Vinci Protocol’s NFTs Lending and borrowing Mechanism

7 min readFeb 25, 2022

Vinci Protocol is an NFT-backed DeFi protocol designed to boost Liquidity with a lending platform and simultaneously hedge Volatility with NFT-backed derivative products. NFT holders can deposit their NFTs on the Vinci platform as collateral to take out loans in some of the most popular crypto tokens. Meanwhile, money lenders will earn yields by providing Liquidity. The Vinci lending protocol allows borrowers to use NFT assets as collateral. Now let’s look into more details about lending and borrowing mechanism.

Lending Pool

In the Vinci lending protocol, Each lending market corresponds to a lending pool, and Each pool allows one NFT collection as collateral and multiple tokens as loan assets. The loan assets in a pool may have different interest rates from loan assets in other pools due to the various risks of NFT collections.

If you want to earn yield by providing Liquidity as a lender, here is the step by step guide.

Step 1: Go to https://app.vinci.io/.

Step 2: Browse to the “Lend” section and click on “Deposit” for the asset you want to deposit. (Notice that each type of asset corresponds to a specific NFT collateral collection. And the loan asset in a pool may have different interest rates from that of loan assets in other pools due to the various risks of NFT collections. )

Step 3: Select the amount you’d like to deposit and submit your transaction. Once the transaction is confirmed, your deposit is successfully registered, and you begin earning interest.

How do I withdraw?

To withdraw, you need to click on “Withdraw”. Select the amount to withdraw and submit the transaction. Also, you can use your “vTokens” as Liquidity without withdrawing.

You need to make sure there is enough Liquidity (not borrowed) to withdraw. If this is not the case, you would need to wait for more Liquidity from depositors or borrowers repaying.

How much will I earn?

vTokens holders receive continuous earnings that evolve with market conditions based on:

The interest rate payment on loans — depositors share the interests paid by borrowers corresponding to the average borrow rate times the utilization rate. The higher the reserve utilization, the higher the yield for depositors. Each asset has its own supply and demand market with its own APY (Annual Percentage Yield), which evolves with time.

Borrowing

Why would I borrow instead of selling my NFTs?

Selling your NFTs means losing the ownership of that particular NFT asset. Hence, if you are long on the NFT asset and just want to keep it long-term, you would not be entitled to the potential upside value gain. By borrowing, you are able to obtain Liquidity (working capital) without selling your NFTs. Users mainly borrow for unexpected expenses, leverage their holdings, or new investment opportunities.

How can I get a loan against my NFT?

Let’s think that you own a Mutant Ape and wants to borrow a loan with that NFT. Here is the step by step guide.

Step 1: Go to https://app.vinci.io/.

Step 2: Browse to the “Borrow” section and choose an NFT collateral collection. (Each NFT collateral collection corresponds to a lending pool, which allows the NFT collection as collateral and multiple tokens as loan assets.)

Step 3: Before borrowing, you need to deposit any NFT that can be used as collateral in the pool. The first deposit of one NFT will require an additional approval transaction.

Step 4: Head to the Borrow section and click on “Borrow” for the asset you want to borrow.

Step 5: Set the amount you need based on your deposited NFTs used as collateral for the loan.

How much can I borrow?

The maximum amount you can borrow depends on the NFT value you have deposited and the available Liquidity. For example, you can’t borrow an asset if there is insufficient Liquidity or if your health factor doesn’t allow you to.

How do I repay the loan?

Go to the Borrow section and click on the repay button for the asset you borrowed and want to repay to pay back the loan. Select the amount to pay back and confirm the transaction.

What asset do I need to repay?

You repay your loan in the same asset you borrowed. For example, if you borrow 100 Dai, you will pay back 100 Dai + interest accrued.

How much would I pay in interest?

The interest rate you pay for borrowing assets depends on the borrowing rate, which is derived from the supply and demand ratio of the asset.

What is the health factor?

The health factor is the numeric representation of the safety of the value of your deposited NFTs against the borrowed assets’ underlying value. The higher the value is, the safer the state of your funds are against a liquidation scenario. If the health factor reaches 1, the liquidation of your deposits will be triggered. A Health Factor below 1 can get liquidated. For a HF=2, the collateral value vs borrow can reduce by 1 out of 2: 50%. The health factor depends on the liquidation threshold of your collateral against the value of your borrowed funds.

What happens when my health factor is reduced?

Depending on the value fluctuation of your deposited NFTs, the health factor will increase or decrease. If your health factor increases, it will improve your borrow position by making the liquidation threshold more unlikely to be reached. If the value of your collateralized assets against the borrowed assets decreases instead, the health factor is also reduced, causing the risk of liquidation to increase.

When do I need to pay back the loan?

There is no fixed period to pay back the loan. You can borrow for an undefined period as long as your position is safe. However, as time passes, the accrued interest will grow to make your health factor decrease, which might result in your deposited assets becoming more likely to be liquidated.

How do I avoid liquidation?

To avoid the reduction of your health factor leading to liquidation, you can repay the loan or deposit more NFTs to increase your health factor. Out of these two available options, repaying the loan would increase your health factor more.

About Vinci Protocol

Vinci Protocol is an NFT-backed DeFi protocol designed to boost Liquidity with a lending platform and simultaneously hedge Volatility with NFT-backed derivative products.

Vinci will deliver the generalized solutions for NFT lending and perpetual trading through the following architecture:

Compatible with Different Smart Contracts: These are generalized solutions that will allow access to different smart contract platforms, including EVM contracts for EVM-compatible chains like Ethereum and BSC, WASM contracts, and Substrate contracts, for the Polkadot Ecosystem.
NFT-backed Lending and Renting Platform: serves as the permissionless money market with NFT assets as the collateral. NFT holders can list their borrowing needs on the Vinci platform, which will enable money lenders to respond to their requirements and liberate Liquidity.
Decentralized NFT-backed Perpetual DEX: serves as the fully non-custodial and decentralized perpetual market for NFT assets. NFT holders can deposit NFT assets, including collectables and GameFi items, as collateral to open perpetual contracts to hedge the Volatility of the NFT floor price.
Extreme Efficiency and Trader-friendly VinciVM: serves as the technical base layer of Vinci Protocol. It consists of an off-chain Market Maker Engine and an on-chain Settlement Engine. VinciVM is the core component and can be easily deployed on multiple NFT ecosystems to deliver an extremely efficient and low-cost trading UI/UX

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