NFTs and DeFi are two blockchain-based industries that have grown considerably. Non-fungible tokens, or NFTs, are non-interchangeable units of data stored on a blockchain.
These tokens can be used to represent both intangible and real world assets, such as images, gaming skins, art, tickets etc.
DeFi offers financial instruments such as lending, borrowing and staking without the need for a central authority.
By utilizing smart contracts on a blockchain, intermediaries such as brokerages, exchanges, and banks can be eliminated.
When you combine NFTs and DeFi, you get NFT loans, which allow NFT owners to borrow cryptocurrencies or fiat currency in return for their NFT pieces or collections.
Many NFTs on the market are extremely illiquid, and various DeFi projects have highlighted the growing need to increase NFT liquidity by implementing solutions like lending.
Drops is a platform that facilitates NFT loans and staking, and in this post we’ll look at the platform, how it works as well as the details behind NFT loans and staking.
What is Drops?
Drops is a platform that offers loans for NFTs and DeFi assets, allowing these assets to gain additional value.
Clients can use any asset to form a loan pool using Drops decentralized autonomous organization (DAO).
Users can use their idle DeFi tokens and NFTs to secure trustless loans and earn additional yield by leveraging their assets through the protocol.
In general, the community-driven system, which went live on July 14, 2021, allows any type of asset, from metaverse objects to financial NFTs and DeFi tokens, to be used as collateral.
Over $7 million has been borrowed in the market using the protocols permissionless loans platform, which was developed by Darius Kazlovskis and created by the developers of the Node Runners NFT game.
Drops also partnered with Enjin to enable staking and borrowing by its users against Enjin-powered non-fungible tokens (NFTs) and in-game assets.
How NFT Loans Work?
NFT loans enable holders to borrow money and set their own terms without the need for a middleman.
When it comes to how Drops NFT loans function, there are four processes involved:
- Choose a lending pool - Choose a lending pool that will take your NFT as collateral.
- Provide NFTs as a source of collateral - The NFT Floor Time Weighted Average Price (TWAP) oracle determines the value of the collateral.
- Borrow against non-fungible tokens (NFTs) - Users can borrow up to 30% of the NFT collateral in a single transaction.
- Manage your credit - To avoid NFT liquidation, users must not exceed their borrowing limit.
Using the Drops protocol, users can choose whether to join an existing pool or create their own.
Next they need to choose whether to lend by providing liquidity or borrow by using their NFT as collateral to obtain a loan.
The process is explained in detail below:
- Create or Join a Pool - Users can join existing loan pools or start their own by deciding which NFTs to accept and how much they can borrow against them.
- Lend - Users can choose a lending pool and provide liquidity to earn a return on their Bitcoin and NFT assets.
- Borrow - Use any supported NFT as collateral to get a quick permissionless loan from the Drops lending pool for up to 80% of the asset's worth (determined by the floor price)
Borrowers can expect to receive a loan of around 50% of the NFT's value, with interest rates ranging from 20% to 80%, depending on the NFT's popularity.
Collateral assets are delivered to a secure smart contract, which works as an unbiased, automated third party programmed to make the lending and borrowing process easier.
Lenders determine the collateral's fair value by looking at the asset's previous performance, sales history, or the floor price of similar NFTs.
The lowest offer price for an NFT from a specific series is referred to as the floor price.
Once both parties agree on the terms, the borrower's NFT is moved to an escrow account, and the loan is facilitated through a smart contract.
The lender is entitled to the underlying NFT if the borrower fails to repay the loan plus interest before the conclusion of the loan period.
Lenders may also be hesitant to accept new NFT projects as collateral because of price volatility, as they risk losing money if the defaulted NFT has no market demand.
Features
Drops main features include the following:
1. NFT Loans
Users can put their NFTs down as collateral and receive instant access to a trustless loan without having to talk to the lender or wait for approval.
This is done via the permissionless NFT Lending Pools.
2. Borrow Against DeFi And NFT Tokens
Drops uses governance and liquidity tokens as collateral for short-term loans to reduce the opportunity cost of keeping them, resulting in significant returns and benefits.
Users can also borrow up to 80% of the value of their asset, as calculated by the floor price, using any compatible NFT as collateral.
The protocol's borrowing function may result in collateral liquidation; nevertheless, users are informed of the collateral ratios and limits that must be obeyed in order to avoid the collateral being liquidated.
3. Turn Idle Assets Into Active Yield
Drops allows users to make use of their idle assets by lending stable coins and governance tokens to fungible or non-fungible lending pools.
In addition, individuals can earn money even if their collection isn't on display, as well as improve their cash flow by taking out short loans.
Drops DAO, Drops Ownership Power (DOP) Token & veDOP
Drops DAO is a community-driven trustless loan platform for non-financial institutions (NFTs). The protocol is built on Compound smart contracts and is specifically designed for NFT assets.
Users can earn a variable rate of return by providing liquidity via supported tokens, as well as borrow using over-collateralized loans.
The Drops Ownership Power (DOP) Token
Drops Ownership Power (DOP) is the governance token for the Drops DAO. DOP has the authority to assign liquidity incentives to loan pools and make decisions about the future of Drops DAO.
DOP is currently used for two purposes:
- Voting
- Staking
To participate in voting and staking, users are required to lock DOP and receive veDOP. The creation of increasing liquidity rewards in lending pools is also underway.
Vote-escrow DOP (veDOP)
Vote-escrow DOP (veDOP) is a non-transferable token that can only be obtained through locking DOP.
An NFT is formed when the lock is activated, which reflects the veDOP position. Users lock DOP for a certain amount of time, and the longer the user locks DOP, the more veDOP is received.
The user determines the length of the lock-up, which can last up to four years. For each DOP that has been locked for four years, one veDOP is supplied.
Drops Lending Pools
The lending approach of Drops is based on lending pools, which consist of assets that can be used as collateral and tokens that may be borrowed.
The NFT price oracle estimates the collateral value as soon as a user delivers assets, and depending on the asset type, the user may be able to borrow up to 50% of its value.
Lenders can use isolated pools to choose which specific NFT collections they want to be exposed to, allowing them to better control risk.
Loans do not have an expiration date and can remain viable as long as the borrower does not exceed the loan's limit amount.
An algorithm is used to calculate interest rates using the asset's utilization rate as a starting point.
Drops dTokens
Drops exchanges dTokens for fungible assets provided by the user. The underlying assets of dTokens can be redeemed at any time for the ERC20 tokens they represent.
dTokens can be redeemed at a rate (in proportion to the underlying asset) that changes over time based on the interest earned on the underlying asset.
Drops dNFTs
Drops compensates clients with dNFTs, which are ERC721 tokens that may be swapped at any time for the underlying assets they represent.
dNFTs, unlike dTokens, do not pay interest and may only be used as collateral.
Liquidations
Liquidations ensure that a loan may be repaid in any situation, including high-risk situations, by selling the collateral provided as security.
When a borrower's debt is liquidated, a percentage of the debt is returned to the borrower, and a liquidation charge is added to the overall amount of debt paid off.
Conclusion
NFT loans are a stepping stone towards the NFT/DeFi world. They have the potential to generate lucrative revenue streams for previously illiquid assets such as NFTs.
The primary purpose of NFT loans is to boost the liquidity of NFTs, allowing users to invest in other initiatives and services.
Drops provides a platform for users to store NFTs while collecting yields, and as NFTs continue to grow in adoption, the protocol has a chance to establish itself as a blue chip NFT loan platform.