Introducing PawnSpace: The Next Paradigm of DeFi & NFTs
A Decentralized NFT Collateralized Lending Platform on Polygon.
In the summer of 2020, often coined the “DeFi Summer,” decentralized financial projects started to grow in popularity. Since then, multiple DeFi projects have cropped up in the Ethereum ecosystem, like DEXes, Yield Farming, Governance tokens, and borrowing and lending services.
Soon after, not only were economists, traders, and techies joining the Web3 space but an entire creator economy of artists was cultivated. Artists joining the crypto-space have been creating assets in the form of NFTs (or Non- Fungible Tokens). Though NFTs have been around since CryptoPunks and CryptoKitties — it has recently acquired mainstream attention. Collectibles, CryptoArt, in-game assets, Metaverses, etc. have been gaining in popularity daily.
While OpenSea (Ethereum & Polygon), Rarible (Ethereum), and Venly (previously Arkane on Polygon), allow users to seamlessly buy, sell, auction, or mint NFTs, there is still much to be desired with NFT functionality. NFTs are often considered illiquid and have no clear price valuation. They rely on speculation without any real utility in place.
This has been one of the biggest drawbacks of NFTs lately. Even though NFTs are now being implemented for more than just CryptoArt or digital art, such as:
- Uniswap DEX LP representation
- On-chain data derived NFTs
- Skill-based game NFTs (Snook)
- In-game NFTs with a locked up stake (Aavegotchi)
- Charged NFTs or CryptoArt NFTs with yield-bearing tokens staked (Charged Particles)
not much progress has been made for the financial value of these NFTs. At the moment, owning an NFT is simply owning digital art. Yet it’s not far off to imagine NFTs not only acting as a stimulator for the Creator Economy but also as a new financial instrument that can be used as leverage or collateral to borrow or lend funds to others.
The current DeFi landscape allows you to put up a liquid asset in order to borrow another liquid asset, both with their associated volatility. This not only adds an added aspect of risk and liquidation for the borrower (when prices get too volatile) but also creates a barrier to what and how much can be borrowed. Collateralization in this manner has its benefits in the DeFi world, but with the tokenization of Real Estate, there becomes a need to collateralize these assets without having to sell them.
Most protocols in the DeFi space focus on Fungible Tokens which conform to the ERC20 standard. For example, if you have Ether, you can use it as collateral to withdraw DAI (a stablecoin). In essence, the user will collateralize one ERC20 token in order to “borrow” a different token. However, most cases require a borrower to possess more value for use as collateral than that will be borrowed. This over-collateralization does help in instant liquidity but limits funding possibilities. In traditional finance, it is similar to borrowing the Japanese Yen using the US Dollar as collateral. Yet, in reality, most debt is collateralized with tangible assets (i.e. real estate, stocks) instead.
Non-fungible tokens (NFTs) are an alternative asset class to currencies within the blockchain space. On Ethereum, most NFTs follow either the ERC721 or ERC1155 token standards. NFTs are commonly used to represent unique artwork or as in-game items for use in a game. The potential for NFTs is to enable users to prove ownership of unique assets in a digital form. A mechanism for linking real-world objects such as real-estate and automobiles to NFTs is being actively developed and will come sooner or later to the blockchain.
Due to their unique and individualized nature, pricing of NFTs is as challenging as pricing of real estate; there is currently no way to evaluate its true value beyond a “bid-and-ask” approach. The need for a universal and unbiased DeFi NFT trading product is ever in demand.
Collateralize your NFTs with PawnSpace
With the future of NFTs and its well-needed utility lingering right around the corner, it is a no-brainer to have a way to use your NFTs in a way that no longer stays idle in your wallet, but can be used to generate passive income by bridging the NFT and DeFi world.
PawnSpace is a decentralized NFT-collateral lending platform, which primarily functions in a P2P “bid-and-ask” model. This approach allows PawnSpace to not only allow any NFT to be collateralized but also allows the market to decide the valuation of the NFT, reaching a mutual agreement on its valuation, just like in a traditional NFT marketplace. The valuation of an NFT however, may not need to be speculative all the time; consider financial-based NFTs, whose intrinsic value is determined by on-chain verifiable data.
Let’s take Uniswap V3 as an example; with Uniswap V3 triggering the change from ERC20 liquidity pool tokens to ERC721s, there will be pressure for existing yield farming strategies to either risk obsolescence or go with the flow and accept NFT based LP staking or its derivatives on their platforms. With NFT collateralized loans on PawnSpace, a user could potentially take funds and deposit those funds into AAVE, Curve, or other DeFi platforms to earn yield.
PawnSpace’s approach is to enable NFT collateralization in order for owners to take out loans. Using this model as a base, additional services can be built on top, eventually leading towards an automated pricing mechanism for NFTs.
PawnSpace allows collateralization of any ERC-721 compliant NFT and any potential loans against it. We are driven by a “let the market decide” approach and intend to keep the platform open for any NFT (ERC-721)to be listed on the platform. The “bid-and-ask” approach adopted by the platform conforms to this same notion.
How does PawnSpace work?
The loan process consists of a multi-step procedure, beginning with the creation of a loan order. A borrower who wants to take out a loan against their NFTs will first create a loan order and lock their NFTs within the PawnSpace. The user has the option to collateralize multiple tokens within a single order, provided they are issued from the same ERC721 contract. Before the loan begins, the borrower must wait for lenders to submit offers. At this time, loans can only be issued in USDC.
Once an order has been created, prospective lenders will be able to submit pending offers for the loan. The lender will submit a loan amount, suggested interest rate, and timeframe for the loan. The borrower will then be able to view and accept an offer. Only one offer can be accepted per order. Upon accepting an order, the loan period initiates, and the borrower receives the loan principal (minus fees). The borrower has until the specified deadline to pay back the principal and interest. Failure to pay off the loan results in the lender having the ability to claim the collateral, and the original borrower receiving a demerit point. Upon expiration of the loan period, the lender must initialize the “withdraw” process to receive the collateral, and apply a demerit point to the borrower. The borrower may pay their loan back after the expiration of the loan period, provided the lender has not yet withdrawn.
Lock NFT -> Place an Order -> Get Offers -> Approve Offer & Receive Funds -> Repay and Retrieve NFT / Default and Lose NFT.
BUIDLing on Polygon (LIVE on Mumbai Testnet)
Due to the multi-step procedure for initially starting a loan with PawnSpace, we realized it would be costly for users to transact on Ethereum Mainnet. This had led us to explore alternative Layer 2 scaling solutions such as Polygon (previously MATIC) earlier this year in January.
One of the greatest reasons we decided to focus our efforts on Polygon, was the incredible support from the Polygon team, as well as the thriving, yet still maturing NFT community and ecosystem on Polygon. This combined with near gasless transactions, quick confirmation speeds, and popular DeFi protocol adoption like AAVE, Curve, SushiSwap, etc. has solidified our decision in building and adopting Polygon.
We do believe that Polygon is going to be one of the go-to platforms for Ethereum scaling, especially with their vision for “the Internet of Blockchains” that will be coming soon.
Gitcoin’s KERNEL Block III and Gitcoin Grants
PawnSpace is also part of Gitcoin’s KERNEL Block III and will be shaped and validated throughout KERNEL with help of their amazing mentors, stewards, and fellows. We look forward to providing you with consistent updates on our progress in KERNEL starting with Expo Day coming up quickly this week, and the Gitcoin Grants that have started recently.
If you wish to support PawnSpace in what it is building and bringing to the DeFi + NFT space, consider contributing to our grants here.
Social Media and Community channels
As we keep building PawnSpace, we want to also emphasize community-building, as we know that at the end of the day it is you the community who will use our protocol, and validate what we are doing.
You can find PawnSpace at https://pawnspace.io/.
To stay updated on PawnSpace announcements, and events, follow us on Twitter (@pawnspace).
To keep in touch with us and to reach out to the PawnSpace team, and the rest of the community, join our Discord.
