NFT lending platforms on the rise, although risks remain
While non-fungible token (NFT) trading volumes fell in May, the adjacent NFT lending space is booming. And so far, reviews are mixed.
NFTfi – an evolving term for technology at the intersection of NFTs and decentralized finance (DeFi) – is on the rise. NFTfi encompasses a range of tools that aim to provide broader utility and liquidity for NFTs, including NFT collateral loans, fractional tokens, and the leasing or lending of NFTs.
What started as a way to profit from NFTs in 2021 has recently exploded in popularity as major Web3 players entered the market. In May, the leading NFT marketplace launched Blur Blend (short for Blur Lending) – a peer-to-peer lending platform that allows users to borrow against their NFTs as collateral. Leveraging Blur’s popularity, the platform quickly took 82% of the entire NFT lending market share in its first three weeks.
Shortly thereafter, other NFT lending platforms began to appear. Binance launched its feature called Binance NFT Loan, which allows holders to secure ETH loans using the NFTs as collateral. And Joseph Delong, former CTO of DeFi protocol SushiSwap, launched Astaria, which uses a third party to facilitate the lending market.
Tons of traders have flocked to these platforms to start “pawning” their tokens to make money. In addition, traders who may not have been able to afford an expensive blue-chip NFT from gatherings such as Bored Ape Yacht Club (BAYC) or Azuki can now rent these tokens for a fraction of the cost.
There is no doubt that there are advantages to participating in NFT lending, even if the activity also entails risk. Some Blur traders and NFTfi native users questioned Blend’s lending mechanics and urged newer traders to educate themselves on how to safely borrow NFTs before diving in.
And while traders may support the idea of making extra money by lending out their dormant tokens, the risk of liquidation and concerns over platform-specific lending mechanisms and decentralization among these platforms remain.
This rise of NFT lending platforms makes sense when you consider the current market conditions. Many NFT holders who bought their tokens during the bull run are looking to earn some extra ETH in bear markets. They can pledge their NFTs by renting them to a trader who will pay to hold them over a specified period of time, earning the original owner some ETH. In turn, the borrower gets to join an NFT ecosystem or access certain benefits they may not have had access to otherwise.
For people like Polygon director of growth Hamzah Khan, who playfully describes his approach to NFT trading as “lazy,” lending can be lucrative.
“I just keep things long-term,” Khan told CoinDesk. “I don’t use them daily … basically I like [NFT lending] because it gives me more capital.”
When asked about the potential dangers of NFT lending, Khan noted the risk of liquidation if the asset price falls, which could happen if the token price falls below 30-40%. However, he emphasized that he is positive about the growing industry and sees value in lending assets beyond the highly sought-after NFTs.
“I have so many PFPs and I want to use them somewhere, but this vertical can be much bigger because housing can also be NFTs and mortgages can be denominated as ERC-721s,” Khan said. “I think people greatly underestimate how much we can do with NFTs.”
While the NFT lending markets have primarily courted JPEG traders hoping to earn additional returns on their tokens, they operate similarly to lending markets outside of the crypto space, such as the housing market, which has the potential to bring thousands more traders and companies to The Web3 landscape.
Not all NFT lending platforms work the same way. Mason Cagnoni, CEO of NFT lending platform Wasabi Protocol, and Karan Karia, vice president of business development at Wasabi, told CoinDesk that while the primary risk of NFT lending is early liquidation if the price of a token falls, Blend’s “prepayment” feature . allows a trader to make multiple payments on an NFT purchase over time, which can be difficult for traders new to trading NFTs.
“It’s presented as a ‘buy now, pay later’ that uses a perpetual loan on the back end, which is extremely predatory for the borrower,” Karia said. “Have you ever heard of a loan where you can be called instantly and you have 24 hours to pay it back? The only person who does that is the mob.”
Cagnoni noted that new traders are more prone to engage in risky behavior without fully understanding the consequences.
“Lending platforms already existed — if you look at a Dune dashboard with overlapping users, the Blend users are brand new,” Cagnoni said. “Like, they’re not NFTfi users.”
According to a recent report from blockchain analytics platform DappRadar, in Blend’s first three weeks, it accounted for 46.2% of Blur’s total trading volume. Cagnoni and Karian both explained that it’s likely that so many new traders have flocked to Blend because of Blur’s points farming system. While Blur is not alone in offering rewards to its users for trading activity, its rapid growth and market dominance is often attributed to its successful BLUR token airdrops.
Karia suggested that once Blur users earn their long-coveted tokens through an upcoming airdrop, current numbers may start to drop. He noted that in the larger lending ecosystem, the emerging platforms need to put decentralization at the forefront of their mission to keep NFT lending as close to DeFi as possible.
“I think that we’re all in this Web3 space because we believe in decentralization, and so having these decentralized open permission protocols that all tie together and create a de facto open NFTfi system – I think that’s a much more positive view, Karia said. “That’s what we’re building towards, instead of just everything being brought together in one place, whether it’s a centralized exchange like Binance, or a pseudo-centralized platform like Blur.”