A Look at the Innovative Side of NFTs: NFT Lending

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Last updated on May 29th, 2023 at 11:14 am

The Non-Fungible Token (NFT) space has evolved beyond the point where users hold the tokens for speculative purposes, trade them, or use them in native ecosystems. NFTs are typically used in their native ecosystems. For example, NFTs can be used in-game assets in a Play-to-Earn (P2E) gaming ecosystem.

The NFTs could be in the form of virtual lands that can be cultivated or developed. They could be weapons from the game or other types of collectibles.

NFTs are sometimes held solely for the purpose of reselling them at a higher price in the future. Holders may also want to trade them for others.

With the introduction of NFTFi, a merger of NFT and Finance, new use cases for NFTs have emerged. They are now part of a more complex and rewarding financial arrangement.

NFTFi was created in response to the liquidity issues faced by the NFT market. An NFT typically takes a long time to sell, especially if the demand for that particular collection of NFTs is low.

Another issue people often face in the NFT space is a lack of fragmentation.

When an NFT holder wishes to sell their asset, they must sell the entire NFT. They lose ownership of NFT as a whole because they can’t break it down into fragments.

This article examines NFT lending, a nascent utility in the NFT space; different types of NFT lending activities; and examples of platforms that provide these features.

What is NFT Lending?

NFT lending is an aspect of NFTFi in which holders of NFTs, especially bluechip NFTs such as Bored Ape Yacht Club NFT and CryptoPunks, can lease their assets for a period and earn rewards in return or use their NFTs as collateral for loans.

Firstly, it may come in the form of the NFT owner using their NFT as collateral to get loans from others for a period without the interference of a centralized authority, which can also be referred to as Peer-to-Peer NFT lending.

Secondly, in some cases, the holder of the NFT may use their NFT as collateral to obtain a loan from a protocol. This is referred to as Peer-to-Contract NFT lending.

Thirdly, in the case of NFT rentals, the NFT owner rents their assets, usually in-game assets, to gaming guilds such as IndiGG for a period to use in the gaming environment and earn returns.

Fourthly, the Non-Fungible debt position is another type of NFT lending that allows users to borrow stablecoins to provide liquidity and earn returns while using the NFT as collateral.

What Are The Types Of NFT Lending?

NFT Renting

NFT renting is the first category of NFT lending, and it involves holders using a platform to lease out their NFTs for a set period. This could take the form of renting assets on a dedicated NFT rental platform such as reNFT for a period. Users are allowed to choose their rental terms and conditions.

This rental platform acts as a bridge between holders of NFTs and potential tenants. For instance, a brand may need to use virtual land in a metaverse to erect their virtual office or billboard. They may decide not to purchase the virtual land outright for various reasons and instead opt for a rental agreement with the owner.

When the rental period ends, the owner can renew or use the virtual land for other purposes. Different NFT rental platforms have guidelines on how they operate.

Sometimes, gaming guilds rent out NFTs. The expensive price tags of gaming NFTs of popular Play-to-Earn games like Axie Infinity make them difficult to access for average players. Gaming guilds are platforms that allow both new and experienced gamers to interact with one another. It supports new gamers with scholarships, tutorials, and much more for multiple play-to-earn games.

In-game NFT holders can rent out their assets to the gaming guild for a percentage of the rewards earned by players.

Peer-to-Peer NFT Lending

The Peer-to-Peer NFT lending feature is a decentralized type of NFT lending in which borrowers (owners of NFTs) are matched with lenders of crypto loans without the interference of a centralized body. This NFT lending feature replicates the decentralized crypto lending strategy. Smart contracts typically run the operation. They operate in a trustless manner, with no need for a centralized authority.

In this type of NFT lending feature, users can obtain loans as long as they use their NFTs as collateral. Once borrowers list their NFT as collateral, they can access loan offers from other users. The borrower can select the loan that best suits their needs, and the crypto value of the loan is instantly provided by the lender they previously selected.

The smart contract instantly locks the NFT collateral in the vault for the duration of the loan. Borrowers who default on loan payments instantly lose their NFT to the lender. This is why NFT collateral is typically worth more than the loan amount.

If the borrower adheres to the loan terms, their NFT is returned to them at the end of the loan duration.

Different Peer-to-Peer NFT lending platforms tend to possess varying transaction fees and guidelines. Examples of peer-to-peer NFT lending platforms are NFTfi and the Arcade NFT platform. It is crucial to conduct due diligence before using any of these platforms.

Peer-to-Protocol NFT lending

Peer-to-Protocol NFT lending involves the owner of an NFT using their assets as collateral to collect a loan from a protocol for a period. The difference between Peer-to-Peer NFT lending and Peer-to-Contract NFT lending is that the former allows the holder to use their assets as collateral for loans without the direct interference of a centralized body. In most cases, users are not expected to undergo a Know Your Customer (KYC) process.

Thirdly, unlike their counterparts, NFT owners or borrowers can create customizable loan terms on Peer-to-Peer lending platforms.

In Peer-to-Contract NFT lending, owners of NFTs use their assets as collateral directly to the protocol. Customizable terms may be limited, and a KYC process may be required.

Before they can access crypto loans from the platform, the owner of the NFT, who also serves as the borrower, must temporarily relinquish ownership of their asset as collateral.

In this type of NFT lending platform, borrowers are expected to monitor the value of their NFT collaterals to ensure they do not fall below a certain threshold. If it does, the collateral is liquidated, and the borrower loses access to the NFT. Platforms that offer this feature, such as BendDAO, allow borrowers to access their NFT for a limited time. After the grace period ends, they lose every opportunity to access their NFTs.

Non-Fungible Debt Position

This lending feature allows users to borrow stablecoins by collateralizing their valuable NFTs and using the borrowed coins to add liquidity to the protocol in order to earn returns. Sometimes, the user may swap the borrowed synthetic stablecoin for another cryptocurrency and use it on another platform.

The non-fungible debt position feature is similar to the Peer-to-Contract lending option because the platform monitors the value of the NFT collateral. If it falls below a particular threshold, the borrower (owner of the NFT) may lose their collateral. An example of a non-fungible debt position platform is JPEG’d.

In Conclusion,

NFT lending is an aspect of NFTFi in which holders of NFTs, especially bluechip ones such as Bored Ape Yacht Club NFT and CryptoPunks, can lease their assets for a period and earn rewards in return or use their NFTs as collateral for loans.
NFT lending could take the form of the NFT owner using their NFT as collateral to obtain loans from others for a period without the interference of a centralized authority. This is known as Peer-to-Peer NFT lending.
Examples of Peer-to-Peer NFT lending platforms are NFTfi and Arcade.
The holder of the NFT may use their NFT as collateral to obtain a loan from a protocol. This is referred to as Peer-to-Contract lending. An example of a platform that offers this is BendDAO.
In the case of NFT rentals, the NFT owner rents out their assets, usually in-game assets, to gaming guilds such as IndiGG for a period to use in the gaming environment and earn returns.
reNFT is an example of an NFT rental platform.
Another type of NFT lending is a non-fungible debt position, which allows users to borrow stablecoins to provide liquidity and earn returns while using the NFT as collateral.

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