NFT Lending: Helps Solve Liquidity Problems and Brings People to the NFT

Do we only need to sell our collected work in order to make money from NFT? NFT lending allows people to lend NFT in exchange for a crypto loan guarantee in the NFT space. This is another trend that is gaining popularity as it improves the market's low liquidity and gives NFT owners more opportunities to profit without ever losing their NFT.

What is NFT Lending?

For investors or lenders who want to be paid back for their investment, NFT lending is a loan that uses NFT as a guarantee through NFT lending platforms. It is a concept that increases the possibility for NFT holders to receive more money in addition to only selling their work because some NFT holders would object if they had to sell all of their work permanently in order to obtain money.

In addition, the NFT market has little liquidity. It might take a while before someone buys your NFT in case you want to sell it. As a result, NFT Lending contributes to easing the low liquidity issue in NFT and encourages more investment in the NFT market by lowering investment costs.

How does NFT lending work?

Because the conditions and rates of lending can be established without depending on a third party, NFT lending platforms assist NFT investors in borrowing digital currencies. Typically, a borrower can guarantee a loan at a maximum of 50% of the NFT value with rates ranging from 20% to 80% of the assets' value. Since there is no medium to evaluate the credit and a time-consuming authentication process, the protocol for NFT lending is simpler, quicker, and more transparent than real-life lending platforms.

Being a DeFi app with smart contracts, it gives users the ability to independently control their assets. In a smart contract that operates automatically, a guarantee is typically locked in. By considering the NFT's prior transactions and the floor price of a comparable collection, a lender can determine the value of the guarantee. Once both the lenders and the borrowers have agreed to the conditions, the borrowers will transfer NFT from their wallets to an escrow, a system that ensures the transfer of ownership in assets. The protocol will then control the remaining steps of the process. The borrowers' NFT will be taken if they miss the deadline for paying back their loans or interest.

Types of NFT Lending

• Peer-to-Peer NFT Lending: 

Peer-to-Peer NFT lending is similar to traditional crypto lending. Direct transactions occur between two parties. For instance, if a borrower uses NFT as a guarantee on NFT lending platforms to receive a loan offer, he will instantly receive his preferred coins, while his NFT is transferred to the vault under certain conditions. He will get his NFT back after paying the debt with interest. Lenders typically receive interest as a bonus.

•  Peer-to-Protocol NFT Lending

Similar to the DeFi lending protocol, peer-to-protocol NFT lending allows borrowers to directly borrow assets from lenders. The peer-to-protocol platforms require liquidity providers (LPs) to deposit their tokens in the pools so that the borrowers can access the liquidity by transferring their NFTs to the vaults.

• Non-Fungible Debt Positions

As an illustration, MakerDAO developed the collateralized debt position (CDP) lending system to provide cryptocurrency loans by enabling the borrowers to use ETH as a guarantee to borrow DAI. In "non-fungible debt positions" lending, the borrowers lock their NFT only to obtain stablecoin, following the same process as MakerDao previously described.

• NFTs NFT Rentals

NFT rentals have "reNFT" as a well-known permissionless platform for potential lenders and borrowers under various rental terms and conditions.

Instead of locking NFT as a guarantee in the vault, the rental protocol facilitates peer-to-peer NFT rental. During the rental period, the assets will be transferred from one wallet to another. The NFT lenders will be granted access to many services, including the Discord server and a special prize for NFT holders, through token-gated privileges.

Even though the protocol permits NFT owners to access liquidity, this may not be a strong incentive. In fact, they consent to pay in exchange for access and increased reliability. For example, in the case of CryptoPunk rental, the tenants believe they receive a lot of attention and greater engagement, which causes them to become well-known in the space at the time.