NFT Loans- solving the NFT illiquidity problem

In order to understand what NFT loans are, one first needs to know what an NFT stands for and second, one needs to understand what DeFi stands for as this is one of the main driving forces behind the blockchain economy, a decentralized financial system.

July 20, 2022

NFT, non-fungible token is a word which has been heard quite a lot recently that stands for a unique token (aka crypto asset) which cannot be replicated. DeFi, or decentralized finance, refers to blockchain platforms that offer crypto investors financial products and services without getting approval from a centralized authority. This merger between Defi and NFT opens up a new form of economy, under which NFT loans fall into. Read on to understand more

What is an NFT loan?

This new sector has emerged as people that own NFTs have realized that it may take some time for them to sell their NFT and that there was a market for improving NFT liquidity by offering lending solutions. So because it limits what investors can do with their NFTs, the NFT loans enable holders to acquire funds using their digital assets as collateral. The loan can then be used to buy more NFTs, purchase tokens that can be converted into physical money, or obtain other tokens that can be used in DeFi procedures to gain more income. The good thing about the NFT loans is that the DeFi allows for rather quick transactions, as there is no centralized authority that needs to check your credit score, check your real identity and spend time reviewing your loan application.

How Do NFT Loans Work?

The loan works via the Defi and enables NFT holders to set the terms without the need for an intermediary. A loan-to-value (LTV) ratio determines the size of the credit you can take out based on the value of your NFT. You can get a credit in the range of 10 to 20% of the momentary value of your NFT, sometimes up to 80%. Now there are several ways to loan an NFT, the most common of which are:

NFT rentals - As a tenant of a rented NFT, you receive full access to token-gated perks like Discord servers (social networking or special giveaways made available to holders of certain NFTs. The NFT is transferred from one wallet to another for the predefined rental period.
Peer-to-peer NFT lending - When you list your NFT as collateral on the platform, you receive loan offers from others
Non-fungible debt positions- works in a similar way to traditional collateralized debt protocols in DeFi, it just has a few additional features which are specific to NFTs.
Peer-to-protocol NFT lending- a token-integrated approach that increases the speed at the cost of customizability.

NFT as collateral

NFT lending has become a thing, where when you list your NFT as collateral you can get loan offers from other users. This is good as once you have loaned your NFT you have the collateral in order to invest in other projects on the blockchain and it also resolves the illiquidity issue with owning an NFT. NFTs have a value and there was even somebody who was able to use their NFT collection which he valued at $5million as collateral to secure a six month loan worth $1.25 million (with a 7.5% interest rate over that period). This allows people that have made large investments in NFTs to get some cash without having to sell their digital assets.

Best Platforms for NFT Loans

There are currently several platforms which offer NFT loans. It is important to check the differences between them and what their terms are. Some platforms to look at are:

NFTfi - digital pawnshop that offers loans using tokens as collateral.
Arcade - geared mainly toward retail investors with high-end NFTs, users choose which asset to use as collateral.
JPEG’d – one of the first lending projects, which enables NFT holders to open collateralized debt positions using their NFTs as collateral.
Drops – NFT holders can put their NFT collection down as collateral and get instant access to a permissionless loan (thanks to Defi platform).

Are NFT Loans a Good Investment?

NFTs can be expensive and if you want to be a part of a collection and it’s up for a loan it could be. There was somebody who put their BoredApe up for a loan and the person who loaned it received recognition on social media for using that as their avatar, some special perks and increased his “rep” in the relevant realm. Also, it allows for those lending out their NFTs to invest in other projects in the Metaverse economy.

Conclusions

Having the possibility to leverage your NFT beyond just as a buy and hold investment strategy is something which makes it a more tradable asset and therefore adds liquidity to an otherwise illiquid asset. By having this liquidity through loans, users can spend more on other projects and keep the NFT market in motion.

FAQ

Can I get a loan on my NFT?

Yes, you can get a loan on your NFT. There are currently several platforms which offer NFT loans, where you can choose which NFT to use as collateral.