NFT Lending Has Gone Moon— Why and What’s Next?

NFT markets and broader crypto have seen many ups and downs in the past two years, but one relative constant has been for the almost inevitable push from NFT’s into DeFi as a real asset class. Or NFT-Fi for short.

According to on-chain data, lenders have lent and borrowers have borrowed a cumulative $496m worth of NFT-collateralized loans across the top NFT-Fi protocols. This number seems small relative to the $20+ Billion Art and Collectibles NFT market, but the growth rate tells the real story.

The NFT lending market saw tremendous growth through the middle of 2022 with the launch of several new innovative NFT lending platforms and a surge in consumer demand.

NFT Lending Market Starts Slowly but Ramps Up Significantly through Mid-2022

Source: Dune analytics dashboard on NFT aggregated lending

Explosive market growth and NFT owner interest suggests NFT-Fi will only continue to expand its reach. And indeed for the NFT market to continue its expansion we believe credit will be critical to drive the next wave of growth.

Why has NFT-Fi seen such explosive growth?

NFT-Fi solves a natural problem for NFT holders — liquidity and enhanced capital efficiency. Before NFT loans an NFT holder could hold substantial value in their wallets and yet be cash-poor — unable to use their valuable assets unless they sold. This forced many to unload less-wanted NFT’s in order to tap into their capital and ultimately seek other investments.

We’ve seen this dynamic in action ahead of major NFT launches — notably we saw the aggregate Floor Price of major NFT collections decline ahead of the May 1, 2022 launch of Yuga Labs’ Otherdeed from the Otherside collection only to recover soon after.

Likewise the Otherdeed launch sparked a surge in NFT borrowing which has largely persisted despite an overall slowdown in NFT market activity.

Volume and Number of NFT Loans Near All Time High in October

Chart and data source: 1xnetwork on Twitter, Dune Analytics

With an NFT-backed loan the user can enjoy most if not all of the same ownership rights yet gain the liquidity to then invest in other crypto assets, collect yields, or otherwise use as they see fit. This is for most users a substantially better outcome than a forced sale, and indeed it’s easy to see why many NFT holders opt for loans against their holdings instead of selling their prized NFT’s.

Of course the user must likewise repay the loan plus interest and could lose their NFT if they fail to do so — borrowing against your assets is not risk-free. But on that front we have likewise seen gradual but consistent improvements in borrow interest rates charged:

Borrowing Rates Have Fallen on NFT Loans Against Top Collections

Chart and data source: 1xnetwork on Twitter, Dune Analytics

Borrowing and Lending against NFT’s is obviously a two-sided market, and many crypto fungible token holders have clearly caught on to the relatively high yields available in NFT-fi. An overall compression in DeFi yields has led many crypto investors to seek the strong risk-adjusted returns available to lenders for overcollateralized loans against valuable NFT’s.

DeFi Lending Yields Continue to Compress, Make NFT Lending More Attractive

Chart and Data source: Lending yields as captured and reported by Defillama

The growth in demand for both borrowing and lending is clear. What is the state of NFT Lending Protocols?

Top NFT Lending Protocols Through Late 2022

Data source: Dune.xyz analytics dashboards, Defillama, Protocol websites

A look through existing lenders shows outright dominance of a single lender — BendDAO — which introduced and popularized the Peer 2 Pool lending model in NFT lending. Though the NFTfi protocol predated it by nearly two years, many blue-chip NFT holders focused on the ease of use of a low-friction borrow against BendDAO’s ETH pool. And it quickly dominated the market in both loan volume and current LTV.

NFTfi introduced and popularized the Peer 2 Peer model where the borrower needs to request a loan offer and wait for another individual lender to provide a loan. The Peer 2 Pool model on the other hand allows for instant borrowing against the supported NFT collections. This isn’t to say NFTfi’s model is outdated or no longer needed, but the speed of growth in Peer 2 Pool lending suggests users have spoken.

We think the Peer 2 Pool model has shown its value and likewise see clear scope for improvement for NFTFi lending protocols.

What are the NFT Lending Problems to Solve?

Existing Peer 2 Pool NFT lending protocols solve a clear user need and have already proven their worth to a range of borrowers and lenders. But they make certain tradeoffs we believe limit their utility. Namely: they restrict which NFT’s and fungible tokens may be borrowed or used as collateral, and they use an overly-rigid isolated margin model.

When a user borrows against their NFT’s on BendDAO they are restricted to borrowing in ETH, and the protocol requires them to take individual loans on a 1-to-1 basis against specific NFT’s. The protocol likewise does not allow the user to post other types of collateral and ultimately the user risks liquidation of their NFT regardless of what other collateral they offer to lenders. We can do better.

Para Space Innovates and Solves NFT Owner Problems with Cross-Margin Lending

Para Space’s cross-margin model allows user to monitor a single account Health Factor and enjoy a flexible credit line which matches their changing needs and market opportunities. We believe this is a far more user-friendly approach which allows borrowers and lenders the ability to borrow and lend against NFT’s on their own terms.

A cross-margin model allows a user to deposit multiple NFT’s and borrow against their cumulative token deposits in the protocol. They may likewise deposit ETH, stablecoins, Wrapped Bitcoin, and APEcoin to then borrow ETH or a range of ERC-20 tokens.

Need to borrow USDC against your NFT collection? It’s a few clicks away. Want to continue to hold both your CryptoPunks NFT’s and Wrapped Bitcoin but need ETH for an upcoming NFT drop? No problem.

This cross-margin model likewise allows depositors to use their credit line to purchase NFT’s across OpenSea or Para Space within a “Buy Now, Pay Later” framework. In the end the user need only monitor a single Health Factor across their range of assets to repay borrows and manage their account.

Cross Margin Model, Risk Controls, and Safety are Paramount for Para Space

Lenders can likewise easily monitor cross-margin accounts and utilization rates of respective pools, lending their ETH, stablecoins, APEcoin, and Bitcoin against vetted collateral. Ultimately we strongly believe Para Space offers high risk-adjusted yields across the most valuable fungible tokens. At time of writing the lending yield for ETH on Aave is a paltry 0.54% while WBTC stands at 0.12%.

Aave has a well-deserved reputation for being one of the safest protocols across all of DeFi given a rigorous smart contract safety policy and stringent risk controls. Though obviously a far newer protocol, Para Space builds on an Aave fork and holds itself to incredibly high standards for risk controls, audits, and bug bounties.

We believe it’s justified that lenders should accept lower yields on Aave, but NFT-backed overcollateralized loans offer what we believe to be strong risk-adjusted yields. And thus we will continue to innovate and compose upon powerful primitives in the DeFi and NFT space to solve important problems for the greatest range of users.

Find out more about Para Space and how to take advantage of this powerful functionality via https://docs.para.space/para-space/para-space/readme

Try out our DApp on the Göerli Testnet: https://app-staging.para.space/

Follow Para Space on Twitter: https://twitter.com/paraspace_nft

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