NFT Lending Market Reveals a Need for Liquidity
Despite most NFTs being illiquid, NFT lending has become a popular way to access more cash
Blockworks exclusive art by Axel Rangel
key takeaways
- NFT-backed loan risk is higher amid falling NFT floor prices and ETH’s price
- Bored Ape Yacht Club NFTs have the highest cumulative total loan volume on NFTfi
Celsius Network’s move to pause withdrawals, swaps and transfers has shaken up the crypto lending market. And, when the wider crypto market takes a downturn, the NFT market follows.
If an exchange as large as Celsius, which registered 1.7 million customers and reported over $20 billion in assets under management in 2021, can have liquidity issues, it emphasizes the importance of maintaining a tradable portfolio.
Despite most NFTs (non-fungible tokens) being illiquid, NFT lending has become a popular solution to accessing more cash. Essentially, NFT owners can collateralize their NFTs in exchange for cryptocurrencies or fiat, and the lenders who invest in NFT-backed loans may earn higher returns as compared to traditional crypto-backed loans or peer-to-peer (P2P) loans.
The two largest peer-to-peer NFT lending marketplaces are NFTfi and Arcade. The latter has disbursed $20 million in loans since it launched in January this year.
Among Arcade’s most recent deals: crypto lender Nexo, which issued a 1,200 ETH loan worth more than $3.3 million, via Arcade to an anonymous borrower who put up two CryptoPunks Zombies NFTs as collateral. The 60-day loan carries a 21% annual percentage rate (APR), according to Bloomberg.
At a time when NFT prices are under pressure both from falling floor prices and ETH’s price, “if the underlying collateral drops in value more than the loan value, the lender might incur a loss of principal,” a Nexo representative told Blockworks. Or the lender might not be able to sell the collateralized NFT at full market price in the event of a default.
Adverse market conditions led Nexo to hedge loan risk through partners such as investment manager Meta4 Capital that agreed to purchase the NFTs at a set price, the company said.
Brandon Buchanan, Meta4’s founder and managing partner, told Blockworks he remains long-term bullish on the NFT market.
While top-tier projects such as Bored Ape Yacht Club see regular daily activity, “liquidity has dried up for some projects, as there had already been several months of consolidation into blue-chip NFTs,” according to Buchanan, adding default rates in the lending market have increased slightly, but remain fairly low.
The largest NFT-backed loan to date was issued to 0x650d, the pseudonymous collector who withdrew at the last minute his lot of 104 CryptoPunk NFTs at Sotheby’s in February, for 8.3 million DAI stablecoin on his CryptoPunks in April. The loan, which was facilitated by NFT lending protocol MetaStreet on the NFTfi marketplace, has a 10% APR with a 90-day duration.
In the second-largest NFT-backed loan at 8 million DAI stablecoin, an anonymous borrower collateralized their collection of 101 CryptoPunks at an APR of 10% and a 30-day duration, also facilitated by MetaStreet on NFTfi.
NFTfi has handled about $165 million in NFT-backed loans so far in 2022 and has a cumulative loan volume of $206,911,303 across 12,119 loans since its 2020 inception, according to Dune Analytics.
The firm tweeted Monday that NFTfi users have unlocked over $30 million in loan volume using CryptoPunks.
When asked about its NFT lending strategy, Nexo said it will “fully hedge our exposure with partner desks” and focus on ETH lending, “where NFT prices incur lower drops and are more correlated with ETH prices.”
As for its outlook on the NFT market, the company expects many projects to drop their roadmaps and “a decimation rate of over 90% with Yuga Labs being the notable survivor.”
In fact, NFTfi reported last week that Bored Ape Yacht Club (BAYC) NFTs have the highest cumulative total loan volume on its platform, with an average loan size of 38.39 ETH. May registered the highest number of BAYC loans on NFTfi at 95 loans. The largest borrower put his BAYC #591 as collateral for 122.9 ETH.
Nexo extended a formal offer to buy assets from Celsius on June 13, claiming it was already aware of the lender’s troubles.
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