Non-fungible tokens (NFTs) took the world by storm in 2021. As per NonFungible‘s 2022 report, over $44 billion worth of NFTs were sold last year across various categories like art, collectibles, gaming, sports, and more.
But like traditional arts and collectibles, NFTs suffer from low liquidity – the bidding and asking price can often vary wildly1. This makes it hard for NFT holders to monetize or obtain financing against their assets.
NFT lending, also known as NFT collateral loans, can change this status quo and open new doors in the NFT ecosystem. This article will cover:
- What are NFT loans and how do they work?
- Factors that determine NFT loan terms
- Benefits of NFT lending
- Comparing NFT loans to traditional lending
- Overview of NFT lending platforms
- The future outlook and challenges
What Are NFT Loans?
NFT loans are a type of financial service offered in the blockchain and cryptocurrency space, involving non-fungible tokens (NFTs) as collateral. This is usually done with NFT-compatible coins and blockchains, like Ethereum. But with the advent of Ordinal Inscriptions, we can expect to see it on Bitcoin as well.
The process involves:
- A borrower puts up their NFT as collateral to secure a loan
- In return, the lender extends a loan in cryptocurrency and earns interest on it
This enables NFT holders to access liquidity without having to sell their digital assets. The NFT serves as security for the lender.
NFT loans work similarly to traditional secured loans, with NFTs pledged as collateral instead of physical assets. The lender can seize the NFTs if the borrower defaults.
NFT Loan Volumes Surge in 2024
NFT lending activity has ballooned over 2022 as the concept gains traction. As per Arcade‘s data, over $700 million worth of NFT loans were originated last year across major platforms:
- $631 million via NFTfi
- $36 million on Arcade
- $28 million through Drops
- Plus other niche players
These volumes indicate strong early adoption of NFT loans by collectors seeking liquidity. The space is poised for substantial growth in 2024 as more platforms emerge.
Factors That Determine NFT Loan Terms
The terms and dynamics of an NFT loan, akin to traditional lending, depend on multiple parameters:
NFT Collateral Type
Popular NFT categories that attract loans include:
Bluechip Digital Art
Top digital art NFTs by established artists make ideal collateral given their brand value. For instance, Beeple‘s Everydays collection pieces regularly sell for six figures.
Platforms like SuperRare have also cultivated prestige in digital art NFTs. SuperRare tokens like Fidenza, with its iconic colorful squares, carry brand cachet.
High-Value Collectibles
Collectible NFTs that are either rare or widely sought after tend to appreciate over time. Bored Ape Yacht Club, CryptoPunks and World of Women are prime examples. Their scarcity and cultural significance make them reliable collateral.
Metaverse Real Estate
Virtual land NFTs in metaverses carry significant value based on their location. For instance, a luxury Decentraland estate sold for $2.43 million in 20212. Such prime real estate NFTs can back high-value loans.
In-Game Assets
Gaming NFTs with utility and importance within their game environments also make feasible collateral. For example, rare Axies in Axie Infinity that can effectively battle and win rewards. These tend to hold or gain value.
ENS Domains
Blockchain domain NFTs on platforms like the Ethereum Name Service can serve as collateral if they are sufficiently short, generic, punny or related to public figures. Their inherent scarcity and resetting cost-basis make them apt loan backing.
Loan-to-Value (LTV) Ratio
The loan-to-value ratio indicates the percentage of an NFT‘s appraised value being borrowed against:
LTV = Loan Amount / Collateral Value
So if a Bored Ape worth 10 ETH is used to collateralize a 3 ETH loan, the LTV is 30%.
Higher LTVs represent riskier loans since collateral covers a smaller portion of the borrowed amount. If the market value of the NFT declines, the collateral becomes inadequate to repay the loan.
Lenders typically prefer lower LTVs – often 50% or less. NFT appraisals also tend to be conservative to counter market volatility. Borrowers may be denied loans or charged higher interest rates for high LTVs.
Duration
Loan duration is the length of the tenor – the period over which the total repayment is scheduled. A 6 month duration spreads repayments across 6 months.
Shorter loan durations pose less risk for lenders, so they tend to offer lower interest rates on them.
Long tenors allow borrowers to reduce monthly payment amounts by spreading repayments over time. But lenders perceive greater risk, so longer durations often attract higher interest rates.
Interest Rates
Interest rates compensate lenders for the risk of lending and opportunity cost of capital. NFT loan rates vary widely based on collateral risks, demand-supply dynamics, competitive landscape and borrower creditworthiness.
In general, interest rates tend to be higher than traditional lending – often in the 10-20% APR range. This pricing accounts for the novelty and volatility of the space.
| Platform | Interest Rate |
|---|---|
| NFTfi | 8-20% APR |
| Drops | 12-18% APR |
| Tinlake | 8-15% APR |
Within platforms too, rates differ based on loan attributes like duration, LTV and collateral risks. The interest rate is agreed upon upfront between borrower and lender via the platform.
Platform Fees
NFT lending platforms charge a fee on loans, either as a percentage of interest paid or principal amount. This fee covers their matching services and risk exposure.
For example, NFTfi charges 5% of interest earned, while Arcade takes 2% of the loan principal as platform fees.
By benchmarking fee structures, platforms aim to strike a balance between revenue and loan affordability. Lower fees can attract more borrowers.
Comparing NFT Loans to Traditional Lending
NFT loans have several advantages compared to traditional financing options:
Faster Lending Process
Borrowing against NFTs avoids lengthy paperwork, credit checks and asset appraisals needed in traditional secured loans.
NFT ownership is instantly verifiable on-chain. And smart contracts enable automated collateral escrow and loan issuance, speeding up funding.
Higher LTV Ratios
For traditional loans, LTV ratios rarely exceed 80%, except for select cases like FHA loans. This is because physical assets like property are illiquid.
But NFT loans can offer higher LTVs – sometimes up to 90%+. This is because the underlying collateral is liquid. Lenders take comfort that they can quickly sell the NFTs if required.
Higher LTVs allow borrowers to extract greater financing against their NFTs.
Global Accessibility
NFT lending platforms are accessible to any eligible borrower with an internet connection, unlike traditional lenders with geographic restrictions.
Lower Interest Rates
NFT loan rates, while still higher than conventional loans, are dropping steadily as platforms scale. Increased competition is driving down pricing.
Rates can be as low as 8% APR – not far off from an unsecured personal loan. And they are bound to decrease further as the market matures.
Ownership Flexibility
NFT owners retain full ownership of their collateralized assets. They regain the NFTs once the loan is paid off, and can benefit from any appreciation.
With secured loans, the asset is signed over, restricting usage during the loan period. NFT loans avoid this downside.
Immutable Records
NFT loans and repayments are logged immutably on-chain. This provides full transparency for both lenders and borrowers, reducing risk of errors or data tampering.
Documentation can be murky with traditional lending across numerous systems and paperwork. The blockchain lends definitiveness to tracking NFT loans.
However, NFT loans also come with some drawbacks:
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NFT markets are still volatile compared to physical asset classes like real estate. Rapid price declines can jeopardize loans.
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Lack of regulation in crypto lending leads to ambiguity around compliances, taxation and disputes.
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Technical complexity of wallet setups, blockchain transactions and managing crypto assets poses challenges for novice users.
Benefits of NFT Lending
Let‘s examine some of the key advantages NFT-based loans offer in detail:
1. Unlocking Liquidity Without Selling
NFT owners can tap into their assets to raise funds for other needs while retaining ownership. Loans allow monetizing NFTs without an outright sale.
For example, an NFT investor needed $150,000 to furnish a new apartment. She took a loan against her Beeple Everydays NFT and will repay it over a year without having to sell the rare digital art piece, which keeps appreciating.
2. Capitalizing on Market Timing
During periods of market decline, NFT owners may not want to sell at lower prices. Loans allow them to borrow against their assets at higher valuations and wait for markets to recover before selling.
3. Consolidating Debt
Individuals struggling with high-interest credit card or personal loan debt can take an NFT loan at lower rates and consolidate multiple debts into a single repayment schedule.
4. Meeting Temporary Needs
NFT loans can provide temporary liquidity for needs like medical bills, home renovations, tax payments, or business investments. Owners can repay over time without losing their cherished NFTs.
5. Generating Passive Income
Lenders can enjoy ~10-20% yields on NFT loans, far higher than conventional fixed income instruments like bonds or savings accounts. It serves as an uncorrelated asset class for diversification.
6. Getting Exposure to NFTs
For lenders not yet ready to invest directly in the NFT market, lending against NFTs provides exposure plus upside if borrowers default. It offers a relatively de-risked method to gain NFT inventory.
The programmability, global accessibility and disintermediation of NFT loans create new opportunities for both lenders and borrowers to optimize capital use cases.
Leading NFT Lending Platforms
A range of startups now offer NFT-backed lending marketplaces and services:
NFTfi
- Venture-backed platform for loans against ETH NFTs
- $631 million in loan originations in 2024
- Interest rates from 8-20% APR
Drops
- Allows borrowing against collateralized NFTs
- Originates loans and fractionalizes NFTs
- Rates between 12-18% APR
Arcade
- Focuses on gaming NFT assets
- Issued $36 million in loans in 2024
- yet to confirm commercial interest rates
Nexo
- Centralized crypto lending platform
- Recently launched NFT lending services
- Rates not yet public
Tinlake
- Leverages NFTs on Centrifuge blockchain
- Loaned $28 million in 2024
- Rates from 8-15% APR
This is still an emerging niche with ample scope for new entrants, innovations and consolidation.
Future Outlook and Challenges
NFT lending shows strong potential, but still has unresolved gaps:
Appraising Collateral
NFT markets are highly volatile compared to physical assets. Reliably appraising NFTs for loans remains difficult without deep historical data. Platforms need robust pricing models attuned to market shifts.
Manual appraisals do not scale for volume lending. Automated tools powered by AI could provide 24/7 real-time valuations adjusted for market risks.
Managing Distressed Assets
In case of borrower defaults, platforms need processes to efficiently liquidate and recover value from seized NFTs.
But forced sales of distressed NFTs could depress overall markets. Platforms need to strategically sell or re-lend seized collateral. Partnering with auction houses could also offer alternative liquidation channels.
Clarifying Regulations
As crypto lending formalizes, regulatory clarity is needed around managing loans, taxation, bankruptcy and cross-border transactions. Proactive policymaker outreach can help draft supportive regulations.
Of course, decentralization and privacy limit regulatory oversight of DeFi protocols. But clear guidelines will boost mainstream confidence in the nascent sector.
Simplifying Access
Despite growing traction with crypto natives, NFT loans remain too complex for casual users. Better onboarding, secure key management and simplified borrower journeys are required.
Integrations with traditional systems could also expand reach, like linking bank accounts for fiat payouts instead of solely crypto wallets.
However, core fundamentals look promising – NFT loans create new monetization avenues, attractive yields on capital, and avoid liquidation needs. Further maturation of the space is inevitable given its utility.
While still early, NFT lending promises to be a lasting fintech innovation with the rise of Web3 and blockchain-based digital assets.
Learn More About NFTs
To delve deeper into NFTs, check out these guides:
- NFT Use Cases – Analysis of 10 unique uses of NFTs
- Dynamic NFTs – Explainer on programmable NFTs
- NFT vs Inscriptions – Comparing NFTs to Bitcoin‘s protocol
References
1. “How Liquid Is an NFT?”. CryptoStars. January 12, 2022.
2. “Plot of digital land in the metaverse sells for record $2.43 million”. NYPost. November 25, 2021.