What is NFT Lending?
In this article, you will find out everything you need to know about NFT lending - making money with NFTs without selling the ones you own.
NFTs are becoming more and more popular due to the rise of decentralized apps and blockchain technology. NFT lending is a process in which borrowers pledge NFT assets to obtain a loan that is funded by another person or lender, who is also seeking returns on their investment. NFT lending will help you get higher returns than regular cryptocurrency loans or traditional peer-to-peer (P2P) loans.
What is an NFT?
NFTs represent digital assets – digital art, music, or other digital content. NFTs are stored on a blockchain, which is a decentralized ledger that allows for secure, transparent, and tamper-proof transactions. As NFTs are stored on a blockchain, they can’t be replicated or counterfeited. They can be bought, sold, or traded just like any other asset.
In other words, NFTs are a way to collect and trade digital content. Some popular examples of NFTs are CryptoKitties, Decentraland, and NBA Top Shot. While a traditional digital file can be copied and shared infinitely, an NFT is a unique and valuable asset for both collectors and creators.
How Does NFT Lending Work?
NFT lending is a good option for those who want to get cash quickly without selling their NFTs. It allows users to collateralize their NFTs to obtain loans in fiat or cryptocurrency for a specified duration.
NFT lending enables lenders to earn interest on their loans without having to worry about the volatility of the crypto market.
NFTfi, an NFT lending platform, matches interested borrowers and lenders using smart contracts. Lenders offer loans in cryptocurrency to other users on their NFTs, while borrowers provide the NFTs as collateral.
Lenders check through an asset’s past performance or compare the asset price with the floor price of closely-related NFTs to determine the fair value of the NTF. Once they agree on the loan terms, the NFT is moved into a digital vault while the crypto loan is released for use.
Borrowers unlock their NFT after repaying the loan within the specified duration; otherwise, the lender can claim the NFT. Loan values are typically about 50% of the current market value of the NFT, and the course can range from weeks to months.
Steps of NFT Lending
For NFT lending, the lender should have cryptocurrency assets in their wallet. The lender should also grant lending permissions to the platform allowing them to lend out their crypto assets. Here are the NFT lending steps of the lender.
- After visiting the platform the lender offers a crypto loan to an NFT holder. They can, for instance, fund the loan with ERC20 tokens, typically wETH or stablecoin like USDC.
- Then the lender chooses the NFT he would prefer as collateral or one that suits his cryptocurrency lending strategy.
- Since NFTs have legendary volatility, lenders have the privilege of stipulating loan terms such as the amount they are willing to lend against the NFT collateral, the interest on the loan, and the repayment period.
- The lender then sends his loan offer and terms and waits for the borrower’s acceptance notification.
Now, look through the NFT lending steps from the borrower’s perspective.
- The borrower, the NFT owner, visits a lending platform and makes a crypto loan request.
- He lists his NFTs as collateral.
- Some lending platforms may require details such as acceptance of NFT lending terms and loan request conditions.
- Afterward, the borrower’s NFT assets details will appear on the loan marketplace.
- The NFT holder will then wait for the lender’s loan offers. He is free to decline or accept lenders’ offers and choose the best loan terms.
As soon as the borrower accepts a certain lender’s offer, the NFT lending platform will lock in the borrower’s NFT since it is now loan collateral. After paying the lender back their crypto loan with interest, the borrower will get their NFTs back.
Otherwise, if the borrower fails to pay back the money owed by the allocated time, the lender has all the rights to the NFT which in most cases costs more than the loan.
Hence, some lenders give NFT loans with high hopes that a borrower will default on payments. In this way, many users bag juicy NFTs easily.
Upsides of NFT Lending
- Earning: Besides just holding, lending markets give NFT holders the opportunity to earn. Borrowers can now pledge their collectibles, while lenders can earn interest on loans.
- Liquidity: We know that NFTs are relatively illiquid due to their non-fungibility. NFT lending provides more liquidity to the market allowing borrowers to make their NFTs more liquid with NFT-backed loans.
- NFT renting: Lending markets allow users to rent out their NFTs for a fee while their ‘tenants’ enjoy the perks of owning the piece for a specified duration.
The Risks of NFT Lending
Risks for borrowers
- As NFT lending is so new, it’s difficult to assess the legitimacy of borrowers, lenders or platforms that may not have an established track record yet.
- NFTs are notoriously volatile, with prices subject to consumer interest and other market factors that are hard to predict.
- It is hard or impossible to insure an NFT due to price volatility or the fact that NFTs “live” on a smart contract, and not with the owner.
- Smart contracts are a new technology and not 100% safe. Contracts can and do get hacked, resulting in stolen assets that are likely recoverable.
Risks for investors
- The assets you place on an NFT platform are not FDIC-insured. You can lose your investment if the platform gets hacked or goes out of business.
- Securities Investor Protection Corporation insurance is designed to protect securities and cash in a brokerage account. But there is no such insurance for NFTs at this time. Moreover, there is not any private insurance that CeFi platforms offer.
- There is no asset insurance for NFTs if the smart contract is breached and the escrowed NFT is stolen.
- Hard to assess the risk of borrowers as they have no track record of repaying a loan.
- Smart contracts are a new technology and not 100% safe. If your borrower’s NFT collateral gets hacked or stolen, you may not have any way to recover your loan’s collateral.
To sum up, NFT lending is a great way to earn passive income and help people get access to things they need. However, remember that there is risk involved with any type of investment or loan, so be sure to do your research before lending out your NFTs out and learn about borrower defaults, loan amount, and lending pools.
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