NFT (Non-Fungible Tokens) has completely taken over the crypto space, introducing a new way to collect and trade digital art, video, and other multimedia on the blockchain.
NFT’s unique qualities of immutability, ownership, and scarcity have caught investors’ attention, bringing it deeper into this new and blossoming space.
By 2021, the total sales of NFTs will almost reach $25 billion, a staggering number. Many say the party is just getting started, this uptrend is expected to continue through 2022 and beyond. At the time of writing, the total market capitalization of all NFTs exceeds $10.2 billion.
In addition, large NFT collections have become extremely popular and increasingly large in size. For example, the top 5 NFT collections have accumulated a total market capitalization of around $9.5 billion.
However, as NFTs continue to boom, their utility remains quite limited in many respects, especially due to their non-fungibility.
For example, many NFTs have daily trading volume in the millions of USD, which means they have relatively good liquidity and have attracted the interest of a very wide user base. This holds great promise in terms of usability as collateral, making them a much more attractive financial vehicle.
NFT & DeFi
DeFi has now shown a stronger presence, now merging with NFT to expand their utility and overall application. One major way they are enhanced is through the NFT lending concept, creating an entirely new blockchain-based lending marketplace that is taking the world by storm.
While the idea of NFT loans has been around for a few years, the growing global community and NFT analytical tools have helped increase liquidity and make valuations more accurate. As a direct result, the link between NFT and DeFi has been strengthened. NFTs can now be assessed in a more precise way, promoting higher utility.
Why is an instant NFT loan important?
Various DeFi and CeFi (centralized finance) platforms have allowed users to borrow money by putting their crypto assets as collateral. NFT loans are the go-to loan, allowing you to do more with your tokens and open up more liquidity.
In particular, blue-chip NFTs can be used as collateral to instantly borrow digital assets in a decentralized, permissionless manner due to their higher liquidity and implementation. rules for providing price feeds.
This provides greater utility to lenders and borrowers in the NFT space, allowing them to use their assets in different ways for potential financial gain.
For example, ETHLend is a P2P (peer-to-peer) lending platform that runs on Ethereum, created in 2017, allowing users to transact with each other through loan requests. Soon after in 2018, it was renamed Aave, officially launching in 2020.
This is where its original P2P lending model is transferred to the current decentralized liquidity market protocol. The ETHLend team realized that their P2P model had a number of inefficiencies, one of the main being the potential shortfall of users on the other side of the transactions.
Aave’s new model allows users to borrow and lend using assets stored in liquidity pools instead of trading directly between people on the network, allowing its smart contracts to work. and maximize efficiency.
When ETHLend was first released, its lending volume reached about 1,293 ETH, or more than $4 million at current prices. Within a month, this quickly grew to over 2,500 ETH in loans, or more than $8 million at current prices, demonstrating huge growth and demand. The total number of users before the renaming protocol reached hundreds of people.
This model of Aave helped solidify it as a DeFi lending company. This is evident through its remarkable growth, jumping from about $1.53 million at the beginning of January 2020 to over $11.97 billion TVL today, an increase of more than 782,000% in more than a year. 2 years. Additionally, the protocol has over 93,000 users at the time of writing.
NFTfi is an example of a platform that allows you to collateralize your NFTs and get WETH or DAI as a loan using this permissionless model. To date, it has accumulated over 1,028 borrowers and over $100 million in accumulated loans.
Overall, the permissionless model allows for greater interoperability with other DeFi applications while turning NFTs into more useful and powerful assets that are liquid and generate higher yields, essentially enhance their use cases.
Given the massive volume achieved by NFTfi as an example, it is clear that the permissionless model is working and has even greater potential – it lowers the barrier to entry so more users pour into the space. and allows adding assets of any shape and size to pools, promoting greater liquidity.
Collateralizing NFTs for instant loans has several advantages in common for lenders and borrowers. Let’s look at some of the key benefits and use cases:
- Instantly Available Liquidity: Get capital whenever you want through collateralizing your NFTs through DeFi smart contracts, giving you instant access to liquidity.
- Key NFT Value Added: Instant loans mean that the NFTs you keep in your wallet are much more productive, making them a new synthetic asset class with a wide range of financial benefits, including greater composability with DeFi and the potential to generate profit aggregators.
- Profit Making Opportunity: With their loan provided by NFT locked as collateral, users can use the loan funds to buy other assets (i.e. more NFTs or cryptocurrencies) ) to join and earn through the DeFi ecosystem.
- No middlemen: With DeFi’s permissionless and trustless nature, no middleman is needed to facilitate or approve transactions.
- Limited Barriers to Entry: Since platforms use smart contracts to enable borrowing and lending, no screening or credit checks are required to get a loan, meaning anyone with a Necessary collateral has capital.
Drops DAO: Seamless & Instant NFT Loans
At Drops DAO, their goal is to make the lending process as simple as possible. This project offers different groups of loans that users can browse through to see which will accept their particular NFT. These separate lending pools provide a key competitive advantage, as they minimize exposure to asset-rich pools while allowing for greater capital efficiency.
The underlying architecture is built in permissionless and trustless styles, allowing the protocol to support any collection of NFTs.
Whenever a user provides their NFT to the project’s protocol to obtain a loan, Oracle can generate and provide the requested collateral value. In regards to the loan itself, users can borrow up to 60% of the value of the NFT, giving them instant access to capital.
The loans received by the user do not expire and if the loan limit is not exceeded, remain liquid.
But this is just the beginning – the platform is taking things to a whole new level by improving the mechanisms in which users can leverage NFT for various financial vehicles.
Main use cases
Here are some examples of other key use cases that the project will unlock:
- Increase Profits on Loans: Loans obtained using your NFT as collateral can be used for other DeFi purposes, such as using Stablecoins to generate interest or earn DOP as a direct reward for borrowing (users providing liquidity earn interest and DOP).
- Vault: Vault will let you enhance your newly acquired portfolio by enabling automation. This means that the infrastructure and technology built into the Vault will help users power their loans with a return, leveraging your borrowed funds for maximum profit. best by turning your NFT into a profitable asset.
- NFT Perpetuals: Maximize the utility of your NFT by enabling margin/leverage on the most popular NFT collections (i.e. CryptoPunks), in addition to futures (perpetual) for staking for value future of these assets.
- Even better, users can get loans without having to sell their underlying NFT, giving them more options and flexibility. They are introducing new types of features to the NFT lending market, trying to create lucrative, financial opportunities for everyone.