NFT
While non-fungible token (NFT) trading volumes fell in May, the adjacent NFT lending space is booming. And so far the reviews have been mixed.
NFTfi – an evolving term for technology that sits at the intersection of NFTs and decentralized finance (DeFi) – is on the rise. NFTfi encompasses a suite of tools aimed at providing wider utility and liquidity to NFTs, including collateralised NFT loans, fractionated tokens, and renting or lending NFTs.
What started as a way to capitalize on the 2021 bull run of NFTs has recently exploded in popularity as major Web3 players entered the market. In May, the leading NFT marketplace launched Blur Blend (short for Blur Lending) – a peer-to-peer lending platform that allows users to borrow against their NFTs as collateral. The platform, benefiting from Blur’s popularity, quickly captured 82% of the total NFT lending market share within its first three weeks.
Soon after, other NFT lending platforms started popping up. Binance launched its feature called Binance NFT Loan, which allows holders to secure ETH loans by using their NFTs as collateral. And Joseph Delong, the former CTO of DeFi protocol SushiSwap, launched Astaria, which uses a third party to facilitate its credit market.
Dozens of traders have flocked to these platforms to “pledging” their tokens to earn yield. In addition, traders who may not be able to afford expensive blue-chip NFT from collections such as Bored Ape Yacht Club (BAYC) or Azuki can now lease these tokens for a fraction of the cost.
There are undoubtedly benefits to participating in NFT lending, although the activity also carries risks. Some Blur traders and NFTfi-native users questioned Blend’s lending mechanisms and urged newer traders to educate themselves on how to safely borrow NFTs before diving in.
And while traders can support the idea of making extra money by lending out their dormant tokens, the risk of liquidation and concerns about platform-specific lending mechanisms and decentralization between these platforms remain.
NFT loans benefit “lazy” traders with large premiums
This emergence of NFT lending platforms makes sense when you consider current market conditions. Many NFT holders who bought their tokens during the bull run want to earn some extra ETH in falling markets. They can pledge their NFTs by leasing them to a trader who will pay to hold them for a period of time, earning the original owner some ETH. In turn, the borrower can join an NFT ecosystem or gain access to certain benefits that they might not otherwise have access to.
For people like Hamzah Khan, Polygon’s growth director, who playfully describes his approach to NFT trading as “lazy,” borrowing can be lucrative.
“I just keep things for the long haul,” Khan told CoinDesk. “I don’t use them on a daily basis… fundamentally I like it [NFT lending] because it gives me more capital.”
When asked about the potential dangers of NFT lending, Khan noted the risk of liquidation if the asset price falls, which can happen if the token price drops below 30-40%. However, he stressed that he is optimistic about the growing industry and sees value in lending assets beyond the highly sought-after blue-chip NFTs.
“I have so many PFPs and I want to use them somewhere, but this vertical can get much bigger because houses can also be NFTs and mortgages can be labeled as ERC-721s,” Khan said. “I think people are people who seriously underestimate how much we can do with NFTs.”
While the NFT lending markets have mainly courted JPEG traders in hopes of earning extra returns on their tokens, they operate in a similar way to the credit markets outside the crypto space, such as the housing market, which have the potential to attract thousands more traders. and businesses on board the Web3 landscape.
New traders are most at risk for ‘predatory’ behavior
Not all NFT lending platforms work the same way. Mason Cagnoni, chief operating officer of NFT lending platform Wasabi Protocol, and Karan Karia, vice president of business development at Wasabi, told CoinDesk that while the primary risk of NFT lending is early liquidation if a token’s price falls, Blend’s “deposit” feature allows a trader to make multiple payments over time for an NFT purchase, which can be inconvenient for traders new to trading NFTs.
“It’s pitched as a ‘buy now, pay later’ that uses a perpetual back loan, which is super predatory on the borrower,” Karia said. “Have you ever heard of a loan where you can be called immediately and you have 24 hours to pay back? Like, the only person doing that is the mafia.
Cagnoni noted that new traders are more prone to risky behavior without fully understanding the consequences.
“Lending platforms already existed — if you look at a Dune dashboard with the overlap of users, the Blend users are all new,” said Cagnoni. “They’re not NFTfi users, for example.”
According to a recent report from blockchain analytics platform DappRadar, in Blend’s first three weeks it accounted for 46.2% of Blur’s total trading volume. Cagnoni and Karian both explained that it’s likely that so many new merchants have come to Blend because of Blur’s points farming system. While Blur is not alone in offering rewards to its users for trading activities, its rapid growth and market dominance are often attributed to its successful BLUR token airdrops.
Karia suggested that once Blur users earn their long-sought tokens through an upcoming airdrop, current numbers may dwindle. He noted that in the larger credit ecosystem, emerging platforms need to put decentralization at the forefront of their mission to keep NFT lending as close to DeFi as possible.
“I think we’re all in this Web3 space because we believe in decentralization, and so have these decentralized open consent protocols that all tie together and create a really open NFTfi system — I think that’s a much more positive view, Caria said. “That’s what we’re building towards, rather than having everything locked up in one place, whether it’s a centralized exchange like Binance, or a pseudo-centralized platform like Blur.”
