Undoubtedly, Non-Fungible Tokens (NFTs) have become big business, especially for anyone looking for huge returns. The most recent evidence is that NFT-based lending and borrowing is flourishing and changing the DeFi market.
What is NFT-based lending?
NFT-based lending allows users to use their NFTs as collateral to borrow cryptocurrency. In other words, NFT-backed loans are loans based on the value of NFTs.
The fair value of NFTs might be ascertained effectively using an NFT collateralized lending marketplace. Borrowers might list the NFT they want to use as collateral on the market, and other users could then submit bids based on how much they are ready to lend against it. Additionally, the marketplace might include options for loan terms.
NFT-backed loans have received plenty of attention
The lending marketplace NFTfi can be listed as proof of the rising demand for asset-backed loans that use NFTs as collateral. The peer-to-peer platform is reported to have handled NFT-backed loans that worth roughly US$88 million in the first three months of 2022, more than double the amount of US$40.7 million in the entire year of 2021. Besides, Arcade, another lending platform, claims to have assisted in the disbursement of loans totaling US$24 million. Arcade assesses the current market value of all NFT-backed loans at up to US$400 million, while NFTfi takes a more modest estimate of US$200 million.
NFT-backed loans have been considered the best investment
The NFT business is expected to generate $40 billion in revenue by 2022 thanks to its lucrative and rapid growth. For NFT owners looking to unleash their own intrinsic NFT value, tapping into NFT-backed loans is a fantastic option.
Borrowers in NFT-backed loans can receive substantial amounts of cryptocurrency while keeping their NFT as long as they repay it. This is preferable to their having to sell the NFT, as it may be challenging to wait for someone to come up with a large amount of cryptocurrency to purchase a digital asset. NFT-backed loans, which can increase liquidity, can attract many users to participate.
Due to the ability to charge interest rates that are significantly higher than those of traditional loans, lenders are intrigued by NFT based lending.
Regarding the loan structure, the duration and the interest rate of an NFT-backed loan may change significantly from those in traditional secured financing, particularly in terms of how such material terms are arranged in connection to other essential loan provisions. A conventional loan secured by collateral would typically have a duration of several years, with acceleration clauses built in to reduce the risk to the lenders. However, in the realm of DeFi NFT-based lending and borrowing, a loan's term is typically only a few days or months, so an acceleration clause may not even be necessary. As a result, the interest rate on these short-term loans is typically much higher than it is on traditional loans. In case borrowers default, lenders may take ownership of the NFT used as collateral.
NFT-backed loans can change DeFi forever
By trying too hard to integrate innovative blockchain technology into established economic processes, conventional banks and financial institutions appear to have fallen behind the curve. The $80 billion and $10.7 billion markets for DeFi and NFTs, respectively, serve as adequate proof of this.
There is a good likelihood that the market for collateralized NFT loans will change and develop into a launching pad for a lot more future use cases. Future use cases might involve investments, bank loans, insurance policies, bonds, and debt management, as opposed to the current use cases, which are mostly focused on gaming and digital art.
NFT-based lending and borrowing has taken the world by storm. Since it has helped enhance liquidity and more accurate NFT valuations, the impact of NFT on DeFi will still be in the early stages of development. Therefore, observing how the material terms and the loan structure change over time is important.
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Disclaimer: The information herein is for educational purposes only and should not be considered financial, investment, or trading advice. Please conduct your own research and due diligence before making investment decisions. You understand that you are using the Information provided at your own risk.