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NFT as Collaterals— Part 1

Chris Ciobanica (who’s better known by his digital art collector name, Silver Surfer) was looking for a loan to invest in cryptocurrency companies. Instead of going to a bank, which would have required him to put up his house or car as security, he chose Arcade, a new website that connects owners of digital art and collectibles, known as non-fungible tokens, with lenders.

Private lenders are increasingly utilizing platforms like Arcade to link with NFT owners who wish to borrow money using their NFTs as collateral. The goal is to provide a means for people who have invested huge sums of money in NFTs, a growingly popular investment, to have some money without having to trade their digital assets.

Let’s look at employing NFTs as loan collateral from that standpoint. But how significant are NFT debtors? Let’s start with that.

Why do we require non-financial debt markets:

Non-fungible tokens have gained value in recent years across a wide range of collections. In August 2021, NFT sales climbed from $0.3 billion to $2.5 billion. For example, a 12-year-old London child made pixelated whale artwork and sold it for millions.

The speed of technological innovation is unstoppable. As a result, our digital environment influences more and more aspects of our lives.

As a result, the metaverse, a science-fiction notion, is becoming a reality. The term “metaverse” refers to a set of interconnected lives. The metaverse will undoubtedly take on a new shape as virtual reality advances, the internet becomes more freely available worldwide, and blockchain becomes more extensively accepted.

People need a platform where they can acquire loans and leases from their non-financial institutions. Except for playing certain games or interacting on specific media, most NFT users do not use the assets in their wallets.

A marketplace where users could use their assets as loan collateral or lease their goods to other users may be a fantastic opportunity in an ideal world.

How Would NFT Collateralized Loans Work:

You’ll need to locate someone willing to accept your NFT in exchange for money, just as you would with actual objects like paintings such as Collateral, and these people are considered Lenders.

Here you have two options.

  • A Ceci service or a Defi lending service. Because NFTs are unique and individual, it might be best to choose a CeFi supplier.
  • In addition, it may be more beneficial for them to be evaluated by another human rather than an automated system that may not grasp their value beyond specific criteria.

Even though NFTs are generated automatically, they cannot be examined by stand-alone software. NFT can use CeFi to find a human-based lending platform in such circumstances. When it comes to art, beauty and worth are subjective. Unlike cryptocurrencies, their value is not predetermined. But what is the foundation for this assessment?

Loans are valued using the NFT method:

The value of NFTs is continually changing. NFTs come in a variety of pricing, and people are prone to paying varying sums for the same thing. It’s a complicated situation.

The lender and the borrower need to communicate to arrive at reasonable pricing. Finding a lender who recognizes the piece’s value may take some time, requiring some trial and error. It may be useful to do digging to discover the true value.

An early adopter’s NFT could surge in price as the market matures and expands. What should you do if the property’s value rises during the loan term? Before you do anything, talk to your lender about it. Some lenders may want a greater repayment amount. Writing out the words in advance is critical if NFT valuation is derived using an algorithm like the NEAR protocol.

You’ll need a reasonable pricing estimate to figure out how much your NFTs are worth. BitsCrunch’s Liquify might be the best option for you. Artificial intelligence (AI) is used to evaluate Digital Assets (NFTs), allowing users to embrace and price their assets in real-time.

NFTs and the Collateralized Loan Market: A Solution to NFT Valuation

A collateralized loan marketplace would be highly useful in determining the fair value of NFTs. Users may also be able to pick between DAI and ETH as a form of payment on the marketplace. Let me give you an example to help you understand.

Suppose CryptoKitties is looking for loan offers in this market, for example. In that case, NFT Collateral will create a request based on the general need for CryptoKitties, the final selling price (20 ETH or USD 5,500), its comparative value, and its unique qualities.

The decision is more equitable when many bids and appraisals are compared.

Final Thoughts

NFT loans are a stepping stone towards the NFT/DeFi world. They have the potential to generate interesting revenue streams for previously illiquid assets such as NFTs. The primary purpose of NFT loans is to boost the liquidity of NFTs, allowing users to spend funds on other projects and services.

Hence as the trend keeps expanding, soon NFTs shall lose its characteristics of being illiquid assets to liquidible assets.

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