NFT loans are offered by DeFi platforms. They allow NFT owners to mortgage their NFT pieces or collections in exchange for cryptocurrencies or fiat currency. Many NFTs in the market are highly illiquid, and several DeFi projects have identified the growing need to improve the liquidity of NFTs using solutions such as loans. Read on to learn more about NFT loans.
What is NFT loan?
NFT loan is a type of loan that uses NFTs as collateral, stored in the smart contract. The idea originally came from the lack of use of staked NFTs, as when NFTs are staked, they cannot be used to generate more returns.
NFT loans allow users to place NFTs as collateral and then lock them in for cryptocurrency or fiat money lending, while lenders can borrow their money on the platforms and get their returns. The APR rate and loan term are used as a loan condition. When the term expires, the borrower is obligated to return principal plus interest and return blocked NFTs. In case of late payment, the blocked NFTs will become the creditor’s asset.
NFT Loans: Advantages
- Earnings: Loan markets allow NFT holders to do more than just hold. Borrowers can now pledge their collectibles, while lenders can earn interest on loans.
- Liquidity: NFTs are relatively illiquid due to their non-fungibility. NFT loans provide more liquidity to the market. With NFT-secured loans, borrowers can make their NFTs more liquid while lenders earn interest on their loans.
- NFT leasing: Another potential feature of the lending market is NFT leasing. Here, users can rent their NFTs for a fee, while their ‘tenants’ enjoy the perks of owning the part for a specified period.
NFT Loans: The Risks
While in theory the concept of NFT loans seems foolproof, the reality is far from it. First, for borrowers, defaulting on loans means selling their NFT at a low price. Loan-to-value ratios can be as low as 30-50%. Furthermore, the non-fungible nature of NFTs means that borrowers cannot sustain their position in the event of a margin call. And, of course, the NFT lending markets are not spared the risks borne in DeFi – hacks, thefts and even kiss-ass.
How do NFT loans work?
Platforms that support NFT loans allow holders to borrow and set terms without intermediaries. Borrowers can expect to get a loan of approximately 50% of the value of the NFT, with interest rates ranging from 20% to 80%, depending on the popularity of the NFT. The beauty of DeFi protocols is how simple, transparent and fast they are compared to traditional lending institutions. There is no centralized authority that needs to check your credit score, verify your real identity, and spend days or weeks deliberating your application.
DeFi platforms use smart contracts to give users full control over their funds. Assets that act as collateral are sent to a secure smart contract, which acts as an unbiased, automated third party programmed to facilitate the borrowing and lending process. Lenders decide what they think the fair value of the collateral is, usually by looking at the asset’s past performance, sales history, or the minimum price of similar NFTs. The floor price refers to the lowest bid price of an NFT in a given series. Once both parties agree to the terms, the NFT is transferred from the borrower’s wallet to an escrow account, and a smart contract facilitates borrowing.
It sounds simple and clean in theory, but the market is not entirely risk-free. If the borrower is unable to repay the loan and interest by the end of the loan period, the lender will be entitled to the underlying NFT. Lenders may also not accept new NFT projects as collateral because of price volatility, as they may end up losing out if there is no market demand for the defaulting NFT.
NFT loan types
Peer-to-peer NFT Loans
The peer-to-peer NFT loan works similarly to a regular loan; transactions are made directly between lenders and borrowers, for example, a borrower places an NFT as collateral on the NFTfi platform with a loan offer. The borrower will automatically receive WETH currency (wrap Ethereum), or DAI, while the NFT will be transferred to the digital vault within the specified time frame. If the borrower repays the loan on time, the NFT will be returned, while the lender will earn interest.
Peer-to-protocol NFT Loan
To illustrate, BenDAO uses the peer-to-protocol loan type. It utilizes Chainlink’s oracles to extract the floor price data from OpenSea and then the platform will begin to settle the loan. However, if the value of the collateral NFTs is lower than the loan, the platform will give the borrower 48 hours to pay the debt. Otherwise, the NFTs will be transferred to the creditors.
Non-fungible debt positions
In the DeFi world, the MakerDAO platform has been using secured debt position lending or CDP: borrowers use ETH as collateral for DAI loans. Borrowers use their Blue Chip NFTs such as CryptoPunks, Bore Ape Yacht Club as collateral for synthetic stablecoin loans similar to MakerDAO.
For example, lenders provide PUSd’ liquidity on the protocol or exchange PUSd’ for different Tokens to get returns on a DeFi protocol. In addition, this type of platform uses Chainlink’s oracles to update NFT prices in real time directly from the marketplaces.
reNFT is a highly recommended platform for the provided NFT rental service. NFT rentals are peer-to-peer. Lenders are not required to lock their NFTs in the digital vault, but they can directly transfer NFTs to another wallet. Most importantly, NFT owners can set the lease term to provide tenants with access to NFT benefits as project-only activities.
Lenders (NFT owners) can set the rental price, collateral cost and duration. After the tenants pay the rent plus the guarantee to the platform, the NFTs will be transferred to the tenants. The guarantee will be returned to the lessees after the end of the lease term.
Recommended NFT Lending Platforms
NETfi is a peer-to-peer and peer-to-protocol NFT lending platform. NFT owners can access liquidity in the vault and earn wETH and DAI by providing the liquidity or peer-to-peer loans. In addition, liquidity providers will also take their returns, or NFTs in case of late payment.
Recently, an NFT collector used 104 CryptoPunks as collateral for loans of 8,3 million DAI, which was the most expensive collateral for NFT loans. A lending platform, MetaStreet, provided 10% APR with a loan duration of 90 days. In addition to CryptoPunk, BAYC is another NFT project that is often used as collateral that has already been used with over 95 loan agreements.
By attaching their collection to Drops, NFT holders can access trustless loans without dealing with intermediaries. Using the loan pool, the user can borrow up to 80% of the asset value (determined by the minimum price) and receive an instant loan without permission from the loan pool once the request is approved.
Arcade is a peer-to-peer NFT lending platform. The Nexo company loaned 1.200 ETH worth $3,3 million using 2 CryptoPunk Zimbies as collateral in May 2022, with a loan duration of 60 days and returns of 21% APR. However, NFT price movements depend on of the minimum price and the value of ETH.
With Stater, borrowers can borrow using their NFT assets as collateral, and lenders can generate returns by providing liquidity in the ecosystem for lenders to generate returns on their investments. On the Stater market, borrowers will have the option to list their NFT assets by specifying the asset value, loan duration and loan amount (according to loan-to-value ratio). Depending on the borrower’s needs, loans can be secured with a single asset or a combination of assets (bundle).
In the marketplace, lenders will be able to see all listed assets of all borrowers, allowing them to quickly identify packages they find attractive and provide loans based on those packages. In addition, they will also be able to view game and asset specific information that will help them through the due diligence process and the ability to filter specific loan parameters so they can find the best loan opportunities in the market.
How much money can you earn by borrowing NFTs?
There is a possibility that you might consider betting on your NFTs if you are looking for a more passive income stream. You can earn interest on your NFTs by betting them, which means you don’t have to worry about selling or returning them if you bet on them. In addition to increasing your NFT collection, you will also be able to earn extra income as a result.
There is a wide range of rates available on NFT lending platforms. In addition to market conditions, NFTs must also be taken into account in determining their value. In the case of NFTfi, for example, the borrower does not have to pay a fee. Despite this, the platform receives a 5% cut of interest earned by lenders when they use the platform.
The idea of NFT loans is originally from the DeFi lending protocol, in which NFT holders want to expand their returns by using NFTs as collateral for cryptocurrency loans, while lenders gain by providing the liquidity. However, NFT loans can be risky if the value of collateral NFTs falls below the loan, lenders will take a loss in case of late payment by borrowers. Lenders may sell the NFTs to partners or companies at a specific price, but if there is no offer, the creditors may lose the opportunity to gain from the sale of the NFTs. PortalCripto hopes that the article has brought the necessary information about NFT loans.