An anonymous borrower put up two rare CryptoPunks as collateral for a 1200 ETH loan from crypto-lender Nexo.
Nexo provided a loan of over $3.3 million at an annual interest rate of 21% to a CryptoPunk owner who set up two CryptoPunks with the rare “Zombie” trait as collateral. The transaction involved multiple parties, including decentralized finance (DeFi) marketplace and lending platform NFT Arcade, and investment manager Meta4Capital. “With this multilateral partnership, we are demonstrating the fusion between traditional, decentralized and crypto finance,” said Nexo’s Head of DeFi Strategy, Kiril Nikolov. This transaction is an example of the sophistication of the NFT funding market, says Bloomberg.
You can get instant liquidity of between 10 and 20% of the value of your Bored Ape Yacht Club or CryptoPunk NFT, which must exceed $500K, without selling the NFT. The application process may be longer if the NFT doesn’t belong to the CryptoPunks or Bored Ape Yacht Club collections. The liquidity can be obtained in ETH or stablecoins, and should the value of the NFT vary while funds have been borrowed, they won’t be liquidated. The annualized borrowing rates range from 12 to 15% but depend on market conditions and the NFT being offered, not on your credit history.
NFT loans are a riskier financial transaction than traditional loans due to the volatility of NFTs compared to traditional collateral required by conventional financial lenders. The main purpose of NFT loans is to increase NFT liquidity by giving users access to capital that can be spent on other projects and services. NFT-backed loans can also be used to buy multiple NFTs, buy tokens that can be converted to fiat, or buy other tokens that can be implemented in DeFi protocols for returns to generate revenue.
Appetite for NFT loans growing
If you are an investor, you can lend cryptocurrencies to individuals seeking credit. Suppose the borrower is unable to repay the loan and interest by the end of the loan period. In that case, the lender is eligible for the underlying NFT.
Despite the associated risks, however, it seems that the appetite for NFT loans is growing.
NFTfi, a South African crypto lending company, recently lent $8M to the owner of over one hundred CryptoPunks, who, in February this year, withdrew the CryptoPunks from a Sotheby’s auction. Lenders like Genesis have also granted NFT-collateralized loans.
NFTs linked to the identity of people
For many NFTS owners, digital collectibles become irrevocably tied to their online identity, meaning their unique “brand”. Take, for example, owners of Bored Ape Yacht Club NFTs, who are eligible to become members of an elite community. Platforms like Nexo offer the possibility of generating liquidity without losing your NFT and therefore your membership in the associated community. “Like a lot of collectors, people got attached to their NFTs; they become part of who you are, especially online and on the Web3,” said Meta4 Capital founder Brandon Buchanan.
