NFT Lending & Borrowing: Key Benefits and Four Main Models
Main Takeaways
NFT lending refers to taking out a loan using your non-fungible tokens (NFTs) as collateral.
NFT holders can often loan out their assets for either fiat or crypto more quickly it takes for an offer on their NFT to come in.
Discover the main approaches to NFT lending and their comparative benefits for NFT lenders and borrowers.
NFT lending allows NFT holders to get liquidity without selling their assets. Find out why it’s gaining traction and how four different NFT lending models work.
NFT lending is a new trend that's gaining popularity in the crypto world. Loaning an NFT enables users to diversify their portfolios and get the most out of their digital investments.
An NFT loan can be a win-win for both lenders and borrowers. Owners can lend relatively illiquid non-fungible tokens (NFTs) for instant crypto or cash funds, while borrowers can earn interest on the NFT without owning it.
What is NFT Lending?
How can you lend an NFT to someone? NFT lending is a form of asset lending that uses NFT as collateral, similar to how traditional lending works with real-world assets like cars, homes, or other physical valuables.
NFT holders use their non-fungible digital assets as collateral to secure a loan in crypto or fiat, which is then paid back with interest over a specified period. Such loans can be obtained relatively quickly.
In turn, people who lend crypto and cash to borrow NFTs typically do so to invest in the token. The value of the NFT being loaned is tracked throughout the loan term. Since the lender is entitled to a share of the appreciation or a percentage of any future sales of the NFT, loaning it is a form of investment – except the lender does not need to own the asset they invest in.
Benefits of NFT Lending
For NFT owners
Liquidity
Liquidity is the ease with which an asset can be bought and sold on the market. If a cryptocurrency is highly liquid, it means that it is easy to buy and sell this crypto, even in large amounts, quickly and at or close to the current market price.
NFTs tend to be less liquid than some fungible digital assets, especially blue-chip tokens like bitcoin (BTC) and ether (ETH), which consistently enjoy high demand and massive trading volumes. NFT lending can provide a quicker way for NFT owners to access fiat or crypto liquidity – by loaning out assets instead of waiting for a buyer to express interest in their NFT.
Access to capital
NFT lending allows owners to access upfront capital, which, at the right time, may be crucial. For instance, owners may need funds to purchase limited-edition NFTs that will be snatched up if they don’t act quickly. By lending their NFT, they can obtain the necessary crypto or fiat.
Retaining ownership
You can loan your NFTs in a pinch as an emergency source of funds without actually having to give up ownership of your favorite digital collectibles – just make sure to repay your loan on time. If you’re interested in the idea of co-owning NFTs, check out our article on Fractional NFTs.
Diversification
Having a diversified portfolio is a fundamental component of managing financial risks. When NFT owners temporarily swap their tokens for other crypto or fiat, they spread their investments across a variety of assets. NFT lending could serve as a supplement to a sound risk management strategy as long as loan deadlines are adequately managed.
For NFT borrowers
Reduced risks
NFT lending provides a way for people to invest in NFTs without buying them outright, thus limiting their financial risks to the period of the loan. NFT lending platforms typically involve smart contracts facilitating the NFT’s release back to the owner at the end of the loan term – or the automatic transfer of ownership rights if a borrower defaults on a loan. This does not mean that there’s no risk involved – if the NFT in question falls in value, the NFT borrower could get stuck with an asset that is worth less than when the original loan agreement had been struck.
Diversification
NFT lending models provide NFT borrowers with an alternative avenue to earn interest. This allows the borrowers to diversify their investment portfolios and income sources.
How Does NFT Lending Work?
There are four models of NFT lending: peer-to-peer (P2P) NFT lending, peer-to-protocol NFT lending, non-fungible debt positions, and NFT rentals.
Peer-to-peer (P2P) NFT lending
Under this model, borrowers and lenders are matched on peer-to-peer (P2P) platforms that use a simple offer system. An owner lists their NFT on the platform and receives loan offers from interested parties. Once a match is made, the NFT is put into an escrow vault until the loan is repaid or expires. If the NFT owner defaults on the loan, the NFT is transferred to the money lender's wallet, usually through a smart contract.
Peer-to-protocol NFT lending
With peer-to-protocol NFT lending platforms, users can collateralize their NFTs and borrow directly from the protocol. In exchange, they will receive funds from liquidity providers that add funds (usually crypto) to a protocol pool. Under a peer-to-protocol NFT lending model, the liquidity providers are technically the borrowers of the collateralized NFT and earn interest as such.
Unlike P2P NFT lending, what’s being monitored here is not a deadline but the health factor of the NFT loan – essentially, the difference in collateralized market value and outstanding loan amount. As soon as the health factor falls below a threshold, the asset is typically transferred to the protocol. Depending on the platform, the NFT owner may be afforded a grace period to repay their loan to claim the NFT back.
Non-fungible debt positions
Under this model, a unique digital asset representing a loan agreement, known as a non-fungible debt position (NFDP), is created. The NFDP is secured and stored on a blockchain like BNB Smart Chain or Ethereum and acts as a transparent record of the loan agreement, ensuring that the terms are not altered.
In addition, the NFDP can be traded on a secondary market; ownership of the digital asset can switch hands easily, providing a more flexible way for users to exit an investment or leverage their current NFDP asset.
NFT rental
NFT rentals are slightly different from the conventional lending models as the main aim for renters isn’t interest but the perks associated with the NFT, be it community or club membership or the right to receive exclusive merchandise. Since the main utility extracted from such NFTs is non-monetary, NFT rental agreements usually come without repayment terms, interest, or liquidation.
Instead, a collateralized NFT is transferred to another wallet for a fixed period in exchange for crypto funds. The asset is returned to the NFT owner at the end of the period. Meanwhile, the renter enjoys access to the benefits associated with the particular NFT.
Conclusion
NFT lending adds many exciting scenarios to how people invest and generate income from their NFTs. As such, it could be a game-changer for NFT holders and traders alike. While NFT owners can earn income without selling their holdings, lenders can access new investment opportunities. As the NFT sector expands, we may see NFT lending models mature or evolve to provide a better loaning experience.