NFT lending is exactly what it sounds like, lending your NFTs to someone else in exchange for a free or a share of the profit.
What is NFT Lending?
- NFT lending is a form of asset lending that uses NFT as collateral, similar to how traditional lending works with real-world assets like cars, homes, or other physical valuables.
- NFT holders use their non-fungible digital assets as collateral to secure a loan in crypto or fiat, which is then paid back with interest over a specified period.
- In turn, people who lend crypto and cash to borrow NFTs typically do so to invest in the token. The value of the NFT being loaned is tracked throughout the loan term. Since the lender is entitled to a share of the appreciation or a percentage of any future sales of the NFT, loaning it is a form of investment – except the lender does not need to own the asset they invest in.
How NFT lending works?
- DeFi platforms enable peer-to-peer NFT lending or peer-to-protocol lending.
- NFT owners lock up their assets in smart contracts as collateral for loans.
- To access peer-to-peer NFT lending, owners use an NFT marketplace or NFT lending platform where they can list NFTs as collateral and receive loan offers from lenders.
- The platform may provide valuation tools or market data to help determine the NFT’s fair value.
- The NFT owner can choose an offer they like, accept it and receive the loan, typically in a stablecoin, in their wallet.
- The platform will put the NFT into an escrow smart contract for the duration of the loan period.
- If the borrower pays the loan plus the interest before the expiration of the loan period, the NFT is returned.
- The marketplace will typically charge a fee based on the principal amount of the loan.
- If the borrower defaults on the loan, then the lender receives the NFT, which is usually worth more than the loan value. Also, the lender may either liquidate the NFT to recoup their losses or keep the NFT.
- Peer-to-protocol lending works a little differently. The NFT owner borrows directly from the lending protocol, depositing the NFT as collateral, which is then locked up in the protocol’s smart contracts.
- NFT lending platforms use liquidity providers that add cryptocurrencies to the lending protocol pool so that crypto funds are available to borrowers.
Benefits of NFT Lending?
1. Access to Liquidity
You can access funds without having to sell your NFTs, allowing you to utilize the capital tied up in your digital assets.
2. Flexible Terms
Borrowers and lenders can negotiate terms that best fit their needs, including loan amounts, interest rates, and repayment schedules.
3. Retention of Assets
You can retain ownership of your NFTs, allowing you to benefit from potential future value increases.
4. Earning Opportunities: For lenders, providing loans can generate passive income through interest payments.
5.Access to Capital
It offers a fresh way to get loans, particularly to people who would not otherwise have access to traditional banking services.
Risks of NFT Lending?
1. Market Volatility
The value of NFTs and cryptocurrencies can fluctuate dramatically, affecting both lenders and borrowers.
2. Liquidation Risk
If the value of the collateral NFT drops significantly, borrowers may face liquidation.
3. Escrow Smart Contract Vulnerabilities
Bugs or exploits in the lending platform’s smart contracts could lead to loss of funds.
4. Regulatory Uncertainty
The legal status of NFTs and NFT lending is still evolving in many jurisdictions.
5. Illiquidity of NFTs
Some NFTs may be difficult to sell quickly, potentially leaving lenders with hard-to-liquidate assets in case of default.
6. Valuation Challenges
Accurately valuing unique NFTs can be difficult, leading to potential mispricing of loans.
7. Counterparty Risk
In peer-to-peer models, there’s a risk that the other party may not fulfill their obligations.
