What do you do when you need money but don’t have it? You use your credit card if you have one or look into getting a loan. However, it isn’t easy to get either due to credit scores. NFT lending and borrowing may help.
When you hear or read “NFT lending”, you may assume it means giving out or lending Non Fungible Tokens, but it is not. NFT lending is actually NFT-collateral-based lending. In this article, we break NFT lending down in the simplest way.
What is NFT Lending?
NFT lending is the act of lending crypto or money to a borrower who has an NFT as collateral against the loan you are providing in crypto or fiat.
NFT lending and borrowing are similar to regular lending and borrowing, but with Non Fungible Tokens as collateral. The borrower will put up their NFT as collateral, and in return, they will receive a loan from the lender. If the borrower fails to repay the loan and interest at the end of the set time, the lender can take possession of the NFTs or liquidate the NFT to retrieve the money.
Before we go further, I will stop here to state this: if you don’t know what NFTs are, you have to read our complete guide on NFTs first to grasp this article fully.
How do NFT Loans Work?
Once a deal is reached, the borrower sends their NFTs to the smart contract created by the lender. The smart contract will then issue a loan to the borrower based on the value of the NFTs. The borrower can then use this loan for whatever they need.
If the borrower defaults on their loan, the smart contract will automatically sell the NFTs and use the proceeds to pay back the lender or transfer the NFT to the lender. The borrower will also lose any ownership rights they had to the NFTs.
Since there are platforms that facilitate this process, all borrowers need to do is list their NFTs on an NFT lending and borrowing platform, and the platform will evaluate the NFT to suggest a loan amount based on the value of the NFT.
The borrower can then choose a crypto asset or fiat, depending on what the platform supports. Most platforms only support fiat and/or stablecoins like USDC.
If the platform supports regular cryptocurrencies like Bitcoin and Ethereum, it is likely that if there is a huge price jump or fall leading to the NFT not being enough as collateral, the borrower will be notified to add more assets (NFTs) or crypto to bring a balance.
The figure usually offered is 75%. That means the loan amount can only be worth about 75% of the value of the NFT. If the NFT is worth $100, the borrower can only get $75.
You may wonder why you should get an NFT-backed loan. After all, you have an asset you can liquidate. NFT lending benefits the borrower and lender, and we will look at that next.
The Benefits of NFT Lending
There are several reasons why anyone might want to use NFT lending. We will explore the benefits of NFT lending from the perspective of the lender and the borrower.
Benefits of Borrowing on NFTs
- Get quick cash: If you have an NFT but need cash, selling your NFT at that time may cause you not to make a lot in returns from your initial purchase. It may be best to leave the NFT to appreciate while seeking other alternatives to get money. With NFT lending, you can get quick cash without selling your NFT. You won’t have to part with your digital asset as long as you pay back the loan and interest on time.
- Make more without touching your assets: NFT lending also provides an opportunity for the borrower to earn more without having to sell their NFTs. By taking out an NFT loan, you get liquidity that you can use to invest in other digital assets and earn a return. When the investments mature, they may even be able to use the returns to pay back the loan and keep any remaining profits.
- No lengthy process to obtain a loan: The process of getting an NFT loan is much quicker than a traditional bank loan. There is no need to go through a lengthy application process or provide extensive documentation. You can complete the entire process online and receive the funds in a matter of minutes. Since NFT-backed loans are secured by blockchain technology and smart contracts, no credit checks or bank verifications are required, leading to a frictionless process.
- Lower interest rates: In the United States, you may be able to get loans with about 4-40% interest rates, but how low you can get depends on your credit score. With NFT loans, you can get somewhere between 0-15%, and it isn’t dependent on any credit check but the platform.
Benefits of NFT Lending to the Lender
- Get Interests on Your Money: You usually expect to earn interest on that money when you lend money out. With NFT lending, you can make interest on your money without worrying about the borrower defaulting on their loan. If they default, you get an NFT which you can hold or liquidate to make your money back.
- Diversify Your Portfolio: By lending your money out in an NFT loan, you can diversify your portfolio and reduce your risk. Instead of having all your money tied up in one asset, you can spread it across multiple assets. This will help to mitigate your losses if one asset should plummet in value.
- Get an NFT for less: Rather than pay hundreds, thousands, or even millions of dollars to purchase an NFT, you can provide crypto or fiat to a borrower who already has an NFT. If the buyer defaults, some platforms will allow you to choose between selling the NFT to recoup your money or keeping the NFT to yourself. If you are able to keep the NFT, you have gotten a non-fungible token for way less than its value.
- Increased Returns: NFT lending platforms usually offer higher returns than traditional banks or investment vehicles. Despite offering lower interest rates to borrowers, the lender gets to keep most, or all, of the interests, unlike going through financial institutions that take a cut. In NFT-backed lending, the platform, in most cases, makes its money from the transaction fees.
The Risks of NFT Lending
NFT lending is a new and emerging industry, which means some risks are still involved. Here are some of the risks to keep in mind before taking out an NFT-backed loan or investing in NFT loans:
Loss of Principal
There is always the risk that you could lose your entire investment if the borrower defaults on their loan. While most platforms have mechanisms to protect lenders, such as selling the NFTs to repay the loan, there is still a chance you could lose your money.
Loss in value of NFT or loan
For the lender, your money is tied up somewhere. If the value of your crypto falls pretty bad while it is tied up in the loan, you would not be able to pull out or diversify to prevent further losses.
On the part of the borrower, if you cannot pay the loan on time, there is the risk of losing your NFT collateral.
Also, like crypto, the value of NFTs can fluctuate dramatically, leading to a loss in value between when the loan is given and when it is paid back. This is a risk for both the lender and borrower, depending on if the borrower pays back or defaults.
Smart contract Risk
Since smart contracts secure NFT loans, there is always the risk that the smart contract could be hacked or otherwise tampered with. While this is a risk with any smart contract, it is worth keeping in mind when considering an NFT loan.
Lack of Regulation
The lack of regulation surrounding NFTs and NFT lending means more risk is involved. Since the industry is still in its infancy, there are no concrete rules or regulations governing it. This could lead to scams or fraud being more prevalent.
However, this works like any crypto-related thing. With decentralized platforms and fewer regulations, it is harder to hold anyone responsible. However, there are some regulations regarding anything investment, especially in the US.
Another risk to be aware of is that some NFT lending platforms charge very high-interest rates. Be sure to shop around and compare interest rates before taking out an NFT loan.
How to do NFT lending and borrowing
Now that you know the basics of NFT lending and borrowing and the risks, let’s look at how to do it.
There are a few different ways to lend or borrow NFTs. The most common method is through a decentralized lending platform. These platforms connect lenders and borrowers and facilitate the loan process.
Another way to do NFT lending is through an exchange. Some exchanges offer margin lending services that allow users to borrow money against their assets. However, this is not as common as the other methods.
Each method you choose may have a different process. For example, with an NFT lending platform, borrowers may have to list their assets and how much they need based on the system’s limit, and lenders will have to shop the NFT-backed collaterals and loan requests to see which to provide an offer.
We will look at a few NFT lending and borrowing platforms and their process.
NFT Lending Platforms
Here are some of the leading NFT lending platforms currently available:
Nexo is one of the leading crypto lenders and offers loans backed by various assets, including NFTs. Borrowers can get up to 20% of the value of their BAYC or CryptoPunks NFTs. It doesn’t offer facilities for lenders, though.
To get started, borrowers must first fill out a loan request form with details on their NFTs. If approved, they will receive a quote from an account manager on Nexo and a lending agreement to sign. Once you sign, you will get money in ETH or a stablecoin. Note that only NFTs with a value of $500k or over are approved.
The borrowing rate on this platform is 12%-15% depending on your NFT and the market.
NFTfi connects lenders looking to give out money to borrowers looking for money.
On NFTfi, borrowers connect to the wallet, which stores the private key to their NFT on the blockchain, to list their NFT for a loan. They can also select how much they require in wETH or DAI.
The platform will display the loan value based on valuation from NFTbank and other platforms, as well as other information about the NFT and requested loan. Lenders can review loan requests listed on the platform and choose which to provide loans to, just like shopping online. If the borrower defaults, the lender can choose to foreclose and receive the NFT.
Note that NFTfi is on the Ethereum blockchain, so you need to have some ETH in your wallet to approve gas fees for any transaction you’d like to perform on the platform, whether requesting loans or lending.
Drops.co is another NFT lending platform, but only for borrowers. The platform provides lending facilities in lending pools.
First, you can choose a lending pool that accepts your NFT. After doing that, the NFT Floor TWAP oracle will determine your collateral value. If you are not familiar with TWAP oracles, they are a method of price discovery that takes the time-weighted average price over a period of time.
You will then be able to borrow up to 30% of the discovered NFT collateral value. You can borrow as much as you need to as long as it is within the 30% limit.
Note that if the value of your NFT falls below a certain threshold, you will have to provide more collateral, or your loan will be called, and you may have to forfeit your NFT due to liquidation.
Arcade.xyz is an NFT lending platform that allows users to take out loans against their NFTs or lend crypto to NFT-backed loan requests.
To get started, borrowers must first create a loan request and connect their NFT to that request and the platform using their crypto/NFT wallet. After doing so, they can select their loan terms and currency (wETH or USDC/other stablecoins) based on what the platforms have calculated and offered.
Upon approving the transaction for the loan request, you will need to sign the loan terms to validate your request parameters if you are matched with a lender. All you have to do now is wait. Note that in addition to the transaction and other fees, borrowers are requested to pay a 2% fee off of the principal of a loan.
Lenders can review loan requests on the platform and approve any they wish to fund. After signing the approval of the loan, it becomes active on their profile. From there, they can view the status of the loan.
NFT Lending vs. Traditional Loans
There are some differences between traditional loans and NFT loans. One of the main differences is that with an NFT loan, you don’t have to go through a credit check. This is because the loan is backed by an asset instead of your credit score. This means that anyone can take out an NFT loan, regardless of their credit score, as long as they have an NFT.
Another difference is the interest rates. With an NFT loan, you can usually get a lower interest rate than with a traditional loan. The interest rates are generally lower because an asset secures the loan.
There are also other benefits, as discussed above. So, if you are looking for a way to get a loan without going through a credit check or need money quickly, or are looking to earn more interest on your crypto or potentially get an NFT for cheap, NFT borrowing or lending might be right for you.
However, keep in mind that there are risks like anything in finance and investments. Do your research on the NFT lending or borrowing platform before moving forward.
Have you had experience with NFT lending? Let us know in the comments. What do you think of this strategy? Do you see yourself using NFT lending to grow your portfolio? Do let us know.
If you are not sure if this is right for you or need personalized advice on what to get into when it comes to crypto, NFT, or the metaverse, you can book a one-hour session with our consultants today.