NFT Labs: Application Scenarios of NFT(Lending)

Application Scenarios of NFT-Lending

With economic uncertainty at near record levels in recent years, more and more people are looking to preserve and increase the value of their assets. It is common to see huge gains made in the online world - Twitter CEO Jack Dorsey's first tweet sold for $2.5 million, and a famous “Nyan Cat” image sold for 59 million......

While the commodities and prices involved vary, the above categories of transactions share a common characteristic - those who want to gain from NFT either intend to sell their NFT assets or plan to sell them in the future to profit from the potential upside.

This traditional strategy has generated significant returns for many investors. Still, as the NFT market has become relatively saturated, it has failed to take full advantage of the value embedded in NFT assets.

There are many regular use cases for NFT: gaming, crypto art, virtual worlds, insurance, domain names, and more. In addition, NFT can be even more useful in finance, where digital assets can play a more significant role.

The collision between DeFi and NFT

In just a few years, DeFi (decentralized finance) has become a huge success in the crypto market, building many applications and putting them into widespread use. MakerDAO allows users to create loans without a bank and offers the DAI currency, a decentralized crypto asset pegged to the US dollar. dYdX has made a new and effective way to lend, borrow, and financing transactions. Decentralized exchanges such as Uniswap incorporate the DeFi scenario, allowing users to securely and seamlessly trade ERC-20-based crypto assets. Popular DeFi protocols such as Dharma and Compound also play a full role in the lending ecosystem.

While NFT is the most exciting crypto craze, decentralized finance (DeFi) continues to be the catalyst that drives NFT's ever-broadening boundaries. According to DeFi Pulse, DeFi is replacing traditional financial entities with decentralized financial entities, with a total market of over $43 billion.

The trend of combining DeFi with NFT has quietly taken root. While most attention and market hotspots are still looking for combinability within DeFi, some projects that have crossed DeFi into the NFT space have begun to show great potential. NFT lending has become the next breakout point in decentralized finance. So, how will two very different systems collide？ What will digital assets be when they are used as tangible assets？

Why NFT Lending Marketplace is NeededLeveraging Idle Assets

Today, NFTs are booming, with many NFT platforms generating record sales. But the main concern for NFT investors is the illiquidity of the market. In other words, selling NFTs and finding the right buyer can be very time-consuming and labor-intensive. As a result, investors need to carefully calculate the percentage of their portfolio allocated to NFT. But liquidity issues aside, the rapid growth of the NFT industry is generating substantial returns for long-term investors.

For now, the debt market is the missing ingredient in the NFT ecosystem. A mature NFT ecosystem needs to create a marketplace where people can use NFT to obtain loans and lease their NFT for income. Many NFT users have assets in their wallets that can only be used in specific games or platforms, and away from them, their NFT assets just sit idle in their wallets. If the marketplace allowed users to lease their assets as collateral for loans, allowing other users to use other people's NFTs on their platforms, this would unlock the endless potential of NFTs.

Further Clarity on NFT Valuation

The NFT mortgage marketplace may become one of the most effective ways to determine the fair value of NFTs. Users can post NFTs they want to use as collateral on the marketplace. Other users can bid on them, offering an intended price.

In addition, the marketplace would allow for the selection of loan terms, whether the lender offers ETH or DAI payments. Such a marketplace would ultimately help generate a fair value for NFTs.

For example, seeking a loan on the marketplace with CryptoKitty as collateral, a user could research the CryptoKitty market in general, the last sale price (e.g., 20 ETH/$5,500), the individual CryptoKitty, and its specific attributes to determine their final bid. As a result of research, perhaps the average user is valued at 5 ETH/3 months, but CryptoKitty connoisseurs can arrive at a valuation of 10 ETH/3 months based on its qualities. This cycle gradually becomes more efficient, and the multiple quotes and valuations help arrive at a more reasonable fair value, making NFT assets more stable.

Providing Liquidity

In the overall market, loans can unlock the value of assets and provide much-needed liquidity to NFTs. Instead of worrying about the challenges of selling assets, investors can instead use loans to explore other opportunities in the NFT.

From a lender's perspective, the NFT mortgage market has many benefits. If a borrower defaults on a loan, a lender that has chosen its collateral wisely can obtain the NFT being pledged at a meager price.

Putting NFT assets to good use is likely to generate significant income. However, the role of NFT lending is crucial when the art and collectibles market is less liquid than other asset types, especially when owners of valuable art and collectibles need funds for a short period. The relatively low liquidity of art and collectibles also allows lenders to earn higher returns than conventional loans.

Three Models of NFT Lending

NFT lending is a lender providing liquidity to the borrower. For example, on NFTfi, the lender uses a wETH loan in exchange for temporary ownership of the NFT assets that the borrower uses as collateral. As a lender, you can set the loan value, interest rate, loan term, etc.

Lending for profit

This model is the most common. Loans are made to others in return for financial gain. On the one hand, this model avoids the risk of significant non-permanent losses in smaller liquidity pools. On the other hand, it provides a more desirable return on capital.

This model drove the initial use of most NFT lending platforms and is the most familiar model. To date, most NFT loans have ranged from 40-100% APR, which suggests that lending to other users does offer a more lucrative return on their ETH or DAI over time.

Of course, there are risks, but lenders can balance the rewards and risks if managed properly. Unlike other lending platforms, on the NFT lending platform, lenders do not have to trust the borrower.

(1) Loan-to-value ratio (LtV) refers to the ratio of the loan amount to collateral value, i.e., to the market value of NFT. The loan-to-value ratio, along with the choice of the loan term, is the most important tool for managing risk. If the loan amount is too high, borrowers may drop straight down in the loan process to give up their NFT assets. The longer the loan term, the longer the borrower abandons their NFTs, which can exacerbate the borrower's market risk.

(2) Ensure that you can sell the NFT within 24-48 hours for more than the loan amount or even at a profit, which can be very rewarding if the loan value of the NFT can be increased to 2 to 4 times the original value after the NFT foreclosure is properly executed.

(3) Only make an NFT offer if you understand how to value it. Reference indicators such as recent sales prices are valuable but must be more accurate. Open OpenSea to find the most current sales price and the lowest price. However, using your knowledge to accurately value the NFT and balance the risk is also essential. For details, you can add Sophia (ID:lovebit98) or follow the “NFT Labs” public number to get the article “How to value NFT.”

(4) The longer the loan period (30-90 days), the greater the return may be, but only for those NFTs with stable market price performance over time.

(5) Decide whether to use wETH or DAI (or both) for quotes based on the available portfolio.

Lending for NFT acquisition

This model has already been adopted by some users, who collect NFTs extensively. Still, it is also likely to be adopted by large NFT DAOs (decentralized autonomous organizations) in the future - buying NFTs at a cost-effective price.

Risks and opportunities exist together, and it is essential to note that.

(1) Rather than attempting to lend to others to gain a financial return, the hope is that the NFT will be available at a pre-determined loan price in the event of a borrower default.

(2) This means that loans should only be made to NFTs that want to acquire. The amount of the loan needs to be within the range that would still be acceptable even in the event of default - the goal of the loan is to acquire.

(3) This model has a strategic advantage over traditional financial lending models. If the borrower defaults, it can offer a lower return rate in exchange for foreclosing on the other party's assets. This allows the lender to provide a more competitive interest rate (10-40% APR) to “win” the loan from the borrower. Because NFT lending is a p2p market, borrowers are most likely to accept the most competitive offers.

Lending for help

A lesser-known mode of NFT lending is to offer friendly loans to friends or other users who need help for an amount you can set.

It is important to note that.

(1) This model can be a safer alternative to private lending among friends. Traditionally, there is still a risk of accidents (even if doubtful) after lending ETH to other NFT holders based on trust; for example, loss of account access, hacking, etc. Once these phenomena occur, nothing can be done, even if the other party is willing to return the loan. But this can be avoided in the NFT lending platform.

(2) NFT lending platform provides a safe and convenient way to lend, the lender offers the loan for free. Still, the borrower can use one or more NFTs as collateral in case of an accident. This model minimizes the loss of money and friendship.

(3) This model is also applicable to artists or project sponsors. They provide a large sponsorship amount while obtaining NFTs as collateral, which increases security. Although the maximum loan term is currently only 90 days, it is possible to make 2-4 overlapping loans to extend the loan term.