NFT DeFi: Lending and Borrowing with NFT as Collateral

September 1st, 2021
4 minutes read

NFT or non-fungible tokens have been around for several years but became widely known only at the end of 2020 and early 2021. They got into the real limelight after Christie's sale of Beeple art for an astounding $69 million and following the success of CryptoPunks once given out for free and with some of them now trading for millions of dollars. These were followed by a wave of less impressive but still huge sales of other digital assets, represented by NFT tokens, also amounting to several million dollars each. 

Although so far, NFT token applications didn't go beyond digital art, sports memorabilia and gaming, and the NFT bubble has reportedly burst (several times), the hype that the non-fungible tokens have enjoyed in spring 2021 gave rise to the development of several NFT DeFi lending platforms, connecting NFT borrowers with interested lenders. 

For the moment, the two best-known P2P platforms for NFT collateralized loans are NFTi and Stater. Both platforms use a similar algorithm by allowing borrowers to use their NFTs as collateral while enabling lenders to define their own loan terms, including the loan duration, interest rate and Loan-to-Value ratio. Here is more on NFT lending and borrowing, how to use NFTs as collateral and what else the NFT DeFi platforms have to offer.

What is NFT Lending?

From a lender's perspective, NFT-backed lending has much in common with other P2P loans in crypto. The lenders should have Ethers in their wallets and should grant the platform permission to spend their cryptocurrency.  Lenders can browse through NFTs listed on the platforms and pick those that they are most interested in as collateral. 

Since prices for NFT tokens are highly subjective due to the nature of the underlying assets, which is digital art in most cases, the lenders can offer their own loan terms, determining the amount they are willing to lend against NFT collateral, the repayment amount or interest on the loan and duration. If the loan is not repaid when due, the lender can foreclose on the NFT collateral, placed in Escrow on the platform.

Speaking about types of NFTs most often offered as collateral, these are mostly digital art, including both images and videos as well as sports memorabilia. Meanwhile, lenders should also be aware of the fact that NFT in itself is not digital art. Instead, non-fungible tokens are, in most cases, smart contracts that only represent the underlying assets and certify them as unique. 

Since storing digital art inside a token takes too much gas (which is the term for the computation effort to execute operations on the blockchain), NFTs only point at the location of the underlying digital assets, providing an URL to a web server where the assets are stored. While NFTs are a secure proof of ownership, the security of the actual images or videos represented by such NFTs totally depends on the websites containing the artwork. 

There is an alternative solution of storing images represented by NFT in IPFS storage, but it presents another set of challenges that is beyond the scope of this report. Today, the question of safe storage and security of NFT digital assets remains pretty much open, with risks laying with their owners and lenders accepting NFTs as collateral.

What is NFT Borrowing?

For the borrowers, getting a loan against their NFTs is pretty much straight forward. Borrowers list their assets as collateral, and their NFTs appear on the loan marketplace. Borrowers are free to accept or decline offers from lenders and choose the most attractive loan terms, including loan duration, amount to return and Loan-to-Value ratio. 

Once the loan is accepted, borrowers' NFTs are locked with the platform as collateral. The lenders provide the loan to the borrower's wallet on the platform in cryptocurrency.

Borrowers repay the loan from their wallets, granting the platform the permission to manage their cryptocurrency. Technically, this is done by converting ETN into wETN (wrapped ETN), allowing token holders to grant other actors permission to spend their crypto.

NFT DeFi Platforms

As of the moment of publishing this article, the best known NFT DeFi platforms working with NFT-collateralized P2P loans are NFTi and Stater. NFTi refer to themselves as Shopify for non-fungible tokens. The platform has a detailed statistics report declaring more than 2,633 wETN in loans, with the biggest credits ranging from  33 wETN to 52 wETN.

The Stater's website doesn't offer detailed stats but specifies the most frequent loan terms offered on the platform, including minimal loan amount starting from 0.2 ETN, LTV ratio up to 50% and an interest rate starting from 7.9 APR. Stater positions itself as a community-owned, open-source platform with auditable code available on Stater's GitHub page.

Although the NFT market has dried up after the peak in May, the prospects of using NFTs as collateral for P2P loans still look promising. Similarly, Bitcoin and other cryptocurrencies have lived through numerous bubbles, but their application and popularity continue to grow. 

NFT is a promising technology that allows capturing value from digital assets and using that value as collateral without parting with the assets. As the market for NFT collateralized loans continues developing, the lenders can expect better tools to evaluate the real value of the NFTs, while borrowers might expect better LTV ratios and interest rates.