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In the strong wave of Web3 and DeFi development, NFT Lending is gradually becoming an important piece for the growth of NFTs, opening up capital access opportunities for millions of people. Although still new compared to traditional lending forms in Crypto, the NFT Lending model has proven its great potential in boosting liquidity and market capitalization growth for the NFT market.
So what is NFT Lending? How does it work? What are the current NFT lending models and which projects are noteworthy? Let’s explore in detail with Allinstation in the article below!
What is NFT Lending?
NFT Lending allows NFT holders to use these assets as collateral to borrow capital from individuals or protocols. Instead of selling NFTs when needing cash, users can retain ownership of the NFT and receive a loan equivalent to 30% to 70% of the NFT’s value.
Typically, the loan will have a fixed or pre-agreed interest rate, ranging from 20% to 80% per year depending on market conditions, the reputation of the NFT, and the type of lending platform.
See also: What is NFTFi? Top 5 notable NFTFi projects
Some advantages of NFT lending:
- Retain NFT ownership while having flexible capital flow.
- Increase liquidity for the NFT market, which lacks flexibility.
- Leverage financial leverage in investment, especially during uptrend seasons.
- Transparent transactions without needing to trust any intermediaries.
How does NFT Lending work?
The entire NFT lending process is conducted through smart contracts to ensure automation, transparency, and no need for intermediaries.
The operating mechanism of most NFT Lending platforms:
- The borrower selects the NFT they want to collateralize and enters the loan conditions such as amount, term, and desired interest rate.
- The lender (or liquidity pool) reviews and accepts the offer.
- The smart contract temporarily locks the NFT in a “vault” and transfers the loaned assets to the borrower.
If the borrower repays on time, the NFT is unlocked and returned. If the borrower does not repay on time, the NFT will be liquidated (sold or transferred to the lender).
Types of NFT Lending Models
Peer-to-Peer Lending (P2P)
This model directly connects borrowers and lenders. Platforms like NFTfi, X2Y2 allow borrowers to propose conditions and lenders to choose whether to agree or not.
- Suitable for high-value NFTs.
- Flexible terms.
- However, it depends on the consensus between individuals.
Peer-to-Protocol Lending
Borrowers do not need to wait for approval, just collateralize the NFT and receive capital from the liquidity pool. Examples include BendDAO or ParaSpace.
- Easy access, fast.
- Automated and transparent.
- Usually supports Blue Chip NFTs like BAYC, Azuki, CryptoPunks.
Collateralized Debt Position (CDP)
A characteristic model of DeFi. Users collateralize NFTs and receive the platform’s native stablecoin, such as PUSd from JPEG’d or DAI from MakerDAO.
- Must maintain a high collateral ratio (e.g., 132%).
- Lower interest rates than P2P or P2Protocol.
Rental NFT
Users rent NFTs for a short period instead of buying or borrowing capital. Widely used in games, whitelists, VIP events…
Example: Rent MAYC NFT to enter a VIP club for 3 months. After the term, the NFT automatically returns to the original owner’s wallet.
Buy Now Pay Later (BNPL)
This model allows users to purchase NFTs in installments. Buyers only need to pay in installments, and the NFT is held in a contract until fully paid.
- Popular on OpenSea, LooksRare.
- Risk of liquidation if not paid on time.
Trends and Future of NFT Lending
In the context of the NFT market stabilizing after the 2021 hype wave, NFT Lending is the bridge between NFTs and real capital flow in Web3. With continuous improvements of platforms, it is predicted that by 2025, this field could account for 25-40% of the total market capitalization of NFTs.
NFT Lending not only helps optimize NFT assets but also promotes application, liquidity, and financial investment in the Web3 ecosystem.
NFT Lending Ecosystem: Notable Projects
NFT Lending is an important part of the NFT market, but this ecosystem is still quite young compared to other pieces in the digital financial space. However, this financial sector has witnessed significant growth and maintains Total Value Locked (TVL) at about 20%-30% of the total market capitalization of NFTs. According to predictions from DefiLlama, if NFT lending continues to develop at the current growth rate, by 2025, the TVL of this field could account for 25%-40% of the total market capitalization of NFTs.
One of the pioneering projects in the NFT Lending field is NFTfi, launched in 2022. NFTfi quickly became an important platform in the NFT lending space, and by 2023, the project had reached a total loan amount of up to 450 million USD. Based on data from Dune Analytics, NFTfi maintains a stable transaction volume from April 2022, ranging from 10,000 – 18,000 ETH.
BendDAO is one of the first projects to apply the Peer-to-Protocol Lending model. Launched on mainnet in March 2022, BendDAO focuses on allowing users to collateralize Blue Chip NFTs. Thanks to this strategy, BendDAO achieved a loan amount of up to 62 million USD in April 2022, proving the success of this model in attracting users and creating borrowing opportunities.
JPEG’d is one of the few protocols applying the Collateralized Debt Position (CDP) model in the NFT Lending ecosystem. JPEG’d allows users to collateralize NFTs to borrow up to 32% of the NFT’s value with an annual interest rate of only 2%, lower than most other protocols (usually ranging from 14-20%). Additionally, the transaction fee when borrowing at JPEG’d is 0.5%. Although it only allows collateralizing Blue Chip NFTs, JPEG’d still attracts many users thanks to its attractive loan terms.
ParaSpace is another notable NFT Lending project, currently ranking second in the list of NFT lending platforms, only after Blend. Launched in December 2022, ParaSpace has surpassed many competitors and within just 6 months reached a total loan value of over 300 million USD. The rapid development of ParaSpace shows its great potential in becoming a key platform in the NFT Lending ecosystem.
Overall, the NFT Lending ecosystem is in a strong development phase with the emergence of many breakthrough and potential projects. From platforms like NFTfi, BendDAO, JPEG’d, to ParaSpace, new financial models and solutions are contributing to expanding opportunities for users in the NFT space, while creating a solid foundation for sustainable growth in the future.
Conclusion
NFT Lending is a trend that is reshaping how we perceive digital assets. From an NFT market once considered “illiquid,” users can now retain NFTs while still borrowing capital to continue investing.
If you own NFTs, consider exploring NFT Lending as a flexible financial solution. The above article is for informational purposes only, not investment advice. Newcomers should be cautious and think carefully before making any investment decisions!
