AIMultiple ResearchAIMultiple Research

NFT Loans in 2024: Unlocking Liquidity for Collectible NFTs? 

Updated on Feb 13
5 min read
Written by
Cem Dilmegani
Cem Dilmegani
Cem Dilmegani

Cem is the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per Similarweb) including 60% of Fortune 500 every month.

Cem's work focuses on how enterprises can leverage new technologies in AI, automation, cybersecurity(including network security, application security), data collection including web data collection and process intelligence.

View Full Profile

NFTs, like traditional arts and collectibles, suffer from low liquidity – the bidding and asking price can often vary1 – and disrupted cash flows. 

NFT lending, also known as NFT loans, can change this and open new doors in the NFT ecosystem. This article will cover NFT-based loans, how they work, and the platforms for them.

What are NFT loans?

NFT loans are a type of financial service offered in the blockchain and cryptocurrency space, involving non-fungible tokens (NFTs) as collateral. This is usually done with NFT-compatible coins and blockchains, like Ethereum. But with the advent of Ordinal Inscriptions, we can expect to see it on Bitcoin as well. 

The borrower would put their NFT as collateral to secure a loan. In return, the lender extends a loan and earns interest on it. This enables the NFT holders to access liquidity without having to sell their digital asset.

What factors affect the value of an NFT loan?

1. The collateral

There’s no definitive list of NFTs used in NFT lending, as it’s a rapidly-evolving market. But bluechip categories that are more widely recognized, with established value, are more popular. They include: 

1.1. Digital art

NFTs representing digital artwork from well-known artists or prestigious collections can be valuable collateral. Examples include works by artists such as Beeple or those sold on platforms like SuperRare, Nifty Gateway, and Foundation.

1.2. Collectibles

Digital collectibles, like CryptoPunks, Bored Ape Yacht Club, and World of Women, have gained significant traction and value in the NFT space. These projects have limited editions, and their value often increases over time, making them potentially suitable for lending.

1.3. Virtual real estate

Platforms like Decentraland (Figure 1), Crypto Voxels, and The Sandbox allow users to buy, sell, and develop virtual land as NFTs. Prime virtual real estate in popular metaverse platforms can hold significant value and be used as collateral for loans. A user in 2021, for instance, purchased a plot of digital land for $2.43M2 on Decentraland.

The image shows a plot of land in Decentraland. The land has an amalgamation of different structures, such as a Sphinx monument atop what appears to be a movie theater, with the backdrop of a blacked-out pyramid, and a cowboy statue in front of it. Valuable real estate on metaverse can be used as collateral for an NFT loan.
Figure 1: A plot of land on Decentraland. Source: NYPost

1.4. In-game assets

Items and characters in popular blockchain-based games, such as Axie Infinity (Figure 2), Sorare, or Gods Unchained, can be represented as NFTs. High-ranking, rare, or powerful in-game assets may have a relatively stable value and could be used for lending.

The image is a screenshot of Axie Infinity. Items and characters in those games can be collaterized for NFT loans.
Figure 2: UI of Axie Infinity. Source: Nikopartners

1.5. Domain names

Blockchain-based domain names, like those on Ethereum Name Service (ENS) or Unstoppable Domains, can be tokenized as NFTs. Valuable or sought-after domain names may serve as collateral in lending transactions.

2. Loan to value (LTV)

LTV (Figure 3) indicates the percentage of the NFT value that the borrower is asking to borrow. For example, if an NFT is worth $10,000 and the borrower is asking for $30,000, then LTV is 300%. Given the illiquidity and volatility of the NFT market, higher LTV exposes lenders to greater risks. So they’d mitigate by either declining the loan, or demanding higher rates of return.

Loan-to-value formula for NFTs
Figure 3: Loan-to-value is calculated by dividing the loan value by the NFT value and multiplying the answer by 100.

3. Duration

Duration is the period of time the borrower will pay the total loan amount back. So a duration of 1 year means the loan payments will be divided into 12, for instance.

4. Interest rate

Some platforms 3 allow borrowers to decide how much interest they are comfortable paying. This is rather unconventional. So other 4 platforms follow a fixed formula to calculate interest rates. 

As with traditional loans, the terms are clearly discussed and laid out before a transaction happens.

5. Service fee

NFT lending is a new concept. So different platforms peer to peer lending structure and service fees vary. For example, NFTFI charges 5% on the interest payment made by the borrower as their service fee (they will forgo it upon default)e. But Arcade, for instance, charges 2% of the principal amount from the borrower.

An Example of NFT loans

10 NFTs of Pac & Ferocious which were valued at $5 million5 were used as collateral for a $1.25 million loan (25% LTV) for a duration of 6 months with an annual interest rate of 15%. Their monthly payments would have been $217K per month, and an effective interest payment of $55K (Figure 4).

Screenshot of the amortization of an NFT loan.
Figure 4: Amortization of an NFT loan. The calculation of installment amounts is the same as a traditional loan. Tool used: EMI loan calculator

How do NFT loans work?

The general process is as follows:

  1. Collateralization: The NFT is put up as collateral and terms are specified by the borrower or are left open for negotiation. 
  2. Terms agreement: Lenders agree to the terms of the loan or make an offer for the terms if the terms were open to negotiation. 
  3. Borrowing: Upon acceptance of the term by the borrower, funds transfer from the lender to the borrower’s digital wallet, and the NFT moves to a smart contract escrow account and remains there until the end of the loan duration. Smart contract ensures that no party can touch the collateral until the borrower pays the full amount or defaults. 
  4. Paid/default: Upon full payment of the principle and the interest rate the NFT will get transferred to the borrower. In the case of default, the NFT can be foreclosed by the lender

5 Benefits of NFT loans

1. Giving liquidity to the borrowers

NFTs are illiquid investments, which means selling them might take time. Using NFTs as collateral allows borrowers to access liquidity for different purposes, without selling their assets. 

2. Retaining ownership

Same as traditional loans, the NFT holders retain full ownership of their collateralized assets. Once the loan is paid, they will be given back their digital assets and can benefit from their appreciation, if any.

3. Providing attractive yields to lenders

Lenders can earn returns above the market average, and in the event of default, they will get the collateralized NFT at a big discount. 

3. Faster than traditional investment

The decentralized financial space doesn’t have any intermediaries or third-parties. In addition, because the NFTs are collateralized, there is no credit score check, or paperwork required. All these make for a faster and more streamlined lending process.

4. Programmability

NFT loans are typically governed by smart contracts, which automate the loan process and ensure that the terms are executed as agreed upon. This can reduce the risk of human error or fraud and provide more transparent, efficient lending transactions.

5. Global market

NFT loans are not restricted by geographical boundaries, as they exist on decentralized networks. This creates a global market, allowing borrowers and lenders from different locations to participate and transact with each other.

What are some NFT lending platforms? 

1. NETfi

NFTfi is a decentralized platform that allows users to use their NFTs as collateral to borrow or lend stablecoins, such as DAI or USDC. The platform supports various NFT categories, including CryptoPunks, Decentraland parcels, and various digital art collections.

2. Aave

Aave is a popular DeFi lending protocol that, in addition to its standard lending services, has implemented NFT-backed loans through its Aavegotchi project. Aavegotchi NFTs are tokenized avatars that can be used as collateral for loans within the Aave ecosystem.

3. Tinlake

Tinlake is a decentralized asset financing protocol built on top of the Centrifuge blockchain. It supports the tokenization of real-world assets and NFTs, which can be used as collateral for borrowing or lending within the DeFi ecosystem.

4. Arcade (ArcadeNetwork)

Arcade Network is a DeFi platform focusing on the gaming industry. It offers a suite of services and tools for developers and players, including an NFT marketplace, game development tools, and in-game asset tokenization. While Arcade’s primary focus is on gaming, the platform may extend its services to include NFT-backed loans in the future.

5. Drops (Drops.co)

Drops is a DeFi platform offering fractionalized NFTs and NFT-backed loans. Users can deposit NFTs as collateral and borrow stablecoins against their value. The platform supports various NFT categories, including digital art and collectibles. Additionally, Drops allows users to create and trade fractionalized ownership of NFTs, increasing their liquidity and accessibility to a wider range of users.

6. Nexo

Nexo is a centralized lending platform that primarily focuses on cryptocurrency-backed loans. Users can deposit cryptocurrencies as collateral and borrow stablecoins or fiat currencies against their value. 

For more on NFTs

To learn more about NFTs, read:

Find the Right Vendors
Cem Dilmegani
Principal Analyst

Cem is the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per Similarweb) including 60% of Fortune 500 every month.

Cem's work focuses on how enterprises can leverage new technologies in AI, automation, cybersecurity(including network security, application security), data collection including web data collection and process intelligence.

Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.

Cem's hands-on enterprise software experience contributes to the insights that he generates. He oversees AIMultiple benchmarks in dynamic application security testing (DAST), data loss prevention (DLP), email marketing and web data collection. Other AIMultiple industry analysts and tech team support Cem in designing, running and evaluating benchmarks.

Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised enterprises on their technology decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.

He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.

Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.

Sources:

AIMultiple.com Traffic Analytics, Ranking & Audience, Similarweb.
Why Microsoft, IBM, and Google Are Ramping up Efforts on AI Ethics, Business Insider.
Microsoft invests $1 billion in OpenAI to pursue artificial intelligence that’s smarter than we are, Washington Post.
Data management barriers to AI success, Deloitte.
Empowering AI Leadership: AI C-Suite Toolkit, World Economic Forum.
Science, Research and Innovation Performance of the EU, European Commission.
Public-sector digitization: The trillion-dollar challenge, McKinsey & Company.
Hypatos gets $11.8M for a deep learning approach to document processing, TechCrunch.
We got an exclusive look at the pitch deck AI startup Hypatos used to raise $11 million, Business Insider.

To stay up-to-date on B2B tech & accelerate your enterprise:

Follow on

Next to Read

Comments

Your email address will not be published. All fields are required.

0 Comments