What is the process behind NFT lending?

Have you heard of NFTs? It’s likely that you have, as they are very popular right now. You may have even collected NFTs on OpenSea, buying and selling them without realizing how unique the NFT world and everything associated with it really is.

Like many people, I have played games where I linked all my items to OpenSea, or played the well-known game Aavegotchi with its ghost-like characters that remind me of Pacman. Without even realizing it, we were involved in NFT lending. But what exactly is NFT lending? I’ll explain it to you in the usual way, and you’ll understand everything.

What Is NFT Lending?

NFT lending is a form of decentralized finance (DeFi) lending where borrowers can use their non-fungible tokens (NFTs) as collateral to obtain a loan.

In NFT lending, the borrower deposits their NFTs into a smart contract and receives a loan in return, typically in the form of stablecoins or other cryptocurrencies. The smart contract holds the NFTs as collateral until the borrower repays the loan with interest, at which point they can retrieve their NFTs. If the borrower defaults on the loan, the lender can liquidate the NFT collateral to recover their funds.

NFT lending provides a way for NFT owners to leverage the value of their assets without having to sell them. It also allows lenders to earn interest on their cryptocurrencies by loaning them out to borrowers who provide NFT collateral.

NFT lending platforms are becoming increasingly popular, and several have emerged in recent years, including Aavegotchi, NFTfi, and Niftyx. These platforms allow borrowers to leverage their NFT assets while also providing lenders with a new way to earn interest on their cryptocurrency holdings.

NFT lending and crypto lending are both forms of decentralized finance (DeFi) lending, which means that they are loans that are facilitated by blockchain technology and do not require traditional financial intermediaries like banks.

However, there are some differences between NFT lending and crypto lending. Crypto lending typically involves borrowers depositing cryptocurrencies as collateral for a loan, while lenders earn interest on the loaned cryptocurrency. The collateral ensures that the lender can recover their funds in case the borrower defaults on the loan.

On the other hand, NFT lending involves borrowers depositing non-fungible tokens (NFTs) as collateral for a loan, with lenders earning interest on the loaned stablecoins or other cryptocurrencies. The value of the NFTs serve as collateral, and like crypto lending, the lender can liquidate the collateral if the borrower defaults on the loan.

In summary, the main similarity between NFT lending and crypto lending is that they both involve using blockchain technology to facilitate decentralized loans. However, the difference lies in the type of collateral used to secure the loans, with crypto lending using cryptocurrencies and NFT lending using non-fungible tokens.

Why is NFT so popular?

The emergence of NFTs has created a new market for digital collectibles, which has proven to be highly promising. At present, collectible items are the most prevalent NFTs in the market, with NBA Top Shot moments, CryptoKitties virtual cats, and CryptoPunks unique avatars being among the most sought-after NFTs.

3.How NFT loan platforms operate
Before Blend was introduced, the majority of NFT lending platforms borrowed cumulative loans using two models: peer-to-peer lending (NFTfi) and peer-to-pool lending (BendDAO).

Peer-to-peer
A peer-to-peer NFT lending model is a financial system that allows direct lending and borrowing of cryptocurrencies using unique, indivisible digital assets (NFTs) as collateral.

Because NFTs have unique quality traits and a value proposition that is indivisible by definition, their appraisal cannot be reduced to the sum of their parts. Peer-to-peer NFT lending models like NFTfi are built on this assumption, and lenders must appraise the value of NFT collateral individually when offering a loan.

The borrower and lender then negotiate to determine the fairest possible terms, which is an inefficient process compared to the automation of decentralized lending platforms like Aave. Decentralized platforms use price oracles to reliably measure collateral value and enforce loan-to-value (LTV) requirements. These user experience expectations have made it difficult for NFT lending platforms to achieve the same level of adoption.

Here’s a step-by-step guide to how NFTfi lending works:

Borrowers connect their wallets to the platform and list their NFT as collateral, setting their desired loan terms such as loan amount, duration, and interest rate.
Lenders browse through NFT collections and propose term offers based on their appraisal of the NFT’s value. Borrowers can review and accept an offer for wETH or a stablecoin transferred from the lender’s wallet. The NFT is then automatically transferred to a smart contract that holds the asset for the duration of the loan.

NFTfi generates revenue by charging lenders a 5% fee on the interest earned once the loan is paid back. If a borrower fails to repay the loan, the lender can initiate foreclosure. The platform then liquidates the NFT collateral from the smart contract and burns the promissory note, allowing the borrower to keep the loan amount.

5.List of platforms with NFT lending.

• OpenSea: OpenSea is one of the most popular NFT marketplaces. Users can buy, sell, and collect their NFTs on the platform.
  However, If the value of the collateral NFTs is lower than the loan, the platform will provide 48 hours for the borrower to pay the debt. Otherwise, the NFTs will be transferred to the lenders.
  Meanwhile, Arcade is a peer-to-peer NFT lending platform that has provided a loan using CryptoPunk Zimbies as collateral.
  However, NFT lending can be risky, as the value of the NFTs used as collateral might decline, causing lenders to be at a loss if borrowers default on their payments. To address this issue, some lenders, such as Nexo, have prepared risk management measures, such as partnering with investment managers to buy NFTs at specific prices.
  Overall, NFT lending has emerged from DeFi protocol lending, offering NFT holders the opportunity to use their assets as collateral for crypto loans and allowing lenders to earn returns from providing liquidity. Nonetheless, caution is required when using NFTs as collateral, as the value of these assets can be volatile.

• The NFT Art from WhiteBIT Platform. The European platform offers the ability to create NFTs, which is similar to creating a work of art. You choose your inspiration, canvas, and paint, design it, and then release your creation into the world. UacatsDivision is an Ethereum blockchain-based NFT collection launched by the UACatsDivision team in collaboration with UNITED24 and the crypto media resource, INCRYPTED. The collection consists of 10,000 unique cats that symbolize the people defending their homeland from the enemy, thanks to whom we can now write this article, and you can comfortably read it on your smartphone or PC.
  Anyone can get one of these cats as a symbol of unity and involvement in the common cause of Ukraine’s victory.

What do CEOs say about NFT lending?

Some borrowers want to maximize how many new NFTs they can buy, while others want the cash to opportunistically buy new investments, said Stephen Young, CEO of NFTfi. Others want to generate returns through play-to-earn games or yield farming. One person even took out a loan on a Doodles NFT to buy a truck to donate to Ukraine, NFTfi reported on Twitter recently.

Another strategy is hedging. In case an NFT drops in price below the amount borrowed, a borrower can default on the loan and walk away with more value in cash, Young said: “You can almost think of it as a put option in that scenario.”

Still, this form of lending is extremely risky, some investors say. “This is the peak of overcollateralizing and overleveraging,” said Adam Jackson, the CEO of Freelance Lab and an angel investor.

In conclusion, NFT lending is a new and emerging form of decentralized finance that allows NFT holders to use their assets as collateral for loans. It provides a way for NFT owners to leverage the value of their assets without having to sell them and allows lenders to earn interest on their cryptocurrency holdings. However, caution is required when using NFTs as collateral, as the value of these assets can be volatile, and there are risks involved. Overall, NFT lending is an innovative and exciting development in the world of DeFi, and it will be interesting to see how it evolves in the coming years.