NFT Lending for Beginners
Peer-to-Peer and Peer-to-protocol NFT lending are the liquidity elixir of the NFT market
Following the Big Bang of 2021, the NFT cosmos has stabilized into two separate galaxies: volatile NFTs whose value fluctuates extensively and blue-chip NFTs which have achieved exponential growth through established household names such as Bored Ape Yacht or CryptoPunks.
In both cases, NFT holders continuously encountered liquidity issues, namely due to the limited nature of the financial infrastructure around web3 assets, which are currently mostly restricted to buy and sell options.
NFT holders every so often want to have their cake and eat it too, which is exactly what Zumer is aiming to provide. The ability to relish the luxury of their blue-chip collections while also enjoying the immediate liquidity their NFTs could generate is a major aspect of what Zumer will offer its users.
In the midst of a downturn in the DeFi market, following the broader NFT market correction, Zumer is rising above the competition with an NFT-lending protocol more innovative and secure than what other NFT-backed lending platforms have offered to date. Providing a practical solution for the liquidity issues of NFT holders while delivering a stable collateralized asset for the DeFi lenders and liquidity providers will position Zumer as the go-to protocol to unlock NFT values via financialization.
NFT-backed lending currently has two business models, the most prominent being peer-to-peer lending and peer-to-protocol lending.
The current NFT lending market
Peer-to-peer NFT-backed loans utilize a matching model of a marketplace. An NFT holder is bound to provide collateral whose perceived price surpasses the suggested loan value and receive loan offers from individual lenders who agree with the price and loan value in the marketplace. Once an offer is accepted, the loan’s value is transferred to the borrower’s wallet in the form of a stablecoin or cryptocurrency (e.g. Ethereum) upon which the platform is built. In this model, credit risks are borne by the lenders. If the loans defaulted, the lenders would take over the ownership of the collateralized NFTs. Platforms like NFTfi and Arcade belong to this type of lending model. The pros of this model are that it is very easy to use and there is no need for a standardized valuation mechanism for the NFTs. However, the flip side is that it is less scalable as deals are closed upon negotiations which usually take a longer time to finalize.
On the other hand, a peer-to-protocol model offers a more scalable solution to collateralize NFTs and extend loans. NFT owners just have to pledge their NFTs to the peer-to-protocol lending platforms based on a pre-determined valuation. The collateralized NFTs are then locked up in a digital vault designed through a smart contract. In a decentralized and enhanced mimicry of the ancient lending models, the NFT is automatically returned to the lender’s model upon fully repaying the loan’s value. In the case of a default or a sudden drop in the NFT’s floor price below the loan’s value, the NFT would be liquidated to recoup capital back for the repayment of loans. The most well-known platforms using this model are BendDAO and JPEG’d. Though they seem to be able to attract certain early users, their risk model remains very similar to the existing lending model adopted by Compound and AAVE which are designed to provide margin loans for liquid and money-market alike cryptocurrencies. The risks we see include 1) static valuation of NFTs is easy to subject to manipulation (e.g. inflated price); 2) no consideration of credit risks in the pricing model; 3) centralized underwriter (the protocol itself); 4) utilization-driven interest rate model would lead to concentrated liquidation in a very illiquid market. 5) Unsustainable tokenomics (using token holder’s money to benefit the NFT borrowers). As we highlighted in our previous article, applying the current DeFi frameworks developed by Compound and AAVE on NFT-backed lending would be disastrous as the former is specifically designed for liquid money-market-like assets using a brokerage-driven model.
The investment bank of the Metaverse powered by Zumer
Unlike other peer-to-protocol platforms, Zumer aims to become a decentralized debt market for NFTs by not just offering loans for NFTs but also allowing securitization of staked positions into NFT bonds to allow more liquid trading of locked liquidity. . Zumer is leading the way in peer-to-protocol NFT lending with a hybrid pricing model through a sustainable risk management mechanism that accords unparalleled security to borrowers and lenders. The protocol is run through a dual-pool system for maximum loan safety. Yield farmers pour into the liquidity pool, which generates funds for loans for NFT holders. In the dire case of a default, a second provision pool will provide the needed liquidity for yield farmers seeking to retrieve their funds while the collateralized NFTs are being liquidated in the open market. Adding a banker spice to the mix, the protocol updates floor prices using a time-weighted 30-day moving average to protect lenders and borrowers from speculated or inflated NFT floor prices. To round it all up, Zumer has established an insurance mechanism to allow NFT owners to enjoy a longer grace period if defaults happen. Our dual-pool mechanism also prevents NFT owners from forced liquidation due to high-interest rates due to high utilization rates. On the other side of the service, Zumer provides is the buy-now-pay-later payment option for NFT buyers and traders, allowing them to acquire high-priced NFTs with a lower starting price.
The holistic, financially-engineered system of Zumer is built to enable NFT holders to painlessly and instantly generate funds through their collateralized NFTs. By rendering NFT loan generation an effortless process, Zumer is positioning itself and every member of its community as the decentralized banker of the Metaverse.
