• Pawn Your CryptoPunk: A New NFT DeFi Lending Marketplace Blossoms

  • It’s like an NFT pawn shop.

    A startup blockchain project called NFTfi allows users to borrow against their uncounterfeitable tokens, and this new project sits at the intersection of decentralized finance (DeFi) and the red-hot NFT market.

    NFTfi allows users to pledge their NFTs in exchange for other cryptocurrencies, which can then be sold for cash. The service provides instant liquidity for NFT holders who are not ready to give up their CryptoPunks or Bored Apes.

    The new service hints at the growing demand for DeFi apps as NFTs gain more user adoption.

    “NFTs are certainly becoming a gateway to the DeFi space for mainstream audiences,” said Lauren Stephanian, a principal at Pantera Capital.” As new collectors become more active in the NFT market, they will be looking for new ways to leverage their assets through the DeFi mechanism, such as mortgages, fractional assets, mortgages, etc.”

    Mortgages for NFTs join a growing roster of services and derivatives that have been launched by various startups to meet the needs of traders. Other NFT derivatives projects include fractionalization platform Fractional, betting provider NFTx, and cross-chain liquidity protocol Taker.

    Once bought, NFT is often difficult to use productively, unlike fungible tokens, which are more liquid and can be easily pinned, loaned, or otherwise put to work to generate revenue.

    “If you have a CryptoPunk and you need the cash but don’t want to sell it, you can use it as collateral,” NFTfi co-founder Stephen Young told us.

    The loan can then be used in a variety of ways: converted to fiat currency, deployed to the DeFi protocol, or even used to buy more NFTs.

    Determining the value of collateral

    The platform runs on the Ethernet network and allows anyone to make loans and set terms without an intermediary, similar to the DeFi protocols Compound and Aave – but with NFTs.

    “The possibilities are endless when it comes to merging technologies,” said Daniela Henao, chief operating officer of cryptocurrency analytics firm Defy Trends.

    Borrowers can expect to receive a loan amount of about 50% of the value of the NFT, with annualized interest rates typically ranging from 20% to 80%, depending on the desirability of the NFT. Lenders determine what they consider to be the fair value of the collateral, usually by looking at recent sales history or the reserve price of similar assets. The reserve price is the lowest offer that can be made to purchase a particular series of NFTs.

    Once the parties agree on terms, the NFT is transferred from the borrower’s wallet to an escrow account and a smart contract facilitates the loan. If the borrower fails to return the loan and interest at the end of the term, the lender is entitled to get the underlying NFT back.

    The company has closed more than $12 million in transaction volume since its launch in June 2020. The average loan size for the month was $26,000, but the platform has facilitated loans of up to $200,000, Stephen Young said. The default rate hovers below 20 percent, which varies depending on the NFT.

    Currently, loans can be made in Ether, a token native to the Ether blockchain, or DAI, a stable coin pegged to the U.S. dollar.

    “There are several different types of people who use our service,” Young said.” Some are people who really liked NFT last year and bought it for very little money. one of our users lost his job during covid and took out a loan to cover the costs.”

    Get pocket money, or double it

    Stephen Young said other users of the service include college students using NFTs as pocket money, DeFi traders looking for liquidity to pay margin calls, and yield farmers using their NFTs to take advantage of DeFi agreements for higher rates.

    CryptoPunks can typically earn lenders an 18% APR, while Bored Ape can earn 40% to 60% APR. Some loans have APRs as high as 100 or 150 percent.

    However, some lenders may not be in it for the proceeds.

    “A lot of lenders actually want the NFT, so they’re hoping the borrower will default,” Stephen Young explains.” Then they’re essentially getting the NFT at a 50 percent discount.”

    In February, the company raised $890,000 in investment from venture capital firm CoinFund, a decentralized autonomous organization called The LAO, and private investors like Dapper Labs CIO Roham Gharegozlou.

    “In the future we are moving towards, meaningful interactions with NFTs will include not only gaming or visual elements, but also financial components, including those enabled by NFTfi’s ever-expanding suite of products,” Evan Feng, director of research at CoinFund, told us.

    Others see NFTs as a way for retail investors to become more engaged with DeFi.

    “DeFi has historically had a high barrier to entry due to user experience gaps, but NFTs now offer a user-friendly entry point to popular DeFi use cases,” said Pantera’s Stephanian.

    Of course, the project also highlights how the nascent but rapidly growing NFT derivatives space is introducing leverage and more risk into an already volatile market – similar to the excessive lending practices that historically fueled asset price bubbles in traditional markets.

    ” Stephen Young says, “I see NFTs as Internet-native property rights.” You’re going to see the accumulation of value in Internet property, and where there’s value, there’s finance.”

    What's your reaction?