liquidity or to use the tokens in other places.
The platform uses a complicated algorithm powered by Chainlink that retrieves data from trusted marketplace to calculate the floor prices of NFTs. They have a policy that doesn’t allow liquidation to happen when the health factor of the loan drops to a certain value. There’s a 24-hour protection period that allows the borrower to repay the loan, so they don’t lose their NFT.
· Model of NFT Lending: Non-Fungible Debt Positions
· Currency: ETH, $PUSd, pETH
Inspired by MakerDAO, which offered DAI stablecoin for collateralized ETH, JPEG’d decided to offer non-fungible debt positions. It works on the same pattern as MakerDAO, but it gives the stablecoin $PUSd for some Blue Chip NFT collections such as CryptoPunks. Like BendDAO, JPEG’d uses Chainlink oracles to keep floor prices updated.
JPEG’d is the only platform that offers non-fungible debt positions, due to the high risk of over-collateralization that this type of transactions carry. Since it only operates on one NFT collection, it still represents a small market.
· Model of NFT Lending: NFT Rental
· Currency: ERC-721, ERC-1155 and blended assets
Last but not least, there’s reNFT which specializes in NFT rentals. It simplifies the process and provides additional security for involved parties. The NFT owners can set up conditions for their rental offer and if they are accepted, the NFT is transferred to a tenant for a set date. The platform works similarly to peer-to-peer NFT lending apps, but there are no interests, strict repayment rules, or liquidity issues.
reNFT allows users to build their own NFT rental marketplaces using the provider’s infrastructure. the protocol claims to be a “chain agnostic” protocol, meaning it can be compatible with any blockchain on the market. Right now, it has a list of prioritized chains, but everyone can send a request to add another to the list. The platform is focused on being as user-centric as possible.
Conclusion
NFT lending is still a quite fresh concept, but it’s rapidly gaining popularity within the web3 community. It’s a great way to use one’s NFTs for further gains. NFT collateralized loans enable NFTs to be used for accessing liquidity and actively expanding a crypto investment portfolio. This tool opens a whole new set of possibilities for NFT holders and liquidity lenders.
However, you should remember that NFT lending can be risky, like many crypto operations. That’s why education is crucial before using your digital assets on these platforms. If you don’t want to lose your NFT, be sure to start small, be cautious about “too good to be true” offers, and always pay your loans on time.If NFT lending is not what you had in mind, there other investment opportunities when it comes to NFTs. For all investors that want to explore the NFT ecosystem even further, nftperp provides a unique experience of NFT trading. It’s another great way to place bets on Blue Chip NFTs without necessarily owning one. Powered by a vAMM, we users can trade with up to 5x leverage. You can explore more on our Discord.
