A $35,000 DeFi loan backed by a luxury watch showed how NFTs could connect physical assets to crypto lending.
CirrusNFT, a pseudonymous NFT collector, shared the deal in July 2023. The borrower used a Patek Philippe watch as collateral and received a loan through Arcade, an NFT lending protocol.
The borrower first sent the watch to 4K Protocol. The company held the physical watch and issued an NFT that represented ownership of it. The borrower then listed the NFT on Arcade, where lenders could make offers.
Coolest thing I saw on chain this week was a lender giving a stranger a $35,000 loan at 12% APR using a Patek Phillipe as collateral
Borrower sent the watch to an escrow company who then sent back an NFT that represents ownership of the watch
Borrower then listed the NFT on Arcade, accepted the best loan offer on it, and then the NFT was transferred to an escrow wallet until the term is up or the borrower repays
The only way to get the watch back is by burning the NFT so if the borrower defaults the lender can claim the watch
Lender doesn’t even have to know the borrowers name, they just have to know that they are the rightful owner of the watch – which is what the NFT does
Sure, you can just go get a loan at your local pawnshop, but tapping into global liquidity versus local liquidity will always eventually land you at the best rate (This market is young so we aren’t there yet)
Just the tip of the iceberg for whats to come for proving ownership of Real World Assets using NFTs
— Cirrus (@CirrusNFT) July 10, 2023
How the watch became DeFi collateral
The borrower chose the best loan offer. The NFT was then moved into an escrow wallet for the loan period.
Reports on the transaction said the loan was $35,000 at 12% annual interest for about 60 days. If the borrower repaid the loan, the NFT could be used to reclaim the watch. If the borrower defaulted, the lender could claim the NFT and, through it, the physical asset.
This setup solved one simple problem: a DeFi lender cannot easily hold a physical watch.
The NFT acted as a digital claim on the watch, while 4K remained responsible for holding the physical item. That made it possible for the watch to enter a blockchain-based lending market without putting the physical watch onchain.
The model also showed why real-world assets have become an important part of crypto. A person does not need to sell a valuable item to get cash. Instead, the item can be locked away while its ownership is represented digitally.
But the process is not fully decentralized. Someone still has to check that the watch is real, store it safely, keep records and hand it over if the borrower defaults.
That was one of the concerns raised by the crypto community. Some users argued that the system adds trusted third parties to a process that is supposed to reduce the need for them.
Others saw a much bigger use case. One community member suggested that the same model could be used for assets such as real estate.
Also Read: SMBC Nikko Partners With Uniswap to Build Compliant DeFi Platform in Japan
The idea is still alive
The 2023 watch deal was not the end of the idea. 4K still describes its platform as a way to put physical collectibles on-chain. Its current system uses vaults, authenticators and other service providers to connect NFTs with physical assets. The company says each backed NFT can be redeemed for its physical item.
Arcade is also still operating as an NFT lending marketplace. Current blockchain data shows millions of dollars in active loans, although the platform is much smaller than major DeFi lending markets.
The main lesson from the watch loan is therefore not that NFTs will replace pawn shops or banks. It is that a token can act as a digital claim on something stored in the real world.
That link can make physical assets easier to trade, lend against and use in online markets. But it also means trust has not disappeared. It has simply moved to the companies and systems that verify, store and release the physical asset.
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