NFTs are one the most important innovations to come out of the blockchain sector. NFTs are not only traded directly but they are also popular among leveraged investors. This article is all about NFT loans and how you can acquire them.
What are NFTs?
NFTs are non-fungible tokens that are used to represent digital ownership of real estate or any other online object. It has gained popularity among musicians and other artists who use NFTs to represent the ownership of audio, video, or other media files.
How Do NFT Loans Work?
There are many popular NFT trading marketplaces where investors can mint, purchase, or sell NFTs. NFTs are evolving like artwork and they are usually sold as collectibles. Therefore, they are used for investing.
To this effect, there is demand for loaning NFTs that are used as collateral. Investors who are performing leveraged trading can use loaned NFTs as collateral to acquire debt for trading.
There are many NFTs collections where a single unit can fetch billions of dollars. The most popular NFT was sold by Beeple which was sold for $69 million in 2021 during a Christie’s auction.
Keeping in view the high value of the NFTs, DeFi projects allow investors to get liquidity by loaning and without selling their holdings. Another very important use case of NFTs is the tokenization of unique asset classes.
How to Get an NFT Loan?
Here are some quick and easy steps that anyone can follow to acquire NFT loans:
NFT owner can nominate their NFT product as collateral on a DeFi trading platform or lending protocol in exchange for a loan.
The platform will ascertain the market value of the applicant’s NFT. If the NFT in question has been traded on a secondary marketplace using a stablecoin the appraisal is faster. Therefore, the more times an NFTs have been transacted the easier it is to ascertain its value while newer NFTs can take longer.
When the appraisal process is completed the loaning protocol is going to credit the account of the loan applicant with proportional cryptocurrencies. In most cases, the leverage amount is issued in the form of stablecoins.
Now it is time for NFT to be locked in a smart contract until the loan is fully reimbursed. Smart contracts are automated and share the rules of the loan terms with the borrowers and the issuers.
The borrower eventually concludes the trade and returned the loaned amount with interest within the allotted time. Since the NFTs are locked in smart contracts as soon as the loan is returned they are released. The process is called liquidation.
There are several DApps such as Solvent, frakt, Honey Finance, and Drops that offer NFT loaning services.
Important Terminologies Related to NFT Loans
Here are some of the most important NFT loaning-related terminologies that every investor should know:
Interest rates are the percentage of additional payment that the borrowers are under obligation to pay the lenders. Interest rates can be expressed in the form of APR (Annual Percentage Rate) and APY (Annual Percentage Yield).
Loan-to-Value (LTV) ratio is the amount of loan that can be issued in exchange for a given value of collateral. Investors can get the best deals if they run a quick comparison of different LTV rations on various lending protocols.
Liquidation ratio is the amount of the loan at which the lender can sell the collateralized NFTs to secure their loaned amount. The borrowers should always beware of the liquidation ratio to ensure that they retain the ownership of their collateralized NFTs. The average liquidation ratio for NFT loans is around 75%.
Floor price refers to the lowest price estimate within an NFT collection. Loaners usually evaluate their risks and collateral value using floor price as a reference. Floor prices are subject to fluctuations.
NFT loans are very useful and viable. They are best for increasing liquidity, promoting the digital art sector, and allowing leverage trading without any credit checks. Individuals who do not have bank accounts or low credit scores can borrow heavily using NFT loans.