Blend is a product developed by Blur in the NFTfi space. The project allows users to borrow money using NFTs as collateral. Let’s learn in this article how Blend works and the role it plays in the NFT market.
Blend working model
Lending Mechanism
On Blend, the process for a user to borrow using NFTs as collateral (borrower) is as follows:
Borrowers make loan requests based on their own needs and set loan criteria, including:
Collections (within the range of collections supported by Blend).
The amount of tokens (ETH) they want to borrow (maximum borrow amount per NFT collateral).
The maximum number of NFTs to lend.
The interest rate (APY) they expect.
On the other hand, if a borrower needs a loan, they will choose the corresponding loan offer.
One thing to note about this peer-to-peer lending model is that lenders can close the loan at any time, and then the NFT collateral borrower must find a new lender within a certain period of time, otherwise their position will be liquidated and the NFT will belong to the lender.
Currently, Blend does not charge fees to lenders and borrowers, but this may change during the project’s governance process.
Debt auction and liquidation mechanisms
In the event that at the maturity date (when the current lender decides to close the loan) and the NFT collateral borrower does not repay the loan, they will have a certain amount of time to find another lender.
Specifically, the borrower will have up to 30 hours to find a new lender for the loan. At this point, an automatic search for a new lender will be conducted within 6 hours (with a constant interest rate). During this period, if any lender has a better or equal offer to the old lender (equal or lower interest rate, higher or equal repayment amount/maximum borrowing amount), the loan will be immediately transferred to the new lender.
If a new lender cannot be found within 6 hours, a loan auction mechanism called a "refinancing auction" will be conducted within 24 hours to find a new lender (using a variable interest rate to make the loan more attractive).
Therefore, the borrower's loan position will not be liquidated immediately.
During the 24-hour auction period, the interest rate on the loan will gradually increase (up to 1,000% APY) according to Blend's algorithm. When a new lender accepts the loan, the auction process is successfully completed, and then:
The old lender will receive the full amount of the previous loan (interest and principal).
The new lender is the responsible party for paying that amount (the cost of purchasing the debt).
In return, the new lender will have a debt with a higher interest rate.
When the auction reaches 24 hours or the APY level reaches 1,000% without new lenders joining, the auction process is considered a failure and Blend will proceed with loan liquidation.
Partial debt repayment
When due, the borrower can repay part of the loan to reduce the loan risk and thus extend the loan term.
For example, you borrow 10 ETH, and the minimum price (floor price) of the NFT drops to 10.5 ETH. At this point, the lender will close the loan to prevent risk. You can pay 1 ETH and reduce the loan amount to 9 ETH.
If no new lender participates to take on the above debt (auction fails), a liquidation process will be carried out. The NFT will serve as official collateral owned by the lender.
Additionally, borrowers will receive email notifications when the lender closes the loan.
NFT lending on Blend has the following basic features:
Peer-to-peer lending: Blend’s lending is done in a peer-to-peer manner (unlike AAVE or Compound), so the project does not face the risk of liquidation events. Instead, this risk is passed on to the lenders.
Reduced reliance on Oracle: Blend does not require the use of Oracle, reducing reliance on Oracle project data sources and operating costs.
NFT aggregation function: Since Blur is also an NFT aggregation platform, Blend aggregates the price and liquidity of NFTs from data sources of various NFT markets. Therefore, lenders can obtain "fairly accurate" information about the current reserve price and NFT liquidity.
No maturity date and instant settlement: Loans have no maturity date and instant settlement requirements, which makes it easier for lenders to operate as they do not have to pay fees for debt default (instead, this process is done automatically).
Buy now pay later (BNPL)
Blend also offers a leverage service that allows users to purchase NFTs using the NFTs themselves as collateral (Buy now pay later - BNPL).
Users who wish to use BNPL will need to make a down payment to purchase the NFT and put themselves in a debt position.
The nature of the transaction is on a partial repayment basis as mentioned above.
In this case, the buyer will play the same role as the borrower. If the price of the NFT rises, they can sell the NFT, repay the debt (including principal and interest), and get a portion of the profits from the increase in the price of the NFT. Conversely, when the price of the NFT falls, they face the risk of being liquidated and losing the above-mentioned down payment.
The benefits and risks of the Blend model in the NFT market
Blend and NFT lending in particular help increase NFT liquidity overall:
Sellers can use their NFTs as collateral to borrow money for other purposes
Through the BNPL mechanism, it is easier for buyers to obtain blue chip NFTs
Blend is not the first platform to conduct NFT lending. In fact, there are other projects such as BendDAO, NFTfi, X2Y2, Paraspace, etc., which started operating as early as 2021.
However, what these projects have in common is that they have achieved quite good results. While there has not been any positive change in NFT PFP trading volume, investors are still widely using this product.
In contrast, with the launch of Blend, NFT lending platforms have seen an upward trend in lending volumes.
As can be seen, the launch of Blend has driven growth in lending volume. However, currently, the development team is increasing lending volume through liquidity mining (allowing borrowers to earn BLUR when providing loans). Therefore, at present, the actual demand for this product on Blend may not be as great as the above data shows. In addition, when the project gradually runs out of tokens for liquidity mining, this will also raise questions about future sustainable growth.
In addition to the above benefits, the NFT lending model also poses risks to users and the NFT market.
Specifically, since the liquidation risk is transferred to the borrower and the liquidation process may take up to 30 hours, the borrower will bear the risk of loss when the NFT price falls rapidly.
In addition, in the event of a sharp drop in prices, borrowers will also need to liquidate their loans and sell their NFTs to recover capital. This will bring a lot of selling pressure to the already illiquid NFT market, further exacerbating the market's conditions.
In addition, if NFT lending projects implement permissionless listings through governance, there is also a risk of price manipulation (as happened when Curve Finance conducted a governance attack on the Mochi Inu project). This will cause losses to projects and users.
Comparing Blend to other NFT lending solutions
Currently, developers have three directions when designing NFT lending products:
Peer-to-peer lending: Like Blend’s operating model. Under this model, loans will operate independently and the platform may charge a portion of the transaction fees. Examples of this model include Blend, X2Y2, NFTfi and other projects.
Lending pool: This project is similar to AAVE and Compound, but the collateral is NFT. If you need to borrow, the user only needs to pledge the NFT into the liquidity pool and borrow from the pool corresponding to the collectible. Typical examples of this model include Paraspace, BendDAO, Pine and other projects.
CDP (Collateralized Debt Token): Similar to MakerDAO, but the collateral is NFTs. This project will allow users to generate stablecoins using their NFTs. Examples of this model include projects like JPEGd.
In both lending pool and CDP models, projects will need to use Oracle to monitor the NFT's floor price so that the liquidation process can be carried out when necessary.
Compared with the peer-to-peer lending model of Blend mentioned above, lending pools and CDPs also need to have a good risk management model to avoid losses (because the responsibility for asset liquidation belongs to them).
Specifically, these projects need to calculate many factors, such as NFT's historical price data, historical liquidity, etc., in order to be able to derive a reasonable collateral ratio (because the liquidity calculation of NFT is much more complicated than that of fungible tokens).
In addition, for projects like JPEGd that are deployed in the form of CDP, they must also ensure the liquidity and anchoring of the CDP stablecoin to meet borrowing needs.
However, in peer-to-peer lending, borrowers will be responsible for their own NFT liquidity when a liquidation event occurs because they receive NFTs as collateral instead of highly liquid assets (such as ETH, stablecoins, etc.) like in the other two solutions.
In general, each solution has its advantages and disadvantages.
However, based on total loan volume, four projects currently account for the majority of the market share: BendDAO, NFTfi, Blend, and Paraspace.
The remaining JPEGd accounts for only 0.4%. Therefore, peer-to-peer lending and lending pools are still the main solutions for NFT lending products today.
In short, Blend is not a new product on the market, and the development team has not yet collected fees from the lending platform. However, Blend is likely to be an important part of Blur's use of vampire attack strategies to capture NFTfi market share.
