NFT Labs: Fungible Token Lending vs. Non-Fungible Token Lending

Fungible Token Lending vs. Non-Fungible Token Lending

A distinction is needed between fungible token lending and non-fungible token lending.

(1) In fungible token lending, most platforms offer only a few highly liquid assets for lending. It is unlikely to be sufficient for the longevity of the NFT market, as NFT projects are diverse, and the actual asset attributes in the projects vary in character and are mostly unique.

(2) In fungible token lending, Oracle automatically performs high-precision valuation, and the market objectively determines the price. However, in the NFT space, this is unlikely to be sustainable in the long run. Because in most NFT projects, the price is not driven by transaction volume but by scarcity, the actual valuation is primarily subjective.

(3) In fungible token lending, liquidation occurs automatically when the borrowing price approaches the market price, and the loan-to-value (LTV) ratio reaches a specific queue value. Under this mechanism, the lender and the platform can never lose money. However, in the NFT space, even though there are thresholds to verify the actual number of asset classes associated with collateralized assets across the program or game, because the NFT market is driven by scarcity, there will always be friction and downtime as the system automatically liquidates assets to prevent lenders from suffering losses.

Taking these three factors together, we can see that NFT lending also faces unprecedented challenges compared to “traditional” crypto lending using fungible tokens.

How to speed up NFT lending

One of the main drawbacks of the P2P market is that there is financial friction. Financial friction is the difficulty of trading financial assets to occur. It can be measured by the optimal occupancy time to exchange a given amount of a financial asset or by the price concession required for an immediate transaction (Price concession). Financial frictions make it challenging to match lenders and borrowers whose goals and needs are aligned.

To solve this problem, it is possible to build services that focus on the P2P market but provide users with fast loans: building loan pools and limiting assets to those specific to the appropriate system, and requiring consideration of key factors related to the project and assets.

There has long been a debate within much of the NFT community about “how to evaluate assets.” Still, there is no absolute objectivity when evaluating assets, so how loan pools should work is up for debate.

To make lending pools work, you can continue to allow the market to value assets subjectively but only focus on projects or artists with proven, credible transaction history and reference loan-to-value ratios and interest rates to reduce overall lending risk. In this case, the actual project should be evaluated more carefully than the assets to ensure that the loan pool will not lose money in the event of a default.

After balancing actual project risk, loan-to-value ratios, and interest rates, the platform also needs to ensure that: it can break even and avoid bankruptcy with only a fraction of the total defaulted assets in escrow to be sold.

To create a loan pool that can provide fast loans, the following metrics cannot be ignored: project-specific transaction volume and growth rate, asset price range/average asset value, and other metrics related to the due diligence process.

Examples of NFT lending platforms

Today there are several platforms where NFTs can be lent as collateral for NFTs, such as Starter, UniLend, Lendroid, and NFTfi. NFT owners can lend through NFTs and put their unused NFTs to good use.