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What Are Collateralized NFTs?

Author: Binh Duy Thai Date: 2022-08-22 08:01:17

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The NFT space is growing at an exponential pace with many different use cases such as Profile-picture (PFP) NFTs, Game Finance (GameFi), and Play-to-Earn (P2E) entering the market. Recently, NFT Finance (NFTfi) has disrupted the NFT space by providing liquidity and accessibility to the Ethereum NFT ecosystem through collateralized NFTs.

Collateralized NFTs

Introducing Collateralized NFTs

Emerging marketplaces like NFTfi, Arcade, Astaria, Stater, and Nexo allow borrowers to put up NFTs for a loan and lenders to make offers (to lend) in return for interest (APR). Both transactions are conducted in ERC20 tokens (wETH) or stablecoins (USDT, USDC, DAI).

Growing The NFT space

With the increasing demand for owning NFTs, especially PFP NFTs like BAYC and Cryptopunks (or any blue chip NFT projects), the demand for new NFT use cases does come along, such as NFTfi.

NFTfi, in particular, is a creative approach acting as a medium for an influx of liquidity and accessibility to the NFT space. Moreover, NFTfi can revolutionize NFT technology and evolve it into a new asset class or a new type of security. By allowing borrowers to lock up their NFTs for a loan of up to 70% of the NFT value (depending on the marketplace/platform), borrowers can use that capital on whatever they want. Thus, increasing the purchasing power of the entire NFT space.

Leveling Up Your NFT Utilization

Currently, you cannot really do all that much with an NFT (especially PFP NFTs) besides owning it in a digital wallet or changing your profile picture on social media. However, that has changed with NFTfi because this new business model has created new marketplaces like NFTfi, Arcade, and Astaria for lenders and borrowers to conduct lending/borrowing businesses with their NFTs.

NFTfi Marketplace Overview

Since we’re in the infancy days of NFTs, NFTfi, and its ecosystem, there are risks involved in conducting business within the NFT lending/borrowing spectrum. So to better protect themselves and their users against market turmoil and unknown risks, NFTfi marketplaces have a safety protocol called whitelisting. Whitelisting is the process of approving specific NFT collections that meet pre-fixed criteria by a centralized marketplace such as floor price, liquidity, and community dynamics.

For example, NFTfi (an NFTfi platform) has its current criteria as follows: floor price greater than 1 ETH, trading volume greater than 500 ETH, and implementation of the ERC721 standard. The majority of the listings on the platform are blue chip NFT projects including Bored Ape Yacht Club (BAYC), CryptoPunks, World of Women (WoW), Doodles, MoonBirds, Pudgy Penguins, and Goblintown. Trustworthy, high-value, and well-known NFT projects are more likely to get approved and listed on the platform.

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What Are Some Strategies For Collateralized NFT Lending?

As a lender, you have the privilege to set the loan value (wETH, DAI, USDT, USDC), the interest rate (APR), and the duration of the loan. This benefits the lender because it gives you full control of your own financial health and risk. Most loans on NFTfi marketplaces range from 40% to 100% APR, hence making NFT lending very attractive for earning a passive income on your NFTs.

Do Your Research

First, before loaning out your money, you should conduct deep research on the project. You can read their whitepaper and roadmap, join their social media groups (Discord, Telegram, Instagram, Facebook), conduct a price analysis of the project (mint price, floor price), sales volume, etc. Furthermore, it’s recommended that you dig a little deeper into that specific NFT you’re loaning to. Below are some particular factors you should look at:

  1. Price history of the NFT (last sale price)
  2. NFT’s rarity & attributes (The rarer the NFT, the more expensive it is)
  3. The previous owner of the NFT (Wallet addresses — if the previous owner of the NFT is someone famous, then your NFT will be worth a lot more. For example, Logan Paul’s World of Women NFT will be worth a lot more than some random user)
    • Moreover, make sure you feel confident that you can liquidate the NFT in a short period of time (24 to 48 hours) at a breakeven price of your loan or even at a price that makes you a profit
    • Do not make a loan offer on an NFT that you don’t feel confident owning and don’t understand how to value it

Maximize The Loan Deal

Second, after conducting your research, you want to set the loan value at a reasonable rate that benefits you the most. For example, if you set the loan value too high compared to the current value of the NFT, you basically offer the other side an option to exit the NFT with a good price. Moreover, determining the reasonable duration of the loan is very important. The longer the duration, the more risks you’re adding to your portfolio.

Have A Backup Plan Before Making The Loan

At this point, even though you’ve done everything correctly from conducting your research to maximizing the loan deal, the worst-case scenario can still happen. For example, the borrower defaulted and now you’re left with the NFT. Before blindly picking a random marketplace to sell your NFT, you should pick the market that has the highest floor price (that also offers a bidding function). Now it’s a matter of time until someone buys your NFT. The best case is to break even or make a profit. However, you should consider the current market trend to price your NFT. For example, you might have to discount it up to 50%. The priority is to liquidate the NFT and get your money back.

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What Are Some Borrowing Strategies With Collateralized NFTs?

As a borrower, your goal is to get the maximum amount of capital against your collateralized NFT, then fully pay it back later with interest. If you don’t pay up, the lender will get your NFT.

Do Your Research

Before listing your NFT on the marketplace, you should conduct research on the project and the NFT you’re trying to get a loan on. These are the following factors you should look at to maximize your NFT:

  1. Floor price
  2. Sales volume & Sale frequency
  3. Price history of the NFT (last sale price)
  4. NFT’s rarity & attributes
  5. The previous NFT owner

Maximize The Borrow Deal

It’s ideal to set the loan value at a reasonable amount, thus lenders will be more likely to give out the loan. Moreover, you should set the loan duration considering your risk tolerance because you want to be able to pay back the loan plus interest. Hence, you will not lose your NFT and your credit history will look good for future lenders.

Conclusion

One of the biggest challenges in the NFT market right now is the lack of liquidity. The emerging NFTfi use case can be a game changer for the blockchain space in general and the NFT space in particular. There are indeed risks to lending/borrowing against collateralized NFTs, so lenders and borrowers have to make extra efforts in evaluating their own risks and risks from the market. All in all, NFT loans are a brilliant solution to bring liquidity to NFTs and accessibility to the masses.


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