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Non-fungible tokens are undoubtedly one of the most popular and successful sub-products of Web3. They continue to be a great asset class in cryptocurrency for community members. While NFTs are by large considered collectible in the forms of art, sports memorabilia, and sorts, they can be utilized to be more than just a fancy digital term to your name.
NFTs tend to be relatively illiquid compared to cryptocurrencies such as bitcoin, Ethereum, etc. and can take months before one manages to sell it for a sweet price. Additionally, when you sell your NFT, it needs to be sold as a whole and cannot be done in parts (until and unless they offer fractional ownership). NFT owners who wish to make quick profits while retaining the ownership of their digital assets can now do so through NFT lending.
WHAT IS NFT LENDING?
NFT lending is a practice where one can borrow or lend digital assets for a stipulated period, 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 rentals. The global non-fungible token market size was valued at USD 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 Grand View Research, a market intelligence firm. According to Paraspace, an NFT money market protocol and Bitkeep, a multichain wallet, the current amount of NFT borrowing and lending has surpassed $430 million.
TYPES OF NFT LENDING
Peer-to-peer NFT lending– This model does the traditional and connects lenders and borrowers. In this, a user can put up their NFT as collateral for a loan and evaluate its loan value based on market worth. They’ll receive loan offers from potential borrowers, and once they accept an offer, they’ll receive the cryptocurrency from the user’s wallet. The NFT will automatically be transferred to a digital escrow vault for the loan duration. Once the duration is about to end, the NFT owner needs to repay the loan to get their NFT back into your wallet, while the borrower receives their investment plus interest amount. In case the NFT owner defaults, the borrower will get ownership of the NFT at a huge discount. Luckily, the volatile change in floor price will not affect the loan terms. Both the parties can mutually negotiate the terms and there is no auto-liquidation. However, the interest rates tend to be on a higher side due to lack of liquidation in times of a drop in floor price.
Peer-to-protocol NFT lending– This form of lending is more liquid and fast in nature. Peer-to-protocol (also known as Peer-to-pool NFT lending) sees users borrowing directly from a liquidity pool, where liquidity providers deposit tokens into pools. Here, owners will list and deposit their collateral into a smart contract, against which they’ll be receiving funds. Typically, in this model, the deadline is not monitored, but the health factor of the NFT loan is. When the health factor falls below the market value, the digital asset is transferred to the protocol, where the NFT owner may be given a grace time to repay the amount to claim the asset back.
Non-fungible debt positions– It refers to a loan agreement secured and stored on a blockchain. In this model, NFT owners will lock their digital assets for a loan in stablecoin such as DAI. In this, they will over-collateralize ETH (a volatile and risky asset) to get a loan in DAI (a stablecoin which claims to be backed by fiat currency). Other platforms let users collateralize whitelisted blue-chip NFTs and borrow a synthetic stablecoin. Once the borrower repays the loan amount, they regain the 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’s a permissionless market where potential renters and tenants can connect with varying rental terms and conditions. This slightly differs from others as the main aim of renting isn’t earning yield but rather the perks and benefits associated with the digital asset. Since the utility is non-monetary, the agreements can be without repayment terms, interest, or liquidation. In this, the collateralized NFT is not transferred to a digital vault but to another wallet for a fixed time period against a crypto fund. The renter enjoys access to benefits associated with such as giveaways, community, etc., while the NFT owner is returned the asset at the end of the period.
Jump.trade, an NFT marketplace offering a wide range of games, offers its users the option of renting NFTs for its MCL Game.
“The thrill of a game plays in the limited supply of game NFTs. However, we also understood that there could be some patrons who would intend to buy NFTs just for the sake of returning them because they look forward to a high growth potential. To bridge the gap and two expand on the number of users which, we thought, should be independent of the number of NFTs, we introduced rentals. We thought rentals could also help in maximizing the reach of the game and the platform,” shares Kameshwaran Elangovan, co-founder and COO, Guardianlink.
BENEFITS
So, what’s in it for the borrower and owner? Reduced risks and diversification are the key reasons one should opt to borrow an NFT. Since NFTs tend to cost a significant amount, it is not feasible for all pockets. By opting for NFT lending, an enthusiast can leverage digital assets to create an alternative revenue stream for themselves at an affordable cost.
As an owner, asset liquidity can be achieved with ease for NFTs which have less liquidity compared to other fungible digital assets such as blue-chip tokens. NFT lending can provide quick liquidity to owners who need fiat or crypto liquidity or wish to have access to upfront capital. Capital can be raised with ease without parting ways from your ownership of the asset.
Typically, not all NFT marketplaces offer NFT lending facilities. On May 1, Blur, an NFT marketplace, launched Blend, a peer-to-peer perpetual NFT lending and borrowing protocol built in partnership with Paradigm. According to a Nansen report titled “Blend: Disrupting NFT Financialization”, at the time of publishing (May 25), Blend had become one of the leading NFT lending platforms, facilitating over 15.8k loans totalling 123.5k ETH (USD224.4m) in volume. Around the same time, Binance, a global cryptocurrency exchange, announced the Binance NFT Loan offering.
RISING CONCERNS
A section of the industry is terming NFT lending ‘predatory’ in nature. If the borrowed NFT’ falls in value, the borrower can get stuck with a digital asset having a lower value than the value when the original loan agreement had been struck. Then there is a fear of liquidation as well if the NFT price falls below 30- 40 per cent.
LOOKING AHEAD
While NFT lending and borrowing are booming against NFT sales, such offers are majorly done by platforms based out of India. However, a few players are active in this space. The potential for NFT lending and borrowing is massive in India. “In 2022, the Indian NFT market was valued at $3.3 billion, and it is expected to reach $27 billion by 2028. As the NFT market in India continues its growth trajectory, the inclusion of NFT lending services can play a pivotal role in enhancing liquidity and accessibility, thereby giving a significant boost to the overall market,” shares Kapil Jain, Cofounder and Chief Business Officer, Piro Space Metaverse. The belief is echoed by Vikram R Singh, Founder and CEO, Antier, “NFT lending is a promising blockchain application, unlocking digital asset value without selling. Indian NFT marketplaces can boost liquidity by enabling borrowing and lending with NFT collateral, creating opportunities for creators and collectors.