Non-fungible tokens (NFTs) are the hottest assets in the decentralized finance (DeFi) economy. Despite the recent bull run in the market, and the lackluster launch of Coinbase’s NFT marketplace, the largest NFT marketplace, OpenSea, still pulls in trades worth billions of dollars every month.
However, the one big difference between cryptocurrencies and NFTs is liquidity. It could be weeks or even months before a listed NFT finds a buyer.
The good news however is that just like other assets, NFTs can be used as collateral to keep the wheels of the DeFi economy churning. NFT lending helps eradicate the low liquidity drawback of the NFT marketplace and helps make it an even more lucrative investment.
Borrowers can usually expect to get a loan amount of around 50% of the approximate value of the NFT. The interest rate for the loan depends on the popularity of the NFT and can vary from anywhere between 20%-80%.
These higher than usual interest rates are what attract lenders to such services. The platforms make money by charging lenders a commission on the interest earned, while borrowers are usually allowed to use the platform with no service fees. It’s a win-win for all!
The lending process
The NFT lending process kicks off with the NFT owner (the borrower), visiting a lending platform to make a crypto loan request using their NFTs as collateral. After accepting the platform’s terms and conditions, the borrower’s NFTs are listed in the platform’s marketplace.
A lender visits the platform and browses through NFTs in its marketplace. Unlike a traditional loan, because of the volatility of the NFTs, in a NFT lending platform it is the lenders who get the privilege of specifying the terms of the loan, such as the amount they are willing to lend against the NFT offered as collateral, the interest on the loan they should receive, as well as the repayment period.
The lender then sends his loan offer and terms and waits for the borrower to accept or reject his terms. Once the borrower accepts a certain lender’s offer, the NFT lending platform will lock in the borrower’s NFT since it is now loan collateral.
When borrowers pay the lender back their crypto loan with interest, they will get their NFTs back. However, in case they default on the loan, most lending platforms will transfer the NFT to the lender.
Popular platforms
NFTfi is a popular peer-to-peer NFT lending platform that charges lenders 5% on the interest earned on successful loans. Arcade is another popular peer-to-peer NFT lending platform, which is popular with borrowers since it allows them to specify their loan terms. Then there are peer-to-protocol NFT lending platforms, such as BendDAO, and Pine, which allow NFT owners to borrow directly from the protocol.
NFT lending is a fast-growing niche within the DeFi economy that is poised to rise with the growth and popularity of NFTs. The market already has quite a few NFT lending platforms, and we expect more to prop up in response to the continued expansion of the NFT market.
