NFT Loans in 2024: Unlocking Liquidity for Collectible NFTs? 

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.

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.

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.

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).

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:

• Top Use Cases of NFTs
• Top 5 Differences Between Ordinal Inscriptions vs NFTs
• Dynamic NFTs: Definition, Top 6 Use Cases & Examples

External Links

• 1. “How Liquid Is an NFT?” CryptoStars. January 12, 2022. Retrieved on April 20, 2023.
• 2. “Plot of digital land in the metaverse sells for record $2.43 million.” NYPost. November 25, 2021. Retrieved on April 20, 2023.
• 3. “List NFTs / Set Terms.” Arcade. Retrieved on April 20, 2023.
• 4. “Interest rates” DropsDAO. Retrieved on April 20, 2023.
• 5. “Someone got a $1.25 million loan by using NFTs as collateral. Here’s how you may be able to do the same thing.” Fortune. February 8, 2022. Retrieved on April 20, 2023.