Taking out Loans with NFTs: Everything You need to Know about NFT Loans

Non-fungible tokens (NFTs) are the most expensive crypto asset types, with trade volumes running into billions of dollars. You can use them for artistic expression, store value, and everyday trading.

But that is not all! Did you know that you can now borrow and lend NFTs.

In this piece, we’ll cover a recent use case of NFTs — NFT loans. Get to know the type of NFT loans and how they work.

What are NFT Loans?

NFT loans are crypto coin or fiat loans that borrowers take when they offer their NFTs as collateral. The collateralized NFT is stored in a smart contract digital wallet.

The lenders here gain in one of two ways. They earn interest when the borrower repays the loan within the stipulated time if the loan is fully repaid. They also profit when the borrower defaults since the collateralized NFT is always worth more than the loaned asset.

The Appeal of NFT Loans

NFT loans are just one of the many complex and lucrative financial solutions that NFTs offer. It solves the problem of NFT illiquidity while allowing people to earn money from their NFTs.

One of the most significant drawbacks of investing in NFTs is the asset class illiquidity. Finding someone interested in your NFT and willing to buy it at your asking price can take a long time. Most people finding themselves in financial distress have to sell their NFT at a lower price than their buying price.

Furthermore, you can’t sell a bit of an NFT asset. You have to sell it all or nothing at all. NFT fractionalization exists, but most people don’t want to give out their NFT forever, even if it is just a part of the whole thing.

NFT Loans solve this problem. It allows people to access instant liquidity without losing ownership of their beloved NFT. This solution encourages people to invest more in NFTs.

The Types of NFT Loans

There are four models of NFT loans. These are:

• Peer-to-peer NFT loans
• Peer-to-protocol NFT loans
• Non-fungible debt positions
• NFT rentals

You need to work through a platform to access these lending models. These platforms are generally decentralized finance (DeFi) apps that allow people to make financial transactions without relying on centralized parties and traditional financial institutions.

Many of these platforms present a measure of risk ranging from smart contract exploitation, regulatory crackdowns, and sudden downturns in the crypto market. You should be aware of this risk before you make financial investments in crypto or NFTs.

Peer-to-peer NFT loan

This type of NFT loan uses the popular DeFi model of matching lenders with borrowers.

To use this model, you must list your NFT as collateral on any platform that supports NFT loans. Lenders on the platform will make loan offers to you based on your collateral. The protocol will transfer your collateralized NFT into a digital vault when you accept an offer.

The lender on the platform will then loan you either wrapped ether (WETH) or DAI (a stablecoin) from their wallets. You can then trade the loaned assets for other cryptocurrencies or fiat on any platform like Binance or Coinmetro.

Your NFT stays in the platform’s digital vault until the duration of the loan period. If you repay the loan within the timeframe, you will automatically get your NFT back through a smart contract. Otherwise, the smart contract will send your NFT to the lender if you don’t. Since the loan value is usually less than the collateralized NFT asset, the loaner will receive ownership of your NFT at a considerable discount.

Some lending platforms will charge a fee on each loan. The lender pays the lending fees only when the borrower repays the loan. In case of a loan default, the lender doesn’t pay any fee. On the other hand, borrowers don’t need to make any payment to access loans.

Another popular lending platform that supports peer-to-peer NFT lending is Arcade (formerly Pawn.fi). This platform allows users to wrap multiple NFTs into a collateralized asset. It also allows more flexibility for borrowers.

Peer-to-protocol NFT loans

While peer-to-peer NFT loans occur between people, peer-to-protocol NFT loans involve dealing directly with a lending protocol.

Like DeFi lending protocols, NFT lending protocols get their assets from liquidity providers. These providers pool their funds into a liquidity pool, then share in the interest paid by borrowers.

On the other hand, Borrowers access these assets by collateralizing their NFTs. The NFTs are stored in smart contract-powered by digital vaults.

An example of an NFT lending protocol that functions under the peer-to-protocol model is BendDAO. The platform gets its price information from OpenSea via Chainlink oracles.

Another peer-to-protocol NFT lending platform is Pine. Pine offers more flexibility, allowing borrowers to choose if they want Ether (ETH), Solana (SOL), or stablecoins in exchange for their NFT collaterals.

Non-fungible debt position

This model uses a collateralized debt position (CDP) structure. Platforms using this model allow borrowers to offer whitelisted blue-chip NFTs like CryptoPunks as collaterals to borrow a stablecoin that is usually pegged to the U.S. dollar on a 1:1 basis.

One NFT platform that offers non-fungible debt positions is JPEG’d. Borrowers that lock their NFT as collateral to borrow synthetic stablecoin, $PUSd. They can earn interest on the $PUSd by locking it on the platform liquidity pool or swapping it for other cryptocurrencies. When they repay the loan, they will get their NFT back.

Renting out NFTs

The final model of NFT loans is NFT rentals. Through this model, NFT holders can rent out their NFTs in exchange for rent payments. They rent out their assets by transferring the NFT from their wallet to the protocol’s wallet. The tenant gets all the benefits of owning that rented NFT.

For instance, if owners of the NFT have access to Discord servers, giveaways, or invite-only events, the tenant will be eligible for all those benefits during the tenancy. The tenant often enjoys immense benefits and social recognition that usually come from buying the NFT.

One popular platform that supports NFT renting is reNFT. It matches renters and tenants together based on varying terms.

The benefit to the renter is that they can access liquidity without having to sell their NFT. They will lose ownership for a while and then regain their NFT at the end of the tenancy.

Wrapping Up

NFT loans allow you to access urgent liquidity without selling your NFT. You can choose from any available models based on your need and risk tolerance. Keep in mind that several risks are associated with NFT loans. So, always DYOR (Do Your Own Research) before you start.