What are NFT loans and how do they work?
NFT loans are offered by DeFi platforms. They allow NFT owners to mortgage their pieces or collections of NFTs in exchange for crypto or fiat currency. Many NFTs on the market are highly illiquid, and several DeFi projects have identified a growing need to improve NFT liquidity using solutions such as loans.
However, non-fungibility is not without its flaws . The most prominent is that it limits what investors can do with their NFTs, making NFTs highly illiquid. Once an investor has an NFT, Nft token generator the standard option to make a profit is to sell once its value rises. Unless it is an F-NFT or fractional NFT .
That’s where NFT lending comes in, a mechanism made possible by DeFi. NFT-backed loans and fractional ownership of NFTs through DeFi protocols are becoming a way to solve the NFT illiquidity problem . These innovations create a market where NFT owners can mortgage their NFTs in exchange for cryptocurrencies or FIAT (USD, EUR, etc…).
How do NFT loans work?
Platforms that support NFT loans allow holders to borrow funds and set conditions without an intermediary. Borrowers can expect to obtain a loan amount of approximately 50% of the value of the NFT, with interest rates ranging from 20% to 80%, depending on the popularity of the NFT.
Lenders decide what they believe the fair value of the collateral is , usually by looking at the asset’s past performance, sales history, or minimum price of similar NFTs. Floor Price or Floor Price refers to the lowest bid price for an NFT from a particular collection.
Once both parties agree to the terms, the NFT is transferred from the borrower’s wallet to an escrow account and a smart contract facilitates the loan.
Sounds good, but the market is not completely risk-free . If the borrower is unable to repay the loan and interest at the end of the loan period, then the lender is entitled to the NFT. Lenders may also not accept new NFT projects as collateral due to price volatility, as they could end up losing if there is no market demand for the defaulted NFT.
The best platforms for NFT loans
The NFT lending market is still in its infancy , but there are already a handful of DeFi platforms offering opportunities to mortgage NFTs for permissionless lending. There are also several upcoming projects, such as those using the Aave Lending Protocol (AAVE), that are looking to accept NFTs as collateral for loans.
NFT fi
NFTfi is basically a digital pawn shop that offers loans using ERC-721 tokens as collateral. It allows users to mortgage NFTs in exchange for various cryptocurrencies, which can then be sold for cash. Lenders offer borrowers loan proposals based on the value of the NFT that has been put up as collateral. If the borrower accepts the proposal, the NFT is locked in a smart contract until the terms of the loan are met.
The platform has reportedly generated more than $12 million in volume since its launch in June 2020. The average loan amount is $26,000 per month, but the platform has reportedly facilitated loans of up to $200,000. Default rates hover just under 20% and vary by NFT.
Arcadian
Arcade is an NFT lending platform primarily aimed at high net worth retail investors and institutional lenders. It is based on the Pawn Protocol , a non-custodial liquidity infrastructure designed specifically for NFT-backed loans.
The platform uses a smart contract to create a wrapped NFT (or wNFT) that represents the borrower’s loan collateral and is used when applying for a loan. The wNFT is locked for the time estimated in an escrow smart contract that indicates when the financing principal is sent to the borrower and repaid to the lender. Arcade earns a percentage of every transaction completed on the platform.
drops
Drops is a DeFi lending platform where NFT holders can deposit their collection as collateral in exchange for instant access to a trustless loan without having to speak to a broker. Nft token development Users can borrow up to 80% of the asset value (as determined by the price floor) and receive an instant loan without permission from lending groups.
Nexus
Nexo is a centralized NFT lending platform that only accepts top-tier NFT cashouts valued at over $500,000. These include valuable NFT collections like CryptoPunks, Bored Ape Yacht Club, and others. Whales holding these top-tier NFTs can acquire instant liquidity without having to part with their assets.
Nexo assigns a dedicated account manager to loan applicants. Once an application is approved, applicants may receive a loan without a thorough credit investigation or credit history review. NFTs held as collateral will not be liquidated , even if the value of the NFT fluctuates over the course of the loan.
