NFTs’ non-fungibility is excellent for establishing the uniqueness of assets. It has created a distinct class of assets for digital items which shares parallels with traditional fine art collecting and other unusual physical collectibles. However, non-fungibility has flaws in that it limits what investors can do with their NFTs, which makes NFTs highly illiquid.
Once an investor acquires an NFT, the usual option to turn a profit is to sell once its value increases. NFT loans come in with the help of DeFi, and NFT-backed loans are a new method to solve the NFT illiquidity problem. These inventions create a market where NFT owners can loan their NFTs in exchange for cryptocurrencies or fiat.
In this guide, we’re going to explore what is NFT loans, how NFT loans work, which NFT Collections are supported as Collateral, where and how to get NFT Loans and the Pros and Cons of NFT Loans.
What are NFT Loans?
In NFT loans, the NFT owner gives his NFT as Collateral to borrow money, and he can receive the loan in stablecoins, ERC20 tokens, cryptocurrencies, or fiat currencies.
DeFi platforms provide NFT Loans, and they allow NFT owners to loan their NFT in exchange for fiat currency or cryptocurrencies. Most NFTs on the market is highly illiquid, and numerous DeFi projects have identified the necessity to grow NFT liquidity using solutions such as NFT loans. The good thing about NFTs is their non-fungibility, which means they aren’t divisible and can’t be replicated.
How do NFT Loans work?
NFT loans work in a way that a borrower needs a loan and puts up an NFT asset as Collateral. The lender gives the loan in exchange for interest. But if the borrower can’t repay the loan on the agreed terms, the lender will acquire the Collateral. In most cases, this process is separately executed by smart contracts on the blockchain.
Borrowers can get 50% of the value of NFT, with interest rates of 20% to 80%, depending on the popularity of the NFT. The DeFi protocols are simple, fast, and transparent. No centralized authority needs to verify your real identity, check your credit score, and take days or weeks to consider your request.
DeFi platforms utilize smart contracts to offer users total control over their money. NFT assets that serve as Collateral are sent to a safe smart contract, which acts as a fair, automatic third-party programmed to enable the lending and borrowing process.
Lenders decide what they feel is the fair value of the Collateral, usually by looking at the NFT asset’s past performance, sales history, or the lowest offer price for an NFT from a particular series. If both parties agree on the conditions, the NFT will be transferred from the borrower’s wallet into an account, and a smart contract will facilitate the loan.
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Which NFT Collections are supported as Collateral
The NFT collections supported as Collateral depends on the lending platform’s token standard and the lender’s preference. For NFTfi, Erc-721 are the only tokens accepted on the platform, and the most common tokens related to it include NFT articles from SuperRare, Crypto Punks, Bored Ape Yacht Club, Meebits, Autoglyphs, tokens sold and bought on OpenSea, Cryptokitties, In-game assets from Axie Infinity, Adorable Aavegotchis, etc.
For Drop.co, there is much range of assets accepted across more blockchains. However, the platform’s creator will still determine what NFT assets will be accepted and how much can be taken against them.
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Where and how to Get NFT Loans
The NFT Loans market is still new, but many DeFi platforms already provide opportunities to use NFTs as Collateral for permission-less loans. The best platforms to get NFT loans are NFTfi, Arcade, Drops, and DeBank.
The process for getting NFT Loans depends on the platform. Generally, these are the guides on how to get NFT Loans:
- Sign up with an NFT lending platform.
- Transfer your NFT assets to your platform wallet.
- Select the NFTs you want to use as Collateral. The NFT won’t be removed from your wallet until the loan is accepted and concluded.
- Create a loan request and select the loan terms you prefer, how much you intend to borrow, the currency you want to receive funds in, the proposed interest rate, and loan term length.
- Submit the loan request and wait to be matched to a lender willing to fund your loan.
Once the loan is accepted, the NFT will be transferred from your wallet into an account, using a smart protect the loan.
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Pros and Cons of NFT Loans
The pros of NFT Loans.
- NFT loans are decentralized and automated via smart contracts.
- Borrowers can borrow money fast through these loans.
- It enable NFT holders to make use of their idle NFTs collections.
- Borrowers can use the money to borrow other digital assets or new NFTs.
The cons of NFT loans.
- The biggest minus of NFT Loans is that the borrower will lose ownership of his asset if he fails to repay the loan.
- NFTs are unpredictable; their prices can change during borrowing duration. If the cost of NFT increases during the loan duration, the lender can ask the borrower to pay more to get back his Collateral.
- The interest rate on NFT loans can be a bit higher.
- NFT Loans are so new that it’s difficult to evaluate the authenticity of lenders, borrowers, or platforms that may not have a recognized track record yet.
NFT Loans are the doorway into the NFT/DeFi sphere and could create exciting revenue streams for formerly illiquid assets like NFTs. The main goal of NFT Loans is to increase the liquidity of NFTs, enabling users to use capital to spend on other projects and services. After reviewing the guide, kindly drop your view on NFT Loans in the comment section.