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NFT-based lending: A new way to utilize NFTs

The cryptoverse is now getting bigger with the growth in usage of Non-fungible tokens or NFTs. NFTs are simply explained as digital certifications of ownership of real-life items like artworks, or even virtual properties like game items (swords, shields or land plots). They are described as non-fungible since each of them is encrypted with a unique code that makes them unable to be copied and interchanged.

Besides selling these NFTs when their values go up in the market, users can earn liquidity through some other ways like renting to other users or depositing NFTs into a vault. One of these ‘no-selling’ trends is NFT-based lending.

This blog post will dig deeper into this mechanism by providing the definition and analyzing the benefits that NFT-based lending brings to users.

What is NFT-based lending?

NFT-based lending can be understood as collateralizing NFTs to get instant payment. It is almost the same as collateralizing houses and cars, but instead of processing the transaction at the bank, it happens on digital platforms and cash is replaced by cryptocurrency.

In 2022, one of the largest NTF lending deals happened when a borrower collateralized two CryptoPunks Zombie and gained a loan of 1,200 ETH which is the equivalent of 3.3 million dollars in real life.

How does NFT-based lending work?

Firstly, users need to find a suitable digital platform that allows them to proceed fast and secure collateral negotiation. Secondly, negotiation concludes with the consent of both parties. Thirdly, the NFTs of the borrowers are locked into the digital vault of the lenders, and the borrowers can receive the promised cryptocurrency. Finally, when the loans expire, the borrowers pay the amount of crypto they lent plus the interest rate to get their NFTs back, or they cannot pay the debt and the lenders will earn these NFTs in exchange.

The two most familiar forms of NFT-based lending are Peer-to-peer and Peer-to-protocol. Peer-to-peer means lenders and borrowers are matched in a lending marketplace and settle the deal without any intervention from third-party. The borrowers show their NFTs on digital platforms as collateral and decide to work with the lenders who have offers that match their expectations.

Meanwhile, peer-to-protocol excludes the part where the borrowers need to find the ideal lenders and links the borrowers directly to the protocol. After locking up the NFTs into the digital vault and issuing a smart contract, the borrowers receive an amount of crypto just like the peer-to-peer form. However, there is no exact due date for the borrowers to pay the lent cryptocurrency in this type of NFT-based lending. The digital vault will liquidate the collateral NFTs when the loan’s health factor drops below a certain threshold and the NFT owners will have 48 hours to get their NFTs back by repaying the crypto to the vault.

What are the benefits and risks of NFT-based lending?

NFT-based lending satisfies both lender and borrower in terms of liquidity. While the lenders receive interest rates from providing loans, the borrowers can earn some cryptos to invest in other tasks in a short period of time. Most importantly, they have the opportunity to not be departed from their precious NFTs and can still exploit their potential in future circumstances. As a result, NFT collateral lending is an ideal option for long-term investment.

On the other hand, users should also be aware that the NFT lending market is famous for its volatility due to its connection to the cryptocurrency market. For example, in 2021, Ethereum’s market value sank from 4,080 dollars to 1,786 dollars and then surged again to 4,082 only in five months. This extreme volatility of the cryptocurrency market might push the price of NFTs to the top or vice versa. In the blink of an eye, the NFTs can lose their value and the users cannot get a satisfying amount of crypto through collateralizing anymore.

Conclusion

With the introduction of NFT-based lending, NFT users no longer have to wait for NFTs to increase in price and for the right buyers to arrive. It maximizes the liquidity of NFTs and allows users to invest in other potential projects.

For more information, join our Discord community: https://discord.gg/GM3U44e6PG

Disclaimer: The information herein is for educational purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.

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Rikkei Finance is a Web3 platform, encompassing a DeFi lending protocol and an NFT Marketplace; with a focus on NFT rentals and NFT-based lending and borrowing.

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Rikkei Finance

Rikkei Finance is a Web3 platform, encompassing a DeFi lending protocol and an NFT Marketplace; with a focus on NFT rentals and NFT based lending and borrowing.