NFT Collateralized Lending
Non-Fungible Tokens (NFTs) have been taking over the crypto market as of late, and many lenders are hopping on the train as a result. NFTs are essentially a digital asset, which is distinguishable from other assets, that can be bought and sold for a cryptocurrency, usually Ethereum, over an online marketplace. The blockchain behind these NFTs are the real magic, where through analysis one is able to identify the online “receipt” of the transactions which that NFT has undergone. This creates some validity behind any particular NFT.
Here’s some examples: a company called NBA Hot Shots started to release packs of playing cards, which contained images from notable moments during NBA games. These moments depicted on these cards contain anything from a dunk by LeBron James, or a 3-Pointer by Steph Curry. These cards are referred to as NFTs, as they are different from each other and hold different values. These cards are then bought by individuals and sold over a marketplace, using the cryptocurrency, Ethereum (ETH).
Now let’s talk about where lenders come into play: When individuals want to take out a loan from a bank or private lender, they have the option to place these NFT assets up as collateral, which are potentially worth something if sold over the online marketplace. These NFTs are no small amount, though, as some can be sold for upwards of 300ETH, which equates to over $600,000, depending on the exchange rate of ETH to USD. Typically, these loans take the form of the cryptocurrency DAI, which is built to track the US Dollar 1:1 on the market.
Today, you can find a couple of solutions which provide owners of NFTs with the ability to borrow against the value of their NFTs. NFTfi is the best, simplest place for NFT collateralized loans. There are two primary use cases for this particular platform:
1. If you need a loan, put your NFT up to be collateralized and await the best loan offer.
2. If you want to lend crypto to someone, find an adequate NFT and submit your loan proposal.
The Future of NFT Lending
There are two main types of NFT lending solutions. The primary difference is the type of accepted collateral. First is one that accepts a fungible representation of the NFT. This assumes that the approach of creating a fungible version of the NFT will be able to effectively determine the price accurately. This is done in order to show comparison with other NFTs on the same level playing field.
The upside to this option is that the lender can gain more of a short-term profit through the use of the collateral. The borrow is also able to easily add more assets and prevent liquidation in the event of a margin call. The downside to this option is that the lender cannot use the underlying NFT functionality, as he only possesses a fungible version of it, not the token itself. For example, the NFT can represent some virtual real estate, domain, etc, but the lender cannot benefit from that underlying asset.
The second solution are lending protocols which accept the NFT itself as collateral, with no need for a fungible conversion. The upside to this solution is that the lender can potentially benefit from the NFT’s actual functionalities. Additionally, the lender can earn additional capital by leasing that NFT to a third party and reaping the profits which it generates. The downside to this solution is the challenge in preventing liquidation in the event of a margin call. Since NFTs, in nature, are non-fungible, the borrower cannot add more of the same NFT to further collateralize. Therefore, the borrower must add a different, acceptable NFT, which is not necessarily practical, as it is difficult to find an NFT which matches the missing value which he wants to add.
US Capital Solutions is still exploring the realm of NFT collateralized lending, so if you have an inquiry about our capabilities in this area, please contact one of our account executives about pursuing an opportunity with us!
