NFT Lending Explained

What is NFT Lending?

NFT lending refers to a process in which borrowers pledge NFT assets to obtain a loan, usually funded by another person or lender, who is also seeking returns on their investment. If you want to make money with NFTs without selling the ones you own, NFT lending can help you get higher returns than regular cryptocurrency loans or traditional peer-to-peer (P2P) loans.

How does it work?

Like the classic DeFi lending platforms, NFT lending allows users to collateralize their NFTs to obtain loans in fiat or cryptocurrency for a specified duration.

NFTfi, for example, is an NFT lending platform that matches interested borrowers and lenders. Lenders offer loans in cryptocurrency to other users on their NFTs, while borrowers provide the NFTs as collateral. Using smart contracts, the platform matches users and allows them to negotiate the terms of the loans. Lenders get to determine the fair value of the NFT by checking through an asset’s past performance or by comparing the asset price with the floor price of closely-related NFTs.

Once the loan terms are agreed on, the NFT is moved into a digital vault while the crypto loan is released for use. Borrowers can unlock their NFT if the loan is repaid 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.

The protocol supports over 150 NFT collections, especially the blue chips such as BAYC, CryptoPunks, Mutant Apes, etc.

NFT Lending: Upsides

Earning: Lending markets allow NFT holders to do more than just holding. Borrowers can now pledge their collectibles, while lenders can earn interest on loans.
Liquidity: NFTs are relatively illiquid due to their non-fungibility. NFT lending provides more liquidity to the market. With NFT-backed loans, borrowers can make their NFTs more liquid while lenders earn interest on their loans.
NFT renting: another potential feature of the lending market is NFT renting. Here, users can rent out their NFTs for a fee while their ‘tenants‘ enjoy the perks of owning the piece for a specified duration.

NFT Lending: The Risks

Although, in theory, the concept of NFT loans looks foolproof, the reality is far from that. First, for borrowers, defaulting on loans means selling your NFT at a low price. Loan to value ratios can be as low as 30-50%. Also, the non-fungible nature of NFTs means borrowers cannot support their position in case of a margin call. And, of course, NFT lending markets are not spared from the risks laden in DeFi— hacks, thefts, and even rug pulls.

NFT Lending: Bottom line

By leveraging DeFi, lending markets expand possibilities in NFT markets. NFT lending, with other DeFi services such as staking and renting, might eventually make the NFTs evolve into assets used for more lucrative financial services.