“Put your NFTs to work” is Arcade’s slogan. This is a platform that offers collateral loans with NFTs, and loans with NFTs as collateral. Gone are the days when a Bored Ape or CryptoPunk was just a pretty picture. Because there are now many more ways to generate income with NFTs. So get started today!
The NFTs, or non-fungible tokens, are getting more and more functions in addition to collectibles. This way it can be used as an asset in a game. Now, in 2022, more and more opportunities are being offered to generate passive income with NFTs. This can be done by combining NFTs with DeFi applications. Lending, on the basis of collateral, is now one of them. In addition to Arcade, this option is already offered by various platforms.
In this article, we will look at what else is possible in the field of collateral lending with your NFT collection, or how you can still benefit from the profits that are made without NFTs. We look at the opportunities of this DeFI application with NFTs, but also where the risks lie.
What is collateral lending?
Maybe you know the show “Pawn Stars”? It’s about the ups and downs of a pawn shop. Here you can obtain a loan by pledging an object that has a certain value. Suppose you have no money, but you do have a stamp collection. You can use this to give your stamp collection to a pawnbroker as collateral and then borrow money, with interest of course. You repay the borrowed within a certain time.
If this succeeds, you will get your stamp collection back. If you fail to pay on time, the pawnbroker can keep or sell your collection. You can also borrow this with collateral, for example with your house or car as collateral. In the financial world, this is done with equity portfolios. Cryptocurrency can also be used as collateral with various DeFi protocols and to borrow tokens. This is possible, for example, with DeFi platform Aave (AAVE).
Different forms of collateral lending
A lending/borrowing method is, for example, P2P. This is in a peer-to-peer loan construction where a loan and provision of collateral between 2 people is arranged with a smart contract. But it is also possible that you contribute the collateral in a liquidity pool. The amount of liquidity you contribute is used by different people. You get what you want to borrow from the pool via a smart contract. You pay back the loan to the protocol.
What is collateral lending with NFTs?
It will not have escaped your notice that NFTs have been booming business since 2020. In 2021, the trading of several collectible NFTs from NFT art achieved spectacular returns. Instagram influencer Sultan Gozhali earned several million dollars within a few days with a collection of NFT selfies. And the amounts paid for a Bored Ape or a CryptoPunk are astronomical at the beginning of 2022.
But an NFT that you can only collect was very passive income until recently. An NFT does not automatically increase in value due to, for example, interest. It is worth as much as the market is giving at the time. Only when you sell one can you really make a profit. This is about to change with the collateral lending protocols for NFTs. But how exactly does such a protocol work?
How does a collateral lending protocol work?
Suppose you own a nice CryptoPunk that is worth 10 ETH. That’s nice in your wallet, but you don’t do anything with it. What you could do is use this CryptoPunk as collateral in an NFT pawn shop, a protocol where you have borrowed a certain value in tokens when you contribute a certain NFT. With these tokens, you can do everything again. For example participating in a token or NFT launch. What you have received in tokens for your collateral, you have to repay within a certain time with a type of interest, the interest rate, based on the APR (Annual Percentage Rate). After that, your NFT is yours again. This can of course be a wonderful way to generate passive income with your NFT.
The collateral lending system, therefore, provides the necessary liquidity for someone who contributes their NFTs in a protocol. But for whom can borrowing an NFT be beneficial? There is, of course, an interest in exchange for lending crypto. You will receive this interest on the amount you have lent. So this way you make a profit on the tokens you have. Of course, there is also a chance that someone will not repay their loan on time. The NFT is then yours. You could then obtain an NFT for a favorable amount.
What are the risks of collateral lending with NFTs?
In theory, collateral lending with NFTs is therefore a good system, but of course there are also risks involved.
Reliability and security of the protocol
In the first place, the collateral lending protocol itself must be safe and reliable. You do not want the protocol to suddenly be offline and with your NFT or tokens with the northern sun. Furthermore, the protocol must be well protected against hacks.
Borrowing costs money
Borrowing of course always entails risks. What if you cannot repay the loan? There is a chance that speculating whether your purchase with the tokens you have borrowed will not yield the profit you expect due to strong price fluctuations or other reasons. There is therefore always the risk that you will lose your NFT.
In a P2P agreement, it is also good to look at the conditions, and also at the value of the NFTs and market forces. Because in some cases the APR can be determined by the amount that a party lends, it is good to see who has the most favorable conditions for you.
With a loan over a longer-term, for example 30 to 90 days, it is important as a lender, the person who borrows an NFT, to realize whether the NFT will retain its value during that period. If an NFT falls in value, it becomes more attractive for the person who has provided it as collateral not to repay the loan and to give up the NFT that has meanwhile become worthless.
What is the normal amount you get relative to the value of your NFT? This can vary greatly, but in general about 50% of the value of the NFT that you provide as collateral is used. It depends a bit on the popularity in the markets how high the interest rate is, and what you have to pay back. This can go from 20% to even 80%.
Collateral lending platforms for NFTS
There are several platforms that offer the possibility of collateral loans with NFTs. However, this is still a whole new sport for NFTs in 2022. Therefore, these protocols generally still need to prove themselves in reliability and to be successful. So first thoroughly research the opportunities and risks before using an NFT lending protocol.
This platform facilitates P2P loans. The loan is fully executed by the smart contracts of the protocol. The protocol has been in effect in a V1 version since 2021, a V2 version is under development. The platform is already being used quite a lot. In February 2022, the platform reported that USD 84 million in lending volume had already been achieved.
If you have NFTs available that you want to lend in order to receive an x amount, you can offer them on a market. In your loan offer, you indicate what you are offering. An offer will remain valid for 7 days. Someone who wants to provide a loan against an NFT can view all offers and agree to an attractive offer. When the agreement is concluded, the agreement is automatically executed with the smart contracts.
If you enter the NFT as a borrower, you will automatically receive the agreed amount from the wallet of the lending party in your wallet. The NFT is fixed in the protocol. When you have repaid the borrow with interest in time, you can transfer the NFT back to your wallet. If you do not pay on time, the person who gave you the loan can claim the NFT and it will be transferred to his or her wallet.
NFTFi has a whitelist of NFT collections whose NFTs can be offered as collateral. New collections are added to this whitelist every week. A collection must meet a number of criteria. For example, the floor price must be above 1 ETH and the trading volume above 500 ETH, the NFT must also be built on the basis of ECR21 tokens.
For your NFT you get wETH or DAI. The borrowed must also be repaid in this cryptocurrency. As of March 2022, there will be a total of 2269707 wETH in circulation and 21779699 DAI on the platform.
NFTFi is currently still managed by a team, which remains anonymous. The project makes a pretty solid impression because there are a number of investors behind it who have already invested in several projects. Furthermore, NFTFi works together with ecosystem FLOW and Animoca Brands. These are partners that have proven their reliability.
We already started this article with Arcade, the platform where NFTs can work. In 2022, this is a fairly new platform that also offers loans for NFTs as collateral. The launch was in January 2022. It uses the Pawn protocol to activate the loans. Pawn protocol is an infrastructure layer that makes it possible to use a DeFi application such as lending for NFTs. They also offer peer-to-peer, person-to-person loans.
NFTs of type ERC721, ERC1155, ERC20 are accepted as loan at Arcade. What exactly happens when a lending smart contract comes into effect? When a loan is requested, an NFT offered is wrapped, wrapped, in a contract. This makes the NFT transportable. It remains the same NFT, just packaged. So your CryptoPunk gets a new coat. The advantage of this jacket is that you can share it with different NFTs. This saves on the gas fees that you have to pay for a transaction on the platform.
On the Arcade platform, you can connect your wallet with NFTs. Once you have done this, you can select your NFT that you want to make available as collateral and prepare a loan request with your offer and conditions. An interested lender can respond to this. The loan agreement is executed by smart contracts.
NFT Liquidity Pawn Shop
Recently opened is the NFT Liquidity Pawn Shop. This protocol is really set up like a pawn shop because you do not take out a loan with a person, but with the platform itself. With this protocol, you can insert NFTs from different ecosystems. It is interoperable with Solana, Ethereum, Near, and Avalanche. The possibility for NFTs from other ecosystems is also expected to follow. Different loan levels are also used for the NFTs of different ecosystems. For example, you can borrow up to 60% of the value of an NFT for Solana and Ethereum. For Avalanche and NEAR, this is up to 35% of the value of the NFT. This level also has to do with the liquidity of the NFTs.
The protocol works with a loan period of 7 days. You can request an extension for this, if you request it in time, this will increase the interest rate, so you have to repay more. You will receive the loan amount in the currency that belongs to the ecosystem on which the NFT is built. So for your Bored Ape you get ETH as a loan. Please note: the transaction fees for executing the loan are for the account of the NFT holder.
The NFT Liquidity Pawn shop just opened its doors in March 2022, so it is not yet fully operational. It really needs to work on brand awareness and community and prove its reliability. For example, it is not yet known who is behind this pawn shop. That means that you can’t say much about the reliability or the coming success of the protocol. In any case, it is interesting to follow this platform to see what new possibilities this protocol will offer.
Pawn My NFT
Pawn My NFT is built on Binance Smart Chain. This is also a protocol that has yet to prove itself. This protocol has various lending/borrowing services with NFTs. Because it is built on Binance Smart Chain, NFTs made on this network can also be traded here. Furthermore, the platform is compatible with Ethereum, Polygon, and Solana. The protocol also has its own token, the PNFT. This token is used within the platform for payments. The entire platform is still under construction and the information about future plans and the team is still somewhat limited.
The platform offers the following services:
- Instant offering – For your NFT you will receive a proposal from the protocol of what you can borrow for the collateral you provide.
- Peer-to-peer – Here too it is possible to borrow from a person with your NFTs as collateral.
- Marketplace – In addition to borrowing, you can also trade NFTs on the Pawn My NFT marketplace.
- Advertising – To promote your NFTs or yourself, you can buy advertising space to make the deal easier.
- Rarity tools – There are also various tools to have your NFTs valued.
In the past, you could only make your money work for you. Then with cryptocurrencies and DeFi came the opportunity to put crypto to work. With collateral loans based on NFTs, you can now use your NFTs to generate passive income. It is a new trend that allows you to borrow cryptocurrency with an NFT as collateral and use it to speculate. There are several platforms that offer loans from person to person or from within the platform itself. This is a new opportunity in 2022 with NFTs that can be interesting and lucrative. Because many protocols still have to be rolled out completely, it is important to look carefully at how reliable a protocol is before you want to use it.