NFT DeFi: NFT Lending, Renting, and Staking

“NFTs are undoubtedly becoming a gateway into the DeFi space for mainstream audiences,” said Lauren Stephanian, a principal at Pantera Capital. Mainstream audiences are buying NFTs for their art value or as part of a metaverse game. It’s clear they are buying more and more NFTs as they become acquainted with blockchain technology.

However, the more non-fungible tokens you collect, the less liquid your portfolio becomes. Several projects have identified this growing need to move NFTs on the illiquid-liquid scale.

At the moment, most NFTs are highly illiquid. Once you’ve bought an NFT, your only option is to sell it. However, projects have come up with NFT staking solutions. Like regular cryptocurrencies, you can stake your NFTs to earn passive yield while maintaining ownership over your NFTs. However, only a handful of chains offer this type of NFT DeFi because it’s not easy to determine the value of an NFT when there’s only a single owner. Someone can boost the price of an NFT and earn a higher amount of yield.

The MOBOX project came up with a clever solution by attaching a randomly generated hash power to each NFT when it’s minted. Therefore, the yield rate is set in stone once the NFT is created.

To make NFTs more liquid, fractionalized NFT ownership has been introduced. This method allows multiple people to own a share of an artwork. This mechanism introduces better price discovery and makes it easier to trade NFTs. Yet, this solution is not ideal.

So, what can we do?

Introducing NFT Lending and NFT Renting

NFT lending tries to solve the NFT illiquidity problem by creating a market where NFT owners can mortgage their NFTs in exchange for cryptocurrencies or fiat. For instance, you can use your CryptoPunk as collateral to access more cash. You can then use this loan to invest in DeFi or even buy more NFTs.

It’s obvious that collateralized NFTs have gained attention. Arcade, a platform that facilitates collateralized NFT loans, has raised $15 million. The platform currently supports Ethereum-based NFTs as collateral. Borrowers can receive loans in all ERC20 tokens and stablecoins like USDC and DAI.

IQ Protocol is launching a similar concept called NFT renting, which caters to the gaming industry and other industries that can benefit from renting out NFTs. “Think about paying a small fee to borrow a special game weapon or skin you need, in order to unlock the badge that you’ve always wanted. You’re not interested in fully buying the weapon, which can be costly, but you’re willing to pay a fee to borrow it for one week,” says Ana Nesterova, Head of Marketing at PARSIQ.

Another cool use case is renting CryptoKitties. For instance, you have a rare CryptoKitty you want to breed with another rare CryptoKitty to potentially unlock an even more rare CryptoKitty. You can leverage NFT renting to access this CryptoKitty to breed your desired NFT-based cat. Therefore, it unlocks new monetary streams for NFT owners because other users can unlock new properties, use cases, or NFTs by renting out their precious NFT.

Why is NFT Lending a Challenging Market?

When you are a decentralized NFT lending protocol, you need to find a user willing to provide capital for the NFT you’ve put up as collateral. This means that you have to agree with a lender on the loan-to-value (LTV) ratio. For instance, you own a CryptoPunk, which you’ve bought for $500,000. When you agree on an LTV ratio of 80%, you’ll receive $400,000 for your collateralized NFT.

However, this market is not entirely risk-free for lenders. When the borrower fails to repay the loan, the lender will receive the collateral, in this case, the NFT. Therefore, NFT lending does not work for each NFT a borrower puts up as collateral. Most likely, lenders will only accept NFTs representing a noteworthy project like CryptoPunks. The value of new NFT projects is too uncertain or volatile for lenders because they might end up empty-handed when there’s not enough demand to sell their defaulted NFT.

On the other hand, an NFT borrower will most likely receive a low LTV ratio when using a less well-known NFT. Therefore, NFT lending can only move well-known NFT projects on the illiquid-liquidity scale. But for most of the NFT projects, this solution won’t work unless it’s implemented locally within their community.

Which NFT Lending and Renting Projects Should You Follow?

1. Arcade

Arcade is mainly targeted at institutional lenders and high-net-worth retail investors. As for its business model, the platform earns "a small percentage" of every transaction completed on its platform. According to co-founder Robert Masiello, Arcade’s competitive advantage allows borrowers to bundle NFTs to apply for collateral. This helps to reduce the gas fee for your loan request because only a single loan transaction is submitted.

2. IQ Protocol (PARSIQ)

IQ protocol makes non-fungible tokens liquid by enabling NFT renting. It opens up a new potential revenue stream for NFT owners. For instance, you can rent a skin in a game to try it out. If you like the skin, you can decide to buy it yourself.

In short, IQ Protocol’s model brings an entirely new NFT consumption economy, benefitting all parties who participate in the renting process.

3. NFTfi

NFTfi allows borrowers to put any ERC-721 token up for collateralization. Lenders can then offer a loan for your NFT. Once the borrower accepts a loan proposal, the NFT is locked in one of the NFTfi smart contracts.

What are the benefits? Lenders can earn interest on the loan, while borrowers can make their NFT more liquid.

4. Nexo

Nexo offers a centralized NFT lending solution. At the moment, they only accept blue-chip NFT collections to minimize risk. To apply, the value of your NFT has to exceed $500,000. You’ll get in touch with an account manager who prepares the lending agreement for your NFT collection. It’s a different approach that benefits the crypto whales.

Conclusion

Some claim that NFT lending is the gateway to NFT DeFi. It’s certainly one aspect to enable more NFT DeFi. If you combine NFT staking, lending, and renting, you can potentially create some exciting revenue streams for your previously illiquid NFTs. Overall, the goal of NFT DeFi is to make NFTs more liquid and allow users to access more capital to spend on DeFi protocols and other blockchain services.