NFT collateralized loans are tipped to be the next big thing in the world of decentralized finance.
First of all, the NFT space is booming right now with record sales being reported across a number of platforms.
However, a major concern of any NFT investor is the illiquidity of the market. In other words, selling an NFT can be a time-consuming process since the right buyer needs to be found.
Therefore, investors need to carefully calculate what percentage of their portfolio to allocate to NFTs.
So can NFT collateralized loans bridge the liquidity gap?
NFT’s and DeFi
DeFi is starting to have a profound effect on the NFT marketplace by providing much-needed liquidity.
To begin with, decentralized lending protocols link borrows and lenders of blockchain assets, such as cryptocurrencies, tokenized real-estate, and NFTs.
And to guarantee loan integrity, most protocols require an over collateralized loan. This means that collateral exceeding the value of the loan is necessary to cover potential losses in cases of default.
However, for standard lending protocols, NFTs bring about a whole host of issues when it comes to price discovery and liquidity.
To combat the issues associated with NFT collateralized loans, NFTfi has developed a peer to peer marketplace.
This approach allows borrowers to offer NFTs as collateral and in return lenders get to choose which NFTs and rates they are willing to accept before initializing the loan.
How does NFTfi work?
Firstly, borrowers list an NFT on the marketplace and if a lender is interested in accepting that NFT as collateral, they can make an offer.
There is no obligation to accept an offer and in many cases, borrowers will receive multiple loan offers. Therefore, getting to choose the most favorable terms.
And, in the event, the borrower does not repay the loan, the underlying NFT gets foreclosed. This will result in the NFT being transferred to the borrower in return for waiving claims for the outstanding term amount.
Therefore, to remain liquid, lenders will generally offer between 50% – 60% of the floor price of an NFT. This allows the borrower to sell on the NFT quickly should the lender default on the loan.
In the marketplace, users can view various NFT’s that are available to lease. Here you can check out the different categories of NFTs that are trending and check out the latest offers.
The stats take into account all loans since the launch of the platform in June 2020. And while the volume is still relatively low, the platform has been growing at an impressive rate.
It’s important to note that NFT collateralized loans can incur a hefty repayment ratio of up to 100%. With this in mind, NFTfi is a peer to peer marketplace. Therefore, lenders can earn handsome rewards by accepting their favorite NFTs as loan collateral.
NFT loan volumes
First of all, Cryptokitties is NFTfi’s most popular collateralized loan asset and accounts for a large portion of loan volume. This is mainly due to Cryptokitties being one of the first NFT collectible projects.
Therefore, they are less risky and have a more established price history. To date, the largest Cryptokitties backed loan was for 32 Ethereum and involved a Frank Pussitano.
Next up, Metaverse projects are proving to be very popular with Cryptovoxels currently boasting the highest loan volume.
On the other hand, Decentraland accounts for some of the biggest loans on the platform. In fact, the biggest loan to date, valued at 34 Ethereum was for a Decentraland estate.
When it comes to gaming, Axie Infinity has quite a substantial trading volume. However, it must be noted that loan APR’s are substantially higher than other assets.
Finally, Cryptopunks is another game that features in the top 6. The game is well established and despite having considerably lower volume when compared to Axie Infinity, it offers a far more competitive loan APR.
Benefits of NFT loans
From an overall market perspective, loans provide NFTs with much-needed liquidity by unlocking the value of an asset.
As a result, investors no longer have to worry about selling their assets for quick cash and can use loans to capitalize on other opportunities within the NFT space.
NFT collateralized loan markets also offer a number of benefits from a lender’s point of view. Astute lenders who choose their collateral wisely have the opportunity to capitalize on greatly discounted NFTs should the lender default on the loan.
Finally, since the offers on the platform are very much on the conservative side, the rates quoted go a long way to establishing the floor value of an asset.
Make no mistake, DeFi collateralized loans, have a fundamental role to play in the development of the NFT space.
And out of all the NFT and DeFi projects out there, NFTfi is one project that really stands out for us.
However, the platform still has a number of issues to address, mainly high gas prices and uncompetitive APR rates.
All in all, if NFTfi can address these issues we see it being a leading player in the world of NFT loans.