Looking for liquidity? Here’s everything you need to know about NFT loans

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The last 24 months have been a whirlwind for NFT enthusiasts, with unprecedented demand for digital property creating a new and exciting asset class right before our eyes. But all new toys eventually lose their luster. And after a crazy period of buying, selling and trading NFTs, investors are looking for new ways to leverage their assets.

Enter the rise of fractional ownership, staking, and NFT’s hottest new sector: lending.

You read that right. People lend their relatively illiquid JPEGs for instant crypto and cash payouts. And it has become a huge market sector.

It’s finally time to break down the basics of NFT lending – how it really works and the different types of lending models.

But first a definition.

What is NFT lending?

NFT lending is the act of collateralizing your NFT as a loan in exchange for an instant crypto payment. And it solves the asset class’s most important problem: liquidity. Compared to other asset classes, NFTs are relatively illiquid — meaning it’s not easy to quickly sell your NFT for cash (or cryptocurrency) for their stated market value. In other words, it could be months before someone buys your JPEG. Additionally, for investors with sizeable asset allocations tied up in NFTs, accessing liquid capital quickly can sometimes be a major challenge. Loans also offer NFT owners the opportunity to generate non-taxable income as opposed to the tax implications of a sale.

How it works: The borrower needs a loan and provides an asset as collateral (NFT). The lender grants the loan against interest. But if the borrower cannot repay the loan on the agreed terms, the lender receives the collateral. In most cases, this process is performed autonomously by smart contracts on the blockchain.

But in all cases, NFT lending is conducted through one of four main models, each with its own advantages and disadvantages.

Peer to Peer: NFT lending platforms made easy

The simplest form of NFT lending is peer-to-peer as it is very similar to the relationship between a borrower and a lender that you can find at your local bank.

Most transactions take place on peer-to-peer NFT lending platforms such as NFTfi, and follow a similar process. But unlike borrowing against an asset with a stable price, NFTs are a bit trickier. The market is unbelievable volatile, meaning that the market value of an NFT today can differ significantly from its future value. How do you assess its current value?

The truth is, it depends. Most peer-to-peer lending platforms use a simple quoting system that allows anyone to make loans and set terms without a central or external intermediary.

A user lists their NFT on the platform and receives loan offers based on the NFT’s perceived collateral value by the lender. If the borrower accepts the offer, they will immediately receive a wrapper of ETH or DAI from the lender’s wallet. At the same time, the platform automatically transfers the borrower’s NFT into a digital vault (read: smart contract) until the loan is either repaid or expires. If the borrower defaults on the loan, the smart contract automatically transfers the NFT to the lender’s wallet.

Source: @NFTi/Twitter

Consolidate multiple NFTs with Arcade and more

Other platforms like arcade Allowing users to consolidate or “wrap” multiple NFTs into a single secured asset. Unlike NFTfi, Arcade allows borrowers to set their desired terms and payback periods in advance and then search for a matching lender through the marketplace. Once a match is discovered, the process begins.

The bottom line? Peer to peer lending has emerged as the most affordable option for both borrowers and lenders, mainly due to its ease of use and security. The flexibility for both parties to set terms helps accommodate rare NFT features, and the smart contract logic within the escrow process is fairly simple. However, it is important to note that peer-to-peer lending may not be the case as fast as possible Model as it relies on a borrower finding a lender willing to agree to mutual agreements.

Corresponding Richard ChenGeneral Partner at a cryptocurrency focused investment firm 1Confirmationpeer-to-peer lending is not only the safest model but also the most liquid and competitive on the lending side.

“If you list a CryptoPunk on NFTfi, you get a dozen offers pretty quickly,” Chen said in an interview with nft. As DeFi yields have fallen, DeFi lenders have shifted to NFT lending as that is where the highest yields in crypto are currently being made.”

Peer-to-Pool NFT Lending

As the name suggests, peer-to-pool lending allows users to borrow directly from a pool of liquidity rather than waiting to find a suitable lender. To assign value to secured NFTs, peer-to-pool platforms such as BendDAO use Blockchain Bridges (Chainlink oracle to be precise) to get floor pricing information from OpenSea and then give users instant access to a set percentage of their NFT floor price as an NFT-backed loan. The NFT is then simultaneously locked within the protocol.

In the case of liquidation, the point in time at which the repayment is made is irrelevant. Instead, it occurs when the loan’s health factor — which is a numerical representation of the collateral composed of the secured market value and the outstanding loan amount — falls below a certain threshold. However, the borrower has 48 hours to repay the loan and reclaim their collateral.

Meanwhile, lenders who have added liquidity to the liquidity pool will receive interest-bearing bendETH tokens, where the price is linked one-to-one to the initial deposit.

in summary, With peer-to-pool lending, you gain speed but lose flexibility. Because these platforms allocate value based on reserve prices, owners of rare NFTs are disadvantaged, limiting the amount of capital they can access. The credit market is also much smaller. While platforms like Pine offer access to more NFT collections, BendDAO is only compatible with select blue-chip NFTs. Most importantly, compared to peer-to-peer, there is significantly greater platform and hacking risk, Chen said.

“Given the illiquidity of NFTs, the price oracles used in peer-to-pool are much easier to manipulate compared to other tokens,” Chen said. For him, good NFT assessment tools are like Low NFT value exist, but there is “no oracle infrastructure yet, so teams run their own centralized oracles, which are vulnerable to infrastructure hacking risks.”

Unfungible Debt Positions

An offshoot of MakerDAO’s secured debt position structure, where borrowers overcollateralize ETH (a risky asset) in exchange for DAI (a less risky stablecoin), non-fungible debt positions offer a similar deal. But on NFDP platforms like JPEGInstead of depositing ETH in exchange for a DAI, borrowers deposit select blue-chip NFTs in exchange for $PUSd, a synthetic stablecoin pegged to USD.

Like peer-to-pool lending, JPEG’d uses custom chainlink oracles to pull and maintain on-chain pricing data. The goal? Combining reserve prices and sales data into real-time price collateral with high accuracy.

Source: Homepage in JPEG format

Non-fungible debt positions still exist very new and still needs to mature before it can be considered a serious lending model. Collateralized debt positions on MakerDAO are overcollateralized by 150 percent (or 1.5x) to mitigate ETH volatility. NFTs are even more volatile and the lack of need for over-collateralization raises concerns about the unpredictability of the NFT market and future liquidations. Additionally. JPEG’d is currently the only platform offering this structure and is strictly limited to CryptoPunks, so the available market is tiny and the platform risk is quite high. All in all, unacceptable debt should be closely scrutinized as it unfolds.

NFT rental and leasing via capital

NFT Lease breaks with the other three structures and allows NFT holders to lease their NFTs against upfront capital. platforms like ReNFT work similarly to peer-to-peer marketplaces, allowing tenants and renters to conduct transactions with different lease terms and agreements without having to wait for approval.

Like exchanges on NFTfi, all rental transactions are facilitated by smart contracts. But instead of a borrower sacrificing an NFT as collateral and locking it in a digital vault, the NFT is transferred to someone else’s wallet for a period of time. In return, the “borrower” receives a flat rate cryptocurrency. At the end of the predetermined period, the NFT is automatically returned to its owner. This is the simple form of “lending” as there are no repayment terms, interest or liquidation worries.

Unlike other forms of lending, where lenders are rewarded by earning interest, NFT leases generally give lenders access and credibility. The NFT space thrives on social proof, and owning an expensive NFT can increase awareness and recognition in the space. Some communities are also token-gated, where renting an NFT helps users connect with people and experiences they might not otherwise acquire. Much like renting clothes, cars, or other status items, the burgeoning sector of NFT rentals is poised to become one of the most enduring.

Whether NFT lending is the right decision for you ultimately depends on your time horizon and risk tolerance. As with all crypto protocols, it is important that you do your own research and do not overdo it or invest money that you do not wish to lose.

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