Recently, NFT holders have been taking out loans against their assets. This became very popular since it allows them to unlock liquidity and access borrowing.
The unique nature of NFTs makes using them on the DeFi platform a bit difficult. This is what initiated the need for lending.
Key Takeaways
- NFT Lending Explained: DeFi platforms offer two types of NFT lending: peer-to-peer and peer-to-peer, enabling NFT owners to use their assets as collateral by locking them in smart contracts to secure loans.
- Types of NFT Lending: Peer-to-peer NFT lending, Peer-to-protocol NFT lending, Nonfungible debt, and NFT rentals.
- Benefits of NFT Lending.
- Risks of NFT Loans.
- NFT Lending Summary.
NFT Lending Explained
DeFi platforms offer two types of NFT lending: peer-to-peer and peer-to-protocol. NFT owners can use their assets as collateral by locking them up in smart contracts to secure loans.
For peer-to-peer NFT lending, owners list their NFTs as collateral on an NFT marketplace or lending platform. They receive loan offers from lenders, aided by valuation tools or market data provided by the platform. After choosing an offer, they accept it and receive the loan, usually in stablecoin, directly into their wallet.
During the loan period, the NFT is held in an escrow smart contract. If the borrower repays the loan plus interest before it expires, the NFT is returned. The platform charges a fee based on the loan amount. In case of default, the lender gains possession of the NFT, often worth more than the loan, and can choose to sell it or keep it.
In peer-to-peer lending, the NFT owner borrows directly from the lending protocol, depositing the NFT as collateral. Liquidity providers add cryptocurrencies to the lending protocol pool, ensuring funds are available for borrowers.
Types of NFT lending
- Peer-to-peer NFT lending
In this type of lending, NFTs are used as collateral. That way owners receive loan offers from other people.
- Peer-to-protocol NFT lending
When users borrow directly from a platform or DeFi protocol, that’s peer-to-peer NFT lending.
- Nonfungible debt position
This type requires a distinctive asset on the blockchain. It represents a non-fungible debt position (NFDP) and is a clear record of a loan agreement.
- NFT rentals
When one user transfers NFT assets to another user’s wallet it allows them to have a period of “tenancy”. They can then access all the benefits offered by the NFT.
Benefits of NFT lending
Speaking of NFT lending benefits, you can imagine there are some very useful ones. Let’s check them out.
DeFi and Digital Art
Digital art NFTs are popular in the crypto world, and NFT lending combines the worlds of DeFi and digital art. This creates opportunities for serious collectors and artists to engage with space.’
Zero Credit Checks
NFT loans, like other DeFi loans, don’t require credit checks typical in traditional finance. Borrowers with poor credit scores can still access lending through the crypto realm. However, some NFT lending platforms might conduct basic Know Your Customer (KYC) checks to comply with regulations and reduce fraud risks.
Accessing Liquidity and Capital
NFT lending offers owners a way to access liquidity without selling their NFT collections. It’s handy for investors who need quick capital for buying other assets or various purposes.
The risks of NFT loans
Cryptocurrencies have their risks, whether you’re buying, selling, or exchanging them. That said, NFT lending has some specific risks. Let’s break them down in a table.
| Aspect | Description |
|---|---|
| Volatility | The value of NFTs can be volatile, akin to cryptocurrencies. This makes it challenging to assess the value of an NFT for loan collateral. If an NFT’s value drops below the loan amount, it could trigger liquidation, where the borrower defaults and the NFT transfers to the lender. |
| Liquidity | NFT lending offers a means for NFT holders to access liquidity when selling NFTs proves difficult. However, the illiquidity of NFTs means that if a borrower defaults on a loan, both the lender and any new owner may encounter difficulties in selling the NFT to recoup their funds. |
| Smart Contracts | Collateralized NFTs and loan terms are governed by smart contracts, yet there is always a risk of bugs or attacks that could lead to the loss of NFTs or funds. |
NFT lending is a very useful practice that addresses the problem of low liquidity for NFTs. It allows owners to use their assets instead of just holding onto them. However, there are some drawbacks to consider: NFT minting can consume a lot of energy, and Ethereum gas fees for transaction validation can be quite high.
Disclaimer
FAQ
NFT lending allows NFT owners to use their digital assets as collateral to secure loans, leveraging the value of their NFTs without selling them.
In peer-to-peer NFT lending, NFT owners list their assets as collateral on a marketplace, receiving loan offers directly from lenders.
Risks include the volatility of NFT values, potential for borrower default, and smart contract vulnerabilities.
Yes, NFT rentals allow users to transfer NFT assets temporarily, providing a "tenancy" period with access to the NFT's benefits.
