NFT Lending Explained

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JB Miller

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Trading in NFTs spiked 21,000% last year, and today it’s a billion-dollar market. Similarly to crypto assets, one can buy, sell or hold digital collectibles. It sounds pretty similar but there is a huge difference in liquidity. While you can instantly convert your crypto to cash, it can be impossible to sell your NFTs quickly. Also, you can sell any portion of your bitcoins or ETH whenever you want. But can you do the same with your NFTs?

 

If you need liquidity and don’t want to sell the whole non-fungible token or don’t even want to fractionalize it, NFT lending may be something you’d be interested in.

 

The new features have just emerged but they have all chances to gain popularity. NFT lending solves the low-liquidity problem and ensures a lower cost of entry for the new investors.

 

So far the new sector provides four different models:

 

1.    Peer-to-peer NFT lending

 

This model is classic, and it replicates any other lending marketplace involving borrowers and lenders. Let’s take a look at the popular NFT lending platform called NFTfi. The volume graph of NFTfi below is clear evidence that the NFT market is maturing. We can already observe the growth of awareness about accessing liquidity locked in NFTs, and the ball has just started rolling.

 

Graph: NFT loan volume as of May 15, 2022, according to dune.com

 

NFTfi users may list their NFTs as collateral and receive loan offers from others as a result. As soon as one of the offers is accepted, the borrower immediately receives wrapped Ethereum (WETH) or a stablecoin (DAI) from the lender’s wallet.

 

The lending platform simultaneously transfers the listed NFT into a digital vault. It’s the escrow smart contract, and the NFT remains safe there for the duration of the loan.

 

2. Peer-to-protocol NFT lending

 

This is an alternative way to use your NFTs as collateral with the purpose to borrow ETH. The NFT lending platforms like BendDAO allow you to borrow directly from the protocol. It is also possible to deposit ETH and earn yields instantly, which creates endless opportunities to invest in NFTs.

 

Image: BendDAO official website

 

Similar to DeFi lending protocols in the first example, these NFT lending platforms also rely on the users who add their crypto funds to a liquidity protocol pool. Borrowers collateralize their NFTs and lock them up in the protocol’s digital vaults powered by the smart contract. Right after that, they can access liquidity. As of May 2022, more than 270 BAYC NFTs and more than 1,000 other NFTs have been collateralized, which clearly shows an upward trend.

 

Another decentralized NFT-backed borrowing platform is Pine. It provides ultimate flexibility, already works with nearly 30 collections, and has multi-chain support, including Solana and Polygon.

 

Image: Pine Loans platform allowing you to borrow ETH, USD, and SOL against your NFTs instantly

 

The platform also promises to launch a “thorough borrower protection plan” in the future.

 

3. Non-fungible debt positions

 

Many people have heard of MakerDAO, which is one of the oldest platforms in DeFi. It is well-known for its collateralized debt position (CDP) structure, allowing the borrowers to collateralize ETH and take out the stablecoin DAI.

 

JPEG’d utilized a similar model but applied it to the non-fungible debt positions. With a total value locked (TVL) of 4,393 ETH in its smart contracts as of mid-May 2022, JPEG’d lets users collateralize selected blue-chip NFTs like CryptoPunks and EtherRocks and borrow $PUSd – a stablecoin pegged to the USD on a 1:1 basis.

 

Image: JPEG’d official website

 

The borrower can easily exchange $PUSd for other cryptocurrencies or provide liquidity on the protocol and earn interest without leaving JPEG’d. Once the loan is repaid, the user takes back full control of their NFT.

 

4. NFT rentals

 

And finally, it’s necessary to say a few words about NFT rentals. Currently, the most popular space to go if you want to use the perks of non-fungible token rentals is reNFT. The potential renters and tenants have varying rental terms and conditions, and there are now hundreds of tokens from various collections available for rent.

 

 

Image: reNFT – NFT Rent Page of the Official Website

 

reNFT doesn’t lock up NFT collaterals in a digital vault. The protocol fosters peer-to-peer token rentals where the NFT transfers to another wallet for a limited period of “tenancy.” Rented NFT provides full access to token-gated perks like whitelist giveaways and locked Discord channels. Some people also use this feature to add visibility and social proof to their social media accounts.

These are just a few examples of NFT lending which is still a new concept. There is no doubt we will see more incredible NFT lending platforms with expanded functionality in the nearest future.