NFTs And NFT Lending

Today’s NFT industry sees continuous growth and development every day. However, after a glance at the market, we see two niches that saw the most action. These niches are also the driving forces behind the industry’s growth. They are NFT art and NFT gaming.

It is easy to say that the niches fulfill the user’s requirements. Each one accomplishes the task differently in ways that collectors see the properties that add value to those assets.

Consider NFT gaming as an example. In gaming, we have more excellent utility attributed to those assets while NFTs in the art is different. Here, the assets have a close relationship with the brand the artist created for themselves. No one would consider buying an art NFT if it came from an unknown talent. Like typical art collectors, NFT art collectors want assets made by someone famous or renowned.

However, there is a lot of intrinsic value taken from the buyer’s perception of the asset’s actual price, even with utility. Additionally, scarcity plays a significant role in the two niches. Absence makes an objective valuation more arduous compared to regular fungible tokens.

Looking at the NFT crypto exchange liquidity in terms of adoption, the answer is clear. There is a significant branching out of asset types and a constant stream of new projects and testing new ideas. As the entry bar gets lower each day, anyone can estimate that the volume of new theories and projects will increase in the future.

The Current State Of NFT Lending Platforms

Presently, several spaces provide NFT owners with the provision to borrow funds. In return, the owners lend their NFTs as collateral. Examples of these NFT lending platforms include NFTfi, Android, Starter, and UniLend.

However, many of these sites still exist as early-stage protocols. Among the examples, Starter and NFTfi are the most developed. The Starter is currently updated to the Rinkeby version, while NFTfi is available only on the mainnet.

NFTfi is an accessible location for NFT collateralized loans. There are two use cases for the platform, and it depends on the user’s needs. The use cases vary depending on the user’s requirement to borrow or lend crypto.

If the user requires a loan, they can put up any ERC-721 token as collateralization. Then, they want the best offer provided by other users. Conversely, users who wish to lend to others find an acceptable NFT and submit their proposals. The proposal includes information like the loan value, duration, and repayment value.

At a glance, the platform is a beneficial and straightforward solution.

Presently, there are no alternatives actively working on NFT-oriented lending. However, two initiatives strive to contribute to the topic.

In January 2020, one initiative rapidly gained publicity in the digital world. It was a project called Rocket, but the project was not released to production yet. The team behind the idea now proposes to transfer project ownership to the highest bidder.

Dragos I. Musan put forward another early idea. The user undertook comprehensive research and proposed solutions on ways to bridge the existing gaps in the NFT marketplace. These ideas included using important Defi principles.

Challenge

The lack of options for collateralized loans by NFT is the direct result of the issue of NFT liquidity and NFT asset price defining. This challenge is the same one that ERC-20 tokens faced before the introduction of automated market makers (or AMMS). Overcoming this issue and creating an efficient price discovery mechanic will see a marked increase in NFT backed loans.

Proposed Solutions

Several projects in development strive to provide an efficient price discovery mechanism. These projects often rely on sales and auction models, but these models are not enough. The reason is that if they were, then the NFT lending platform would have an appropriate price discovery mechanism.

Also, some projects use a model to create fungible fractions of non-fungible tokens. At present, many NFT enthusiasts see these projects as potential solutions.

NFT20 and NIFTEX are mainnet solutions. Some even have ERC-20 token pools on Uniswap and Sushiswap. These pools have a significant amount of liquidity in them.

Another project in development is UpShot One. The project works on the idea of combining the benefits of P2P networks, the DMI-mechanic, and the historical backing of appraisals to provide a low-velocity asset price definition.

Future Of NFT Lending

It is a matter of time before we see a good platform that can define an NFT’s value. However, we want to predict how the lending protocols that accept collateralized NFTs will look like in the future.

There are two NFT lending solution types possible—the difference lies in the collateral type they accept.

The First Type

The first type accepts fungible representations of non-fungible tokens built with ERC-20 tokens. This type is where the approach used to create the ERC-20 versions of NFTs defines their price. There is no significant difference between this lending protocol and the ones offering loans backed by fungible assets. The approach is accessible and proven.

The benefits to this type are that lenders can use collateral and gain profit. Also, the borrower must add more assets and prevent liquidation. This approach safeguards the borrower from a margin call.

The downside to this type is that the lender cannot use the token’s underlying functionality. This reason is that the lender has an ERC-20 representation of it and not the NFT token. In this instance, the lender does not benefit from it as they do not have that specific NFT.

The Second Type

The second solution is a lending protocol that accepts the NFT as collateral. This solution can only reach full completion when other solutions like UpShotOne are fully developed. Until then, the second type is not entirely decentralized. There should be a fair price-defining mechanic in place to determine the NFT’s value. If not, this type will rely on a central authority to accept the NFT and the NFT’s worth.

Aside from waiting for an effective pricing mechanic, the other downside to this type is the issue of preventing liquidation due to margin calls. A non-fungible token means that the user cannot add more of that same NFT as collateral. Hence, the user has to add another NFT of acceptable value. This approach is not practical as there is little chance to find an NFT that matches the required value.

Conclusion

The NFT world sees many trends and developments regularly occurring. NFT lending is another new development in the field. Presently, there is no concrete price-defining mechanic, but it won’t be long before this mechanism enters the industry. Till then, all that’s left to do is wait for new developments in the NFT loan platform sector.