• Pawn Your CryptoPunk: An Emerging NFT DeFi Lending Market

  • For NFTs, it’s akin to a pawn shop.

    In a new project that sits at the nexus of decentralized finance (DeFi) and the red-hot NFT market, a startup blockchain project called NFTfi is allowing users to borrow against their non-fungible tokens.

    Users can use NFTfi to mortgage their NFTs in exchange for other cryptocurrencies, which can then be sold for cash. NFT holders who aren’t ready to part with their CryptoPunks or Bored Apes can use the service to get immediate liquidity.

    As NFTs become more widely used, the new offering hints at a growing demand for DeFi applications.

    Lauren Stephanian, a principal at Pantera Capital, said, “NFTs are unquestionably becoming a gateway into the DeFi space for mainstream audiences.” “As more new collectors enter the NFT market, they’ll look for new ways to leverage their assets through DeFi mechanisms such as collateralized lending, fractionalized assets, staking, and more.”

    Collateralized lending against NFTs is the latest addition to a growing list of services and derivatives products that various startups have launched in response to trader demand. Fractionalization platform Fractional, staking provider NFTx, and cross-chain liquidity protocol Taker are among the other NFT derivatives projects.

    Unlike fungible tokens, which are more liquid and can easily be staked, lent out, or otherwise put to work to generate yield, NFTs are typically difficult to use in a productive manner once purchased.

    NFTfi co-founder Stephen Young told ULTCOIN365 that if you have a CryptoPunk and need cash but don’t want to sell it, you can use it as collateral.

    The loan can then be converted into fiat currency, used in DeFi protocols, or even used to purchase more NFTs.

    Calculating the value of the collateral

    The Ethereum-based platform, similar to DeFi protocols Compound and Aave — but with NFTs — allows anyone to make loans and set terms without the need for an intermediary.

    “When it comes to combining technologies, the possibilities are endless,” said Daniela Henao, COO of Defy Trends, a crypto analytics firm.

    Borrowers can expect to receive a loan of about 50% of the NFT’s value, with annualized interest rates ranging from 20% to 80%, depending on the NFT’s desirability. Lenders look at recent sales history or the floor price of similar assets to determine what they believe is the collateral’s fair value. The floor price is the cheapest price at which an NFT from a specific series can be purchased.

    Once both parties have agreed on the terms, the NFT is transferred from the borrower’s wallet to an escrow account, and the loan is facilitated by a smart contract. If the borrower fails to repay the loan and interest at the end of the term, the lender is entitled to the underlying NFT.

    Since its launch in June 2020, the company has generated over $12 million in revenue. According to Young, the average loan size for the month is $26,000, but the platform has already facilitated loans of up to $200,000. The default rate is just under 20% and varies depending on the NFT.

    Loans are currently available in ether, the Ethereum blockchain’s native token, or DAI, a stablecoin pegged to the US dollar.

    Young explained, “There are a few different types of people who use our service.” “There are some people who were really into NFTs last year and bought them on a shoestring budget. During covid, one of our users lost her job and had to take out a loan to cover her expenses.”

    Get some extra cash, or go all-in.

    University students putting up NFTs for pocket money, DeFi traders looking for liquidity to pay margin calls, and yield farmers leveraging their NFTs to earn even higher rates using DeFi protocols are among the other users of the service, according to Young.

    For a lender, CryptoPunks typically yield 18 percent annual percentage yield (APY), whereas a Bored Ape could yield between 40 and 60 percent APY. Annualized interest rates on some loans can reach 100 percent or 150 percent.

    Some lenders, on the other hand, may not be in it for the money.

    “In the future,” Evan Feng, director of research at CoinFund, told ULTCOIN365, “meaningful interaction with NFTs will include not only gameplay or visual elements, but also financial components, including those enabled by NFTfi’s expanding product suite.”

    NFTs, on the other hand, are seen by some as a way for retail investors to get more involved with DeFi.

    “Due to the user experience gap, DeFi has historically had a high barrier to entry, but NFTs are now offering a user-friendly entry point into popular DeFi use cases,” said Pantera’s Stephanian.

    Of course, the project also shows how the nascent but rapidly-growing field of NFT derivatives could add leverage and risk to an already volatile market, similar to how excessive lending and borrowing has historically fueled asset-price bubbles in traditional markets.

    Young described NFTs as “Internet-native property rights.” “Internet property will gain value, and where there is value, there will be finance.”

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