Bankless: An Overview of the NFT Lending Ecosystem
Compile: TechFlow intern
Compile: TechFlow intern
As the NFT ecological sentiment has become hot, a large number of high-quality projects have emerged, and more and more people have begun to seek to use NFT without selling NFT. NFT lending is definitely one of the hottest areas in recent weeks.
Main Types of NFT Lending
Today, there are two main types of NFT lending:NFT Leasing and NFT Lending。
The first type is for users to rent out their NFTs to others, For example, if borrowers want to enter a community with an NFT threshold, they can rent their NFT temporarily. reNFT is such a team working in this field.
The second type, NFT lending, lets people stake their NFTs and then lend out other cryptocurrencies.Below I will focus on NFT lending as they are more prevalent and in demand than current rental programs.
Why use NFT as collateral for borrowing?
In many jurisdictions, selling NFTs (just like selling regular cryptocurrencies) would result in a taxable event.However, borrowing against your assets, such as cryptocurrencies or NFTs, generates non-taxable income in the US.
Therefore, by choosing an NFT and using it as collateral, one can get immediate liquidity without actually selling the NFT and incurring tax implications.
In addition, in order to obtain more funds to buy more NFTs, some people will also mortgage their NFTs to borrow money, that is, leverage.
Lending platforms proliferate
The earliest and most popular NFT lending protocol is NFTfi, a peer-to-peer (P2P) NFT lending project where users borrow and lend directly to each other.
On NFTfi, lenders can earn interest by providing DAI or WETH loans, while borrowers can obtain liquidity by mortgage-listed NFT.The terms of the loan (term, interest, etc.) are agreed upon by the transaction parties, and in the event of default, the relevant NFT will be returned to the lender. To date, NFTfi has facilitated loans worth over $170.5 million.
Other Newer P2P NFT Lending Platforms
AbraNFT - an NFT lending project built by Abracadabra Money
Arcade - an NFT lending project built on Pawn Protocol, an NFT infrastructure system
Other Methods of NFT Borrowing
P2P lending is not the only way to lend NFTs.
For example, the NFT lending protocol JPEG pioneered a new approach - NFDP.The working principle is similar to Maker Vaults, but it does not mean that you mortgage ETH to borrow DAI stable currency, NFDP lets you deposit NFTs like CryptoPunk to borrow JPEG’s PUSD stablecoin.
Notably, the project uses Chainlink oracles to obtain and maintain on-chain prices for its NFT collateral.
Another NFT lending method, the peer-to-pool model, is also booming recently.
This type of project requires the lender to act as a liquidity provider (LP) to provide ETH to the liquidity pool, and the borrower can borrow by first mortgaging NFT. For example, take BendDAO, a peer-to-pool lending project that accepts blue-chip NFTs such as Azukis, Bored Apes, CryptoPunks, CloneX, Doodles, and Mutant Apes as its initial collateral type.
Other peer-to-peer pool projects worthy of attention
DropsDAO - "Instant lending of JPEGs, NFTs, and Metaverse assets"
Fluid - "Fair, instant, protected, NFT-backed lending"
Pine - "Permissionless NFT-backed lending and NFT financing"
P2PVsNFDPVs peer-to-pool model
These three categories have their own advantages and disadvantages for NFT lending:
Advantages of P2P
Suitable for rare NFTs, traders can customize the rarity characteristics of NFTs.
Liquidation, or default, only happens when the borrower can't pay back (as opposed to floor prices falling, etc.).
shortcoming
shortcoming
Loans take longer and take time to find someone willing to lend
Loan income is not constant
Advantages of NFDP
shortcoming
shortcoming
Floor prices falling too quickly could lead to undercollateralized debt positions, leading to liquidation
Custom oracles are not well battle tested
Current collateral options are limited
Advantages of peer-to-pool
Borrowers can get loans instantly
shortcoming
shortcoming
More complex token economics
More complex smart contracts
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