NFTs
How to lend crypto with NFT?
Remarkably, the advancement that greets today’s digital economy knows no bounds. Thus, providing abundant opportunities for participants to explore. One of the opportunities taken advantage of by the advancement of the digital economy is NFT lending, an offer that allows people to leverage their collections to lend cryptocurrencies. With NFT loans, holders leverage their digital collectibles as collateral to lend crypto assets. Prior to the introduction of this offer, users willing to lend a certain crypto asset could only use another form of supported crypto asset as collateral. Now, its introduction brings the acceptance of NFTs as collateral for loans.
With this new trend, NFT holders, in their search for access to liquidity, still maintain ownership of their collections. By taking out NFT loans, participants activate the value of their collections without selling them. However, the NFT collection to be explored in this sense must be valuable. If it is, holders can pledge it to a pool of lenders in exchange for a crypto loan.
Platforms offering NFT loans
Meanwhile, several platforms have launched NFT lending features on their networks. One of these platforms is Binance NFT Market. There, the offer was launched in May 2023 to allow users to leverage their charges as collateral for loans ETH. Although only a few NFT projects are supported by this offering at this time. They include Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), Azuki and Doodles. These charges can be used as collateral for accessing liquidity in the market. In the future, Binance NFT may decide to add support for other collections.
In NFT loans, the amount that can be borrowed is determined by what is described as the Loan-To-Value ratio. However, this refers to the minimum price of the specified NFT collection to be used as collateral. NFT loans present some risks that will be highlighted in this article.
Benefits
Increasing demands in the virtual asset market and more especially in the NFT space have given rise to the introduction of crypto NFT loans. This feature offers NFT holders who need access to funds for trading a good solution with reasonable interest rates. Additionally, it provides a path for users to unlock the value of their virtual assets. Due to this virtue, NFT holders will not have to sell their assets to access their value. Instead, your NFTs will help serve as collateral for obtaining a crypto loan. This feature also provides users with instant liquidity while helping them hold their NFTs.
Disadvantages
However, crypto NFTs loans also have their downsides. Users are likely to lose their valuable NFTs if they are unable to repay loans on time. Mainly, many platforms offering this service often request NFTs of higher value compared to the crypto loans requested by the borrower. This system, which can be obtained in the orthodox world of finance, aims to ensure that the lender is well protected financially when granting the loan. Thus, the NFT that serves as collateral can be liquidated to recover the loan if the borrower fails to repay it.
However, some platforms offering this service still offer broader opportunities for borrowers to repay their loans. On most platforms, borrowers who have been unable to repay their loans can still claim their NFTs as long as there is not yet an offer to do so. However, such a measure may prove costly as borrowers may lose their NFT due to a loan having a low value compared to their assets.
Likewise, volatility in the price of virtual assets is also a major disadvantage against crypto lending with NFTs. The value of the NFT collateral may drop unexpectedly. Such a development could put the borrower on the brink of liquidation. Interest rate changes can also be the downside of NFT crypto loans. An increase in interest rates will certainly increase the cost of borrowing. Forcing users to pay more than expected.
Parting words
Crypto lending with NFT could be a revolutionary innovation in the virtual asset industry. To some extent, it can help reduce selling pressure in the NFT market. However, investors should be very careful when reviewing the conditions of these loans on the platforms that offer them. Agreeing to malicious terms and conditions may result in permanent loss of users’ assets.