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Last updated on May 29th, 2023 at 11:11 am

Unlike bitcoin, which can be sold almost immediately, the NFT industry is more liquid. It can take months for someone to buy another user’s NFT. This challenge brings about the need for financial instruments in the NFT industry.

Also, NFT must be sold as a complete unit. Many people never want to lose access to their NFTs, not even portions of them.

These issues explain why NFT lending has recently become a booming industry. It addresses the issue of low liquidity in NFTs while enticing more people to invest in the NFT market.

NFTfi is a peer-to-peer marketplace where users can secure cryptocurrency loans through the use of collateralized NFTs. The platform works similarly to how the DeFi lending platforms MakerDAO and Aave work (where the borrowers provide ERC20 tokens or ETH as collateral).

This article comprehensively explores what NFT lending is and how it works. It also explores how the decentralized NFT lending platform, NFTfi, can be used to secure loans.

NFT lending comprises a borrower who provides collateral for a loan funded by a third party (or “a lender”) looking to profit from their investment by lending NFT assets.

Since NFT-backed loans are backed by NFTs rather than traditional peer-to-peer (P2P) loans or conventional crypto-backed loans, investing in NFT-backed loans allows lenders to earn higher returns.

Because cryptocurrencies are used as collateral, NFT lending functions similarly to crypto lending. Unlike traditional loans, NFT lending requires borrowers to use NFTs as collateral before they can secure loans.

Many centralized finance platforms, such as Nexo and BlockFi, are available as lending platforms. These platforms, like traditional lenders, set credit and lending rates and terms.

However, most NFT loans are only available through decentralized finance (DeFi) platforms, which frequently use smart contracts on the Ethereum network to facilitate loan agreements, ensure contractual compliance, and streamline the loan application process.

In response to the demand for NFT loans, new platforms such as NFTFi, MetaStreet, and Arcade are emerging, each with a unique set of terms and rates.

How Do NFT Loans Work?

The basic concept of NFT loans is similar to that of a bank loan.

A borrower who requires a loan will pledge their assets as collateral. The borrower must repay the principal and interest before the loan’s maturity date. The borrower’s collateralized asset will be forfeited if this is not done.

The four types of NFT loans are discussed below.

Peer-to-Peer NFT Lending

In this type of loan, lenders and borrowers are matched using a standard market method.

A user first advertises their NFT on a lending platform for NFTs. As they begin to receive loan proposals from others, there will be users willing to lend the borrower money.

When a borrower accepts an offer, the lender’s wallet instantly sends wrapped ETH (wETH) to them. The NFT pledged as collateral will be stored in a digital vault for the duration of the loan. This digital vault must be available on the lending platform where the loan is secured.

Peer-to-Protocol Lending

In peer-to-protocol lending, the borrower obtains funds directly from a protocol. Several NFT classes are supported by a decentralized trading infrastructure (i.e., the NFT Protocol).

This means that to borrow from the protocol, the borrower must abide by a predetermined set of guidelines. The contributions from liquidity providers are a part of this mechanism. These service providers must first fund a protocol pool with their own money. Borrowers who wish to use this liquidity must first pledge their NFTs as collateral. These NFTs are then safeguarded in the protocol’s electronic safe.

Non-Fungible Debt Positions

Using this method, users “trade” their NFTs for $PUSD; a synthetic stablecoin. This stablecoin has a 1:1 peg to the US dollar. This implies that NFTs must be used as collateral to access the $PUSD. Borrowers can use this stablecoin to fund other blockchain transactions while also supplying liquidity to the system and earning interest.

If the blockchain used for the transaction does not provide what the user requires, $PUSD can potentially be exchanged for other cryptocurrencies found elsewhere.

Owners of NFTs can reclaim their NFTs after the loan is repaid. Otherwise, the NFT will be liquidated.

NFT Rentals

This is the only method that does not involve using a digital vault. Instead, rental matching services such as reNFT match renters and tenants based on various terms and conditions.

This technique functions similar to a peer-to-peer NFT lending transaction, with a few added advantages. For instance, you have better access to benefits as a tenant of a rented NFT, such as exclusive access to Discord servers. You can also be shortlisted for giveaways if you hold on to a specific NFT.

What is NFTfi?

NFTfi is a decentralized platform that provides NFT loans in exchange for ERC-721 tokens as collateral. The platform has a mortgage option that allows customers to convert NFTs into different cryptocurrencies.

These cryptocurrencies are then resold for money. Lenders make loan proposals to borrowers based on the value of the NFTs that the borrowers have pledged as collateral. The NFT will be locked into a smart contract that prevents it from leaving it until the borrower has approved the proposal and is prepared to start making payments on the loan.

How to Secure Loans on NFTfi

All borrowers’ NFT assets are listed under the “borrow” tab on the website. The borrower can indicate that an asset is listed as collateral for a loan by clicking on it and selecting “list as collateral.” Other loan marketplace users can view the borrower’s NFT and make offers.

Once the borrower has received loan offers from one or more lenders interested in the collateralized asset, the colour will change to blue. After clicking the asset, the borrower can accept a loan. Accepting an offer locks the borrower’s NFT as collateral in the contract and deposits the loan as wETH into the borrower’s wallet. On the “borrow” screen, the borrower’s NFT will now be highlighted in yellow to indicate that it is in escrow.

To repay the loan, the borrower should click the NFT once more and select the yellow “repay loan” button to complete the repayment. The borrower must ensure that they have enough wETH in their wallet to complete the transaction. The borrower must also confirm that they have granted NFTfi permission to manage their wETH, or the transaction will fail.

How to Provide Loans on NFTfi

Lenders can make loan offers on the “lend” page shown above.

The lender must first ensure that there is enough wETH in their wallet and that they have permitted NFTfi to manage their wETH (a bar will appear on the site until the lender grants this permission). Doing this will prevent transactions from failing.

The next step is to click the “lend” tab in the top right corner. All of the NFTs listed as loan collateral can be found here. The lender can then look for an NFT to bid on, select the asset, enter the loan amount, payback amount (i.e., the total amount the lender expects the borrower to return), and loan duration. After submitting the offer, the lender must wait for the borrower to accept it.

As soon as the loan is approved, NFTfi will withdraw wETH from the lender’s wallet, and the borrower’s NFT will be locked in escrow in NFTfi’s contract. The borrower must pay the entire repayment amount to receive the NFT back.

How Much Can Be Made from NFT Lending?

This is determined by the NFT being lent and the terms of the loan. In general, lending popular NFTs can earn a good return on investment. However, there is always the possibility of default, so lenders should only lend what they can afford to lose.

If lenders want a more passive source of income, they can stake their NFTs. Staking enables lenders to earn interest on NFTs without worrying about them being sold or returned. This could be an excellent strategy for increasing NFT stock while earning some extra cash.

Conclusion

NFT loans are one way to get started in the NFT/DeFi world. They can be used to create remarkable new sources of income for non-liquid assets (such as NFTs).
NFT loans are created solely to increase the liquidity of NFTs, providing users with funds to use on other projects and services.
NFT lending has ushered in a completely new lending environment. The rules governing NFT lending are expected to evolve as the market grows, stabilizes, and becomes more regulated.
Understanding the risks associated with NFT lending before using any platform to lend or borrow money is crucial.

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