Key Takeaways
- NFT lending is an innovative type of blockchain-based loans using Non-Fungible Tokens (NFTs) as collateral for loans.
- NFT lending does not require an intermediary as it is executed by a smart contract that coordinates all aspects of the loan from start to finish.
Introduction
In this article, we’ll explore how you can use NFTs in a lending and borrowing situation. We’ll cover everything from the basics of what NFT lending is to how it works. We’ll also discuss some of the key elements of NFT loans and what the process of NFT lending involves.
You’ve probably heard of lending concepts before. Lending has been around since time immemorial and is one of the oldest forms of financing. In fact, it was a widespread practice among ancient civilizations like the Egyptians and Babylonians who used to lend out grain or livestock as collateral for loans.
Today we continue this tradition by lending money against other assets such as real estate or artwork (which are considered “collateral”). But what if there was an alternative way to borrow?
What is NFT Lending?
In the last few years, the market for NFTs has grown at a lightning pace. In fact, it is estimated that there are now more than 500 million active users in the space. And with that growth comes new opportunities in the decentralized finance space. One of these opportunities is NFT lending: an innovative type of blockchain-based loans using Non-Fungible Tokens (NFTs) as collateral for loans.
NFT lending is a new paradigm in the world of financial services. It can be considered as a subset of collateralized loans, but with an important difference: the borrower does not need to provide any form of physical collateral or asset for the lender to secure their loan. Instead, the borrower provides digital assets such as NFTs with the promise to repay the loan in digital assets.
NFT lending works like a traditional mortgage but involves digital assets instead of cash. You can use your digital assets as collateral, meaning that you can borrow money by pledging your digital assets and repaying the loan with interest over time.
Key Elements in NFT Loans
Here are some key elements that you need to know about and consider in NFT loans:
Lender
The lender is the person who owns the digital asset funds that they are lending to a borrower. This could be an individual or a company that would like to earn interest on their asset.
Borrower
The borrower is the person who wants to borrow money using an NFT as collateral. They can be an individual or a company that needs capital for their project but does not want to go through the hassle of traditional borrowing methods.
Smart Contract
Smart contract is the core technology that supports NFT loans. It’s a computer protocol intended to digitally facilitate, verify, and enforce the negotiation or performance of a contract. It coordinates all aspects of the loan from start to finish, including calculating interest rates, determining loan sizes and repayment schedules, managing collateral escrow accounts and distributing interest back to users. The best thing about smart contracts is that they are self-executing and don’t need any third parties involved in the process.
Collateral Value
The collateral value is the fair market value of your NFT asset that you put up as a guarantee to secure a loan. If you default on your loan, the lender can sell your collateral and use the proceeds to pay off their debt.
Loan Margin
The margin of a loan is the percentage of the value of an asset that can be used as collateral for a loan. A higher margin may be beneficial to the borrower but represents higher risk for the lender. The maximum percentage you can borrow against your NFT asset varies depending on how much you’re willing to pay for interest rates and fees. In general, if you want to get a higher margin on your loan, then expect to pay more in interest costs and fees. This is to compensate for the higher risk to the lender for providing a higher loan amount with a higher margin loan.
Loan Amount
The loan amount is calculated by taking into consideration the value of the NFT collateral, and adding a margin to it. The final loan amount is the maximum amount that can be borrowed using your NFT as collateral, taking into account its current value and adding an interest rate (which is also known as a premium). The loan amount is the amount that the borrower will need to repay the lender once the loan reaches the end of its term. The lender will receive this amount plus interest over time from the borrower.
Loan Duration
The loan duration is how long the borrower has until they need to pay back the loan in full to the lender, along with interest. NFT loan durations can range between days to years.
Interest Rate
The interest rate is the fee charged by lenders for providing capital to borrowers. The interest rate is typically calculated as a percentage of the loan amount. It is generally expressed as an annual percentage rate (APR).
The NFT Lending & Borrowing Process
The NFT lending and borrowing process is quite simple. You can either borrow against your NFT or act as a liquidity provider by becoming a lender.
In order to get an NFT loan, you’ll need to find an appropriate lender who offers this service. Although this is still a niche market, there are NFT lending protocols and platforms that offer the service of matching borrowers with lenders using NFT as collateral, such as SOLARR.
The process of NFT lending works like this:
The borrower creates a loan request on the platform, specifying how much they want to borrow and how long they want to borrow it for. They also specify how much interest they are willing to pay for their loan. If the lender accepts their terms then the loan will be created using a smart contract.
The borrower’s NFT asset will be locked up in escrow as collateral for the loan. When the duration of the loan is up, the borrower will need to return the borrowed funds in full along with the pre-agreed interest amount. Once the loan has been repaid, the collateralized NFT will be released from escrow and returned to the borrower.
If the borrower doesn’t repay the loan within the agreed timeframe, ownership of the NFT used as collateral will be automatically transferred to the lender.
Conclusion
NFT lending is an innovative way to use your NFT assets to secure loans from lenders around the world. Unlike traditional loans, NFT loans are convenient, fast, and take away the complication of dealing with intermediaries as it is executed by a smart contract that coordinates all aspects of the loan from start to finish.
