Abstract

• NFT lending is a type of loan in the cryptocurrency field that uses NFT as collateral.

• The concept of NFT lending brings decentralized finance (DeFi) into the world of digital art, collectibles, virtual real estate and other unique tokenized assets.

• When examining NFT lending, several key indicators that need to be considered are loan-to-value ratio (LTV), forced liquidation ratio and NFT floor price.

• NFT lending provides NFT holders with great benefits, such as the ability to immediately release liquidity and obtain borrowings, but it also brings risks, such as price volatility, Lack of liquidity and potential regulatory risks.

What is NFT ?

NFT is a non-fungible token. It is an encrypted token hosted on the blockchain and is used to represent digital assets. . Unlike cryptocurrencies such as Bitcoin or Ethereum, which are homogeneous and identical to each other, each NFT is unique and "non-fungible." The properties and value of each NFT are different.

NFT typically represents ownership of one-of-a-kind items, such as artwork, video game characters and skins, trading cards, Virtual real estate and other digital goods. This means that non-fungible items cannot be traded on a standardized scale because their value is derived from their uniqueness and the subjective value assigned by buyers.

As more and more creators use NFT to monetize their digital works, collectors hold their unique digital works in the form of NFT. Digital assets, brands use NFT to build closer relationships with their customers, and the mainstream application rate of NFT is increasing.

What is NFT lending?

As the name suggests, NFT lending is a type of loan in the cryptocurrency field that uses NFT as collateral. In the DeFi field, equitable tokens such as Bitcoin and Ethereum have traditionally been used as collateral to obtain loans. But as NFTs continue to grow in value and popularity, many platforms are also offering NFT holders the opportunity to mortgage their assets to obtain loans.

Some of the most valuable NFT collections are worth tens of thousands of dollars per piece. NFT holders can borrow money through NFT and easily obtain liquidity without selling NFT. The concept of NFT lending brings DeFi into the world of digital art, collectibles, virtual real estate, and other unique tokenized assets.

How does NFT lending work?

NFT lending works similarly to cryptocurrency pledge lending. Let’s use a simplified example to illustrate how NFT lending works:

Step 1: User applies for a loan

NFT holders use their NFT as collateral to apply for loans on platforms that support NFT lending.

Step 2: NFT Evaluation

The platform or other users on the platform evaluate the value of the NFT. If the NFT has a stable secondary market price record, the evaluation will be simpler, but each NFT is unique and its value is usually subjective, so for NFTs that are not well-known, value evaluation is usually more challenging. .

Step 3: Loan disbursement

After the NFT value is agreed upon, the lender provides a loan to the NFT holder, usually in the form of a stablecoin. The NFT will then be locked in the smart contract until the loan is repaid. Smart contracts typically stipulate the terms of the loan, including the required amount, term, and interest rate.

Step 4: Loan repayment

After the borrower repays the loan, the NFT will be unlocked and returned to the borrower. But if the borrower fails to repay the loan, the NFT will be automatically transferred to the lender through a smart contract. This process is called liquidation.

Users can view the platform’s product page or research various DeFi DApps to find platforms that provide NFT lending. If you are considering NFT lending, it is best to do thorough research and find the platform with the best loan terms, trustworthiness, and a proven track record.

Understand the key indicators of NFT lending information

Use personal NFT as collateral Before borrowing a product, you need to have an in-depth understanding of the key indicators that measure the feasibility of the loan. While these terms are similar to those for borrowing against collateral, these terms take into account the additional complexity of using NFTs as collateral.

1. Interest Rate

When you borrow money using NFTs as collateral, you need to consider the interest rate you will need to pay. Find out how much interest you will pay over the life of a loan. Also, please understand the difference between annualized interest rate and annualized yield.

2. Loan to Value Ratio (LTV)

Loan-to-value (LTV) is the ratio of the loan amount to the value of the collateral. For example, if you borrow 50 DAI using an NFT worth 100 DAI as collateral, the LTV ratio is 50%. The ratio is a fundamental risk metric for lenders and helps measure the risk of a loan becoming less than fully collateralized if the value of the collateral (NFT) declines.

The maximum LTV ratio allowed by the platform varies, but in most cases it is between 50% and 75%. For more volatile assets, the LTV ratio will tend to be lower, taking into account price volatility. NFT lending generally has a lower LTV ratio than staking, as NFT prices are more volatile and there are challenges in accurately assessing their value.

3. Forced liquidation ratio

This ratio is the LTV ratio at which collateral can be liquidated to repay the loan. If a borrower's LTV ratio reaches the forced liquidation ratio, the platform can sell its collateral to ensure its loan is repaid. In NFT lending, lenders can claim ownership of the NFT.

For example, if a platform’s forced liquidation ratio is 75%, and the user’s collateral value drops causing their LTV to reach this If it reaches a level, its collateral may be liquidated. To incentivize borrowers to avoid being liquidated, penalties are often charged in these cases.

Borrowers need to pay close attention to this indicator, because liquidation will cause them to lose NFT.

4. NFT floor price

The floor price of NFT refers to the lowest-priced work in a collection. It is recognized as one of the main indicators used by collectors to measure and evaluate the feasibility of a project. . Through this metric, buyers can understand the minimum investment required to own an NFT from a specific project.

The floor price may affect the terms of the loan, although the NFT used as collateral has compared to the cheapest NFT in the collection. Rare features. The collective floor price will have a significant impact on the borrowing limit and LTV ratio. For example, a borrower who intends to use an NFT with unique and rare characteristics as collateral may expect to receive a higher loan amount, while a common NFT may receive a relatively low borrowing amount.

These ratios are critical to understanding the dynamics of DeFi mortgage lending, and the ratios will vary greatly depending on the platform and collateral type. Big difference. Lending against NFT collateral is still a relatively new and ever-changing field, so these ratios may differ significantly from those for fungible token collateral. Furthermore, NFTs are relatively illiquid, making it difficult to assess their value, both of which will also affect these ratios.

Benefits of NFT lending

NFT lending has many benefits, including the following:

1. Release liquidity

Holders of high-value NFTs do not need to sell their assets to release liquidity. It could be beneficial for those who believe in the long-term value of NFTs but want immediate access to funds.

2. Expand DeFi into the field of digital art

NFT lending provides NFT holders with a way to participate in DeFi through loans. It may be very beneficial for artists or collectors in the NFT field who want to utilize their digital assets in DeFi.

3. No credit check required

Like other DeFi lending, NFT lending does not require a credit check. This is a significant advantage for individuals with lower credit scores or lack of access to traditional banking services.

Risks of NFT lending

It should be noted that NFT lending is There are risks. The value of NFTs can be extremely volatile and difficult to accurately assess. NFTs are less liquid than traditional cryptocurrencies, which means that if a borrower defaults, it may be difficult for lenders to sell their NFTs to recover their funds.

Risks that need to be considered in NFT lending include:

1. Price Volatility

NFTs are generally less liquid than other cryptocurrency assets. If a borrower fails to repay the loan on time, it may be difficult for the lender to sell its NFT to recoup the funds.

3. Smart contract risks

Like other DeFi protocols, NFT lending is usually run by smart contracts. These contracts may have flaws or loopholes that can lead to the loss of funds or NFTs when exploited by hackers.

4. Regulatory risk

Like other fields in DeFi, there are regulatory uncertainties in the NFT lending field. Future regulations may affect the viability of NFT lending or impose additional regulatory requirements.

Conclusion

NFT is popular for its ability to tokenize a range of assets, from digital art to real estate. NFT lending represents an exciting development in the DeFi space, providing liquidity options for holders of unique digital assets.

While NFT lending provides NFT holders with a new way to release liquidity, the risks involved are also high. It is crucial for users to fully understand these risks before participating in NFT lending or any other DeFi protocol.

Extended reading

• What is non-identical Qualitative tokens (NFT)?

• How to create NFT

• What is NFT staking and how does it work?

• What are dynamic NFTs and how do they change?

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