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What Is NFT Lending?

Non-fungible tokens have become a sensation in the global market right now. Since its market boom in 2021, NFTs have conquered every sector including art, entertainment, game, fashion and real estate.

We have already witnessed the immense potential and benefits of tokenisation, fractional ownership and staking. However, the moment you think that use cases of NFTs will stop here, it gives birth to a new sector. 

Enter the NFT’s hottest sector – lending. Though NFTs are illiquid assets, NFT lending has picked its pace in the financial world. 

The two largest NFT lending platforms are NFTfi and Arcade. Since its launch, $20 million in loans have been disbursed on the Arcade platform. 

You can too build an NFT lending platform and capitalize on this latest market opportunity. Leverage the benefits of our NFT marketplace development services to build a secure NFT lending platform and offer users a safe environment for lending and borrowing.

You must have heard about crypto loans. But NFT loans are a new concept. That is why today we are here to help you understand how one can take out loans on NFTs.

What Is NFT Lending?

In the assets market, NFTs are a lucrative instrument. However, it has many underlying issues. 

If you have cryptocurrencies, you can sell them instantly. But you cannot sell an NFT as quickly as cryptocurrencies or other assets. 

It may take months for you to sell your NFTs to someone. It is because the NFT selling depends on its popularity and demand in the market. 

Moreover, NFTs are more volatile than cryptocurrencies. An NFT which is worth millions today can slide down to a few hundred. You can never guarantee that your NFT will sell at a higher price unless you own the bigger ones. This makes NFTs illiquid.

Another major problem with the NFT market is that most people don’t want to invest in NFTs. Even if they have invested they don’t want to be associated with it for a long time.

All these problems call for a need for a financial instrument in the NFT market. 

NFT lending can be a smart way to make NFTs more liquid. It would also encourage people to invest in the NFT market.

But what does NFT lending mean?

NFT lending is a process through which you can request a loan by pledging your NFTs as collateral. The lender funds your loan and keeps your NFT as assurance for the repayment. 

NFT loans are similar to crypto loans. The only difference is that here you use NFTs as collateral to secure loans instead of cryptocurrencies. 

As an investor, you can invest and earn huge profits on NFT loans. The interest rate on NFT loans falls between 20% to 80% APR. 

Thus, NFT lending is profitable for both borrowers and lenders. Borrowers can get instant loans on their NFTs while the lenders enjoy profits from higher interest payments. Even if the borrower fails to repay the loan, the lender receives the NFT as payment.

Understanding The Four Models Of NFT Lending

There are several platforms that offer NFT lending services. Cefi platforms like BlockFi or Nexo are the major players in NFT loans. However, the majority of the NFT lending services are available on Defi platforms like Arcade, MetaStreet and others. Defi platforms use smart contracts on the Ethereum network to automate the loan process and ensure that loan agreements are met.

These platforms work on different models to issue NFT loans. Let us understand each one of them in detail.

The NFT lending structure is categorized into four major financial models. They are:

  • Peer-to-peer NFT lending.
  • Peer-to-protocol NFT lending.
  • Non-fungible debt positions.
  • NFT rentals.

Peer-to-peer NFT Lending

Peer-to-peer NFT lending is a classic model of the lending and borrowing sector. It uses a simple system to match lenders and borrowers on the platform. 

On a peer-to-peer lending platform, you can easily apply for a loan on your terms and conditions. Both the lender and borrower have the flexibility to discuss and set the terms of the contract without the involvement of any third party.

One fine example of a peer-to-peer lending platform is NFTfi. On this platform, you can keep your NFT as collateral and request a loan. The lenders will analyze the value of the NFT and offer you loans accordingly.

You can view all the offers and accept the one that’s most suitable for you. As soon as you accept the offer, you will receive Wrapper ETH in your wallet. Also, according to the loan agreement the platform will transfer your NFT into a digital vault. It is bound by an escrow smart contract for the duration of the loan.

You will get your NFT back when you repay the loan as per the terms of the contract. If you fail to pay the loan, the lender will receive the NFT as payment.

The best thing with this model is that the price fluctuation of the NFT does not impact the agreements of the loan. 

Another popular peer-to-peer lending platform Arcade allows for the consolidation of multiple NFTs into a single collateral asset. Unlike NFTfi, Arcade allows you as a borrower to set the loan terms and payback period.

Peer-to-protocol NFT Lending

In the peer-to-protocol NFT lending model, as a borrower, you can instantly borrow funds from the liquidity pool. In this model, you do not have to wait to find a suitable lender or offer.

Investors or liquidity providers add crypto funds to a protocol pool. Borrowers can access this liquidity immediately after collateralizing their NFTs. The NFTs are locked in an escrow vault within the protocol.

The liquidation does not depend on the deadline of the loan repayment. Instead, it depends on the health of the loan. When the collateralized market value and the outstanding loan amount drop below a certain level, the loan health falls triggering liquidation. 

The borrower still has 48 hours to repay the loan and claim their collateral back. 

Lenders who contributed funds to the liquidity pool are compensated with interest-bearing bendETH tokens, whose value is pegged one-to-one with the initial deposit.

BendDAO is a peer-to-protocol lending platform that uses blockchain bridges to get the floor price information of the NFTs from OpenSea. It then uses this information to allow borrowers to access a set percentage of their NFT’s floor price as a loan.

Non-fungible Debt Position

Similar to MakerDAO’s collateralized debt position structure, in the Non-fungible debt position, you deposit NFTs and receive stablecoins pegged to USD as loans.

One such platform is JPEG’d where the users deposit blue-chip NFTs to receive $PUSd in return. You can then use $PUSd to provide liquidity on the protocol and earn interest. Alternatively, you can swap it for other cryptocurrencies.

The platform uses custom chainlink oracles to fetch and maintain on-chain pricing data. It enables them to accurately evaluate the price of the collateral in real-time.

NFT Renting

If you do not want to put your NFT in collateral, you have other options as well. NFT renting allows you to lease your NFTs in exchange for funds.

ReNFT is a leading platform where renters and tenants transact in NFTs with set terms and conditions. 

In the NFT Rental model, the NFT is transferred to the tenant’s wallet for a specific period. Instead of sacrificing your NFT as collateral and locking it up in an escrow digital vault, you rent it for some time in exchange for cryptocurrencies. At the end of the predetermined renting period, the NFT is automatically transferred to the renter’s wallet. 

Unlike other lending models, NFT renting does not include interest rates, payment terms and liquidation. 

But what benefit does the tenant get?

As a tenant, you get full access to token-gated benefits like Discord servers and giveaways. For instance, a three-month CryptoPunk rental in 2021 skyrocketed the social media engagement of its tenant. 

Conclusion

NFT lending is an emerging sector in the financial realm that is gaining popularity among investors worldwide. Whether it’s about increasing the liquidity or resolving the issues of the NFT market, NFT lending will surely be a hit in the market.

If you are looking to build an NFT lending platform based on any of the above models, you can hire our services. We offer customized and reliable NFT marketplace development services tailored to meet your business needs. Our skilled and experienced developers will help you build an NFT lending platform embedded with high-security features and the latest technologies for world-class performance.Talk to our experts today.

August 20, 2022

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