In this guide, we will go over the principles of What is NFT lending, its benefits, risks, and the best NFT lending platforms to search for.
NFT lending is a way for users who own non-fungible tokens (NFTs) to get loans using their digital assets as collateral. This means that instead of selling their NFTs, owners can borrow money against them. It’s like getting a loan from a bank, but instead of using a house or car as collateral, you use your digital art or collectibles.
NFTs are unique digital items stored on a blockchain, which is a type of computer network. These items can be anything from digital art and music to virtual real estate in online games. Each NFT has a special code that makes it one-of-a-kind, which is why they’re called “non-fungible”.
First, the NFT owner (borrower) deposits their NFT as collateral on a lending platform. Then, the borrower sets the terms of the loan they’re seeking, including the amount, duration, and interest rate.
Lenders review the available NFT-backed loans and choose which ones to fund based on the terms and the value of the NFT collateral. Once a lender agrees to the terms, the loan is issued to the borrower in the form of cryptocurrency. The borrower repays the loan plus interest according to the agreed-upon terms.
If the borrower repays the loan successfully, the NFT is returned to them. If they default, the lender may claim the NFT as compensation.
This process allows NFT owners to access funds without selling their assets, while lenders can earn interest on their cryptocurrency holdings.
There are a few different ways to do NFT lending. Let’s look at the main types:
In peer-to-peer (P2P) NFT lending, one person lends directly to another person. There’s no big company in the middle. Here’s how it usually works:
This type of lending can be good because it lets people set their own terms. However, it might take longer to find a lender, and the deals might not be as safe as other types of lending.
Peer-to-protocol lending involves borrowing through a decentralized lending protocol. Here, NFTs are deposited into the protocol, which then facilitates loans based on pre-set conditions.
Smart contracts manage the entire process, reducing human involvement and errors. This type typically provides more consistency and reliability in loan terms.
Non-fungible debt positions (NFDPs) are a more complex form of NFT lending. In this system, the debt itself becomes an NFT. This debt NFT can be traded or used as collateral in other DeFi protocols.
It allows for more complex financial instruments and strategies in the NFT space. NFDPs are still an emerging concept and are less common than other forms of NFT lending.
NFT rentals involve leasing NFTs rather than using them as loan collateral. This model is prevalent in gaming or virtual worlds where NFTs represent in-game items or virtual property. The renter pays a fee to use the NFT for a certain period, while ownership remains with the original owner.
It supports a wide range of NFTs, including art, digital collectibles, and items from games, allowing you to unlock cash without selling your valuable assets. NFTfi does not charge any fees to borrowers. However, lenders on the platform are required to pay a fee of 5% of the interest they earn from loans.
On Arcade, you can list your NFTs with specific loan terms to receive offers or choose to deposit them into a Vault for quick NFT borrowing options. As a lender, you can fund loans based on set terms or create custom offers for individual NFTs or entire collections.
If you are a lender, you earn interest on the loans you fund. In cases where borrowers fail to repay, you can extend the repayment period or claim the NFTs used as collateral, depending on what was agreed. Arcade currently supports a variety of assets, including popular ERC-20 tokens like WETH, USDC, USDT, DAI, and APE for funding loans.
NFT lending offers several advantages:
While NFT lending offers benefits, it also comes with several risks:
NFT lending is a promising development in the field of decentralized finance, providing new opportunities to use digital assets. It gives liquidity to NFT holders while also allowing lenders to earn rewards. However, like any financial activity, particularly in the quickly growing crypto realm, it has hazards.
As the NFT business grows and matures, we should expect further developments in NFT financing. This might include more advanced valuation models, interaction with traditional finance, and new forms of NFT-based financial products.
Those considering participation in NFT lending, whether as borrowers or lenders, must clearly grasp the process, carefully assess the dangers, and only engage with a reliable NFT lending platform.
To secure a loan using your NFT, you’ll need to choose a lending platform that accepts NFTs as collateral. After listing your NFT, you negotiate loan terms with a lender. Once an agreement is reached, the NFT is locked in a smart contract, and you receive the loan amount. After repaying the loan, your NFT is returned to you.
NFTs cannot be taken out as cash straight away since they are not a traditional financial asset. However, there are a few methods that you might be able to access cash via NFTs:
The NFT may be sold on a cryptocurrency exchange marketplace and converted back into fiat currency. As mentioned in this guide, another choice is to use the NFT as loan collateral. Finally, if the NFT has usable value (such as in-game items), you can think about renting it out.
NFT fractionalization involves breaking down an NFT into smaller, tradeable pieces. NFT fractionalization, while not directly related to lending, can benefit lenders in several ways:
NFT loan platforms generally operate in the following steps:
