NFT Lending and Its Implementation
We’ve been working hard on the development of Mantle, an NFT lending platform. Here are some of our product ideas. Welcome to join the community and brainstorm!
Our starting point is to “improve the liquidity of NFTs”, and we have tried almost all NFT lending products on the market: Fractionalized NFT, P2P NFT Lending, non-fungible debt positions (NFDPs. Like DAI).
Why Do We Start with NFT Lending (or Lending-related Products)?
Have you ever heard a crypto theory: the market value of NFTs will eventually exceed the market value of fungible tokens. Just like the value of currency (money) is actually far less than the value of all the “things” in the world.
Precisely speaking, the M2 money supply of the world’s 3 major central banks (U.S. Fed, European Central Bank, Bank of Japan) is about 55 Trillion USD, which is far less than all companies, all visible (real estate, crops and oil) and invisible (intangible assets) valuable things.
Do you remember when everyone was crazy about ICO in 2017 and 2018, when everyone was wondering when this dream would be shattered? There was a team that saw the needs of users and validated it: Compound made token lending happen. The emergence of ICO proved that token had its value, but no one made good use of it.
Instead of issuing tokens and promoting unrealistic ideals, the Compound team found a market for token lending. For the almost same reason, no one will say that NFT has no value at the moment. Instead of making the PFP (Profile Picture) project like others, we chose to fix the pain point: NFT lending.
Fractionalized NFT is great. But who really knows the rules?
The NFTX solves the NFT liquidity problem through fractionalizing NFT. The process and principle are simple:
Create a smart contract (a Vault), any NFT of the same collection sent into the vault can be exchanged for 1 ERC-20 token.
The minter who receives the ERC-20 token can then sell these tokens. It has benefited many people who want a NFT of a certain collection but cannot afford it. You can buy 0.2 tokens at the beginning of the year, and then buy the other 0.8 when you have money at the end of the year, so as to exchange it for 1 complete NFT of that collection.
Because NFT becomes ERC-20 Token, it can be commonly used in AMM exchanges with preset trading pairs. If you want to sell the NFT for cash urgently, you can choose the NFTX service: first turn the NFT into pieces, and then sell them on AMM.
The fractionalization idea is clever and can vary a lot. NFTX has a rule: those who own 1 complete ERC-20 token and want to redeem a specific NFT need to pay more 0.03 as an administrative fee, which will be used to reward those who provide liquidity on the platform.
This is one of my favorite methods at present, but I doubt if the NFT owners really want this? Here are my questions:
- The fractionalization process is too complicated. And NFT holders may not have participated in DeFi liquidity mining before. Even if they do, it’s possible they were only at the beginner level. Who likes to go through so many procedures to borrow money?
- After fractionalizing the NFT, you cannot redeem the original NFT. This is actually quite paradoxical. Most NFT holders (borrower) just didn’t have the money at the time. They still want to keep their own NFT, otherwise they can just sell it. No one should want to borrow money and end up getting another NFT back.
P2P lending. Kind of a waste of time…
The most well-known P2P Lending project is NFTfi. Its total loan volume is currently around 50M USD. This kind of protocol is the easiest to operate, but also very inefficient. To put it simply: the borrowers and lenders have to set the amount and match by themselves.
Our protocol Mantle is currently using this model. Borrowers have to think about how much to borrow and the interest when placing an order. If lenders think that the value of the collateral (NFT) for this order is higher than the loan amount, they will agree to lend .
Feedback from someone in the Mantle community: Let the lender offer a loan value and see if the borrower accepts it. This is actually what NFTfi does. In addition, our team also thought of a model: Multiple lenders fund one borrower.
Although the P2P lending may seem inefficient, it will still be one of the inelastic demands. Why? Because each NFT has a different price. The price of some rare NFT is many times higher than the floor price of the collection. How to borrow funds against this type of NFT? You still need P2P Lending.
Automated Market Maker. Is it possible?
We are about to launch Mantle, a token and NFT lending protocol, on Flow Blockchain. I remember one afternoon, when my colleague was calculating and explaining the token loan interest algorithm, a thought came to our mind: Is it possible to combine these two?
Suppose that at Compound, we can provide not only tokens, but also NFTs to increase our credit limit. Since the protocol can get the real price of token, it can also get the floor price of the NFT trading market. Right?
We know that the current floor price of NFT is volatile and slow to update, and there is also the possibility of fake transactions. However, no protocol is perfect from the start. Speaking of which, it’s all about risk. Just set the NFT’s loan-to-value ratio lower. It can avoid many lending risk factors.
The Future: Real NFT Loans Are Still To Be Discussed.
Traditional bank loans also take the form of over-collateralization: for a house of 10 million, the loan ratio is up to 50–80%. In real life, we have laws and moral principles, and the right to use is separate from ownership. So even if the property (house) is mortgaged, we can still use it.
In the case of on-chain lending of NFTs or tokens, there is no legal or government authority. Therefore, if you need to borrow money, you need to transfer the ownership and keep it in the smart contract as collateral, which also makes real NFT lending impossible in the existing blockchain model.
To solve this problem in the future, there are 2 possibilities: Other third-party authorities, or lending protocols that directly cooperate with NFT or GameFi projects.