Darren Kleine


<p>NFT markets are much quieter these days, but “blue chip” <a href="https://blockworks.co/tag/nfts">NFTs</a> are still pretty pricey. Granted, prices have crashed massively — more than 90% — from the peak insanity days of Justin Bieber million dollar Bored Ape <a href="https://twitter.com/Blockworks_/status/1487732061838495745?lang=en">buys</a>, but they’ve held pretty steady since the plunge to reality. </p>



<p>Even through the tumult of terrible market conditions, blue chips have naturally held their value far better than the average digital asset. The floor price of a <a href="https://blockworks.co/tag/cryptopunks">CryptoPunk</a>, for example, is still hanging around 50 <a href="https://blockworks.co/price/eth">ETH</a>, despite subdued sentiment.</p>



<p>But other than bragging rights and speculative flipping, many of the most expensive digital images haven’t exhibited a great deal of utility in the past. A vast amount of value just sits there tied to a JPEG, waiting for someone to somehow unlock it.</p>



<p>Just next door, over in the <a href="https://blockworks.co/tag/defi">DeFi</a> space, a massive market has blown up over the last couple years with participants profiting from lending, accruing interest in peer-to-peer and peer-to-pool environments with stablecoins as the primary medium.&nbsp;</p>



<p><strong>Read more:</strong> <a href="https://blockworks.co/news/how-nft-lending-works">How Does NFT Lending Really Work? A Beginner’s Guide</a></p>



<p>Both spaces attract risk-tolerant traders, yet DeFi and NFTs have existed in mostly separate neighborhoods of the Web3 environment. A few <a href="https://dune.com/impossiblefinance/nft-lending-aggregated-dash">NFT-DeFi hybrids</a> have sprung up in recent months, but many suffer with liquidity and volatility challenges, reducing the willingness of lenders to put up funds for borrowers.&nbsp;</p>



<p>So it only seems logical that the largest NFT trading platform by volume, Blur, would jump into the fray, attempting to merge the two elements of the market with their new solution, Blend.</p>



<p>Soon after the platform’s launch, Blur founder Pacman spoke to Blockworks about <a href="https://blockworks.co/news/blur-nft-lending">the peer-to-peer lending platform</a>, which uses NFTs as collateral. On a recent <a href="https://www.youtube.com/watch?v=PWESiHwKupo">Empire podcast</a>, he says things are off to a strong start, with Blend already dominating the competition, becoming the <a href="https://blockworks.co/news/blur-nft-volume-opensea">largest NFT lending protocol by volume</a> and user share within 24 hours of launching.</p>



<h2 class="wp-block-heading">Hunting for higher yields</h2>



<p>The founder explains <a href="https://blockworks.co/news/how-nft-lending-works">how borrowing against an NFT works</a> on Blend with CryptoPunks as an example. Being that it’s an “OG blue chip collection,” he says, “it’s probably one of the safest collections to lend against” in the eyes of the market.</p>



<p>A lender might make a 50 <a href="https://blockworks.co/price/eth">ETH</a> loan offer, Pacman says, at which point a Punk owner could borrow 50 ETH against their asset. “Let&#8217;s say it was a 50 ETH loan offer at 20% APY. That means that once you start borrowing that 50 ETH, your interest will accrue at a rate of 20% per year.”</p>



<p>“If you held that position for a year, your total debt that you would owe would increase from 50 ETH to 60 ETH.”</p>



<p>Normally in DeFi protocols, Pacman explains, the medium yield is closer to four to six percent — a far cry from what’s possible with NFT lending on Blend at the moment.&nbsp;</p>



<p>“So the yield is much higher,” which is not necessarily due to the nature of NFTs as assets, Pacman says, but more so the types of borrowers in the space who exhibit higher risk tolerances.</p>



<p>“Lenders would provide these loans because, based on their risk tolerances, they can earn a nice yield on their ETH that&#8217;s much higher than they can get in traditional DeFi.” </p>



<p><strong>Read more:</strong> <a href="https://blockworks.co/news/nft-investing-guide">NFT Investing Explained for Today’s Market</a></p>



<h2 class="wp-block-heading">Buy now, pay later</h2>



<p>Another interesting mechanism Pacman explains about the Blend platform is the ability to “buy now, pay later.”&nbsp;</p>



<p>Blend provides liquidity with a small amount of capital upfront, allowing purchasers to pay the rest of the costs later, Pacman explains. “So for example, let&#8217;s say there&#8217;s an NFT that costs 10 ETH, you could provide one ETH of your own collateral and then borrow nine ETH to make the purchase.”&nbsp;</p>



<p>It’s “a huge unlock,” he says, “because now people can buy very <a href="https://blockworks.co/news/how-to-sell-nft">expensive NFTs</a> with much less capital upfront.” </p>



<p>He compares it to the Web2 environment, where ‘buy now, pay later’ deals are commonplace. If a consumer buys an iPhone, he says as an example, they can use a payment plan over a period of 24 months with a 0% interest rate.</p>



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG4371824793" width="100%"></iframe>



<p></p>



<p>“The reason why that&#8217;s possible is because the ‘buy now, pay later’ functionality is so useful,” Pacman says, “that the merchants will actually subsidize that 0% interest rate.”</p>



<p>“The Blur protocol incentives are subsidizing that 0% interest rate phenomenon, just like it happens in Web2, where the merchant is subsidizing it.”</p>



<p>It’s a complex new tool in a field that is full of possibilities — and <a href="https://blockworks.co/news/nft-investing-guide">plenty of risk versus reward dilemmas</a>. Pacman explains who he thinks will perform best with the new lending tools. “Ultimately, it&#8217;s the same with any market. The liquidity providers who will do the best are gonna be the ones who take the time to understand the market.”</p>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



<p><strong>Get the news in your inbox. Explore Blockworks newsletters:</strong></p>



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/thebreakdown"><strong>The Breakdown</strong></a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/empire"><strong>Empire</strong></a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance"><strong>Forward Guidance</strong></a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch"><strong>0xResearch</strong></a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed"><strong>Lightspeed</strong></a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop"><strong>The Drop</strong></a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock"><strong>Supply Shock</strong></a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>


Blur

Blur Blends DeFi and NFT Market With New Lending Platform

Michael Bodley


<p>Introduced on Monday, Blur’s fast-developing foray into the business of NFT lending has already been met with a number of open questions.</p>



<p>Blur, the upstart NFT exchange that has grown to <a href="https://blockworks.co/news/blur-opensea-nft-volume-traders-airdrop">dominate trading volumes</a>, rolled out <a href="https://blockworks.co/news/blur-nft-lending">its NFT credit ambitions via the launch</a> of its new protocol, Blend, designed for that purpose.</p>



<p>Chief among those questions, according to a number of industry participants: Can Blur’s Blend gain enough market share to make the ambitious venture worthwhile?&nbsp;</p>



<p>Though it’s too early to make that call, industry participants, including institutional NFT traders, say they’re starting to get a feel for Blend’s potential.&nbsp;&nbsp;</p>



<p>And they’re looking closely to see how Blur&#8217;s lending product differentiates itself — from both a marketing and a technical perspective. Blur’s NFT exchange runs in its own native token, <a href="https://blockworks.co/price/blur">BLUR</a>.</p>



<p>Blend is up against abundant competition.&nbsp;</p>



<p>The token’s white <a href="https://www.paradigm.xyz/2023/05/blend">paper</a> positions itself as a viable, and winning, alternative to existing DeFi products and protocols designed to make markets on loans collateralized by digital collectibles. And to originate loans for digital collectible purchases.&nbsp;</p>



<p>Blend relies on a peer-to-peer lending model, with Blur playing up its Dutch auction structure that enables a bidding process around blockchain-based lines of credit.</p>



<p><strong>Read more:</strong> <a href="https://blockworks.co/news/how-nft-lending-works">How Does NFT Lending Really Work? A Beginner’s Guide</a></p>



<p>“Blend is a flexible and permissionless floating-rate lending protocol that can support arbitrary collateral with no oracle dependencies, and allows whatever interest rates and loan-to-value ratios the market will bear,” its white paper said.&nbsp;</p>



<h2 class="wp-block-heading">Endless NFT loan rollovers?</h2>



<p>Dutch auction structures aren’t new in NFT markets. But, according to a number of Web3 specialists, Blur’s usage of rollover mechanisms for loans using those same Dutch auctions is something new.&nbsp;&nbsp;</p>



<p>Matthew Liu, the co-founder of Origin Protocol (<a href="https://blockworks.co/price/ogn">OGN</a>), told Blockworks that “Blur’s largest purported innovation is the continuous, rolling lending mechanism that allows for rollovers of loans.”&nbsp;</p>



<p>In other words, according to Liu, “the same lender and borrower don’t need to be in contract,” which introduces additional lending liquidity.&nbsp;</p>



<p>Blur’s <a href="https://blockworks.co/news/blur-nft-volume-opensea">core NFT trading volumes have tapered off in recents weeks</a> on the heels of its repeat airdrops — with some costly delays that <a href="https://blockworks.co/news/blur-last-airdrop-nfts">hit participants with up to $200 in gas fees</a>.&nbsp;</p>



<p>But its marketplace has still been holding down the top spot in terms of volumes. Investor eyes are now turning to Blur’s latest gambit to maintain its NFT standing.&nbsp;</p>



<p>“When a lender wants to exit at any time, they can initiate a Dutch auction to pass the loan over to another lender at an interest rate determined by the auction,” Liu said. “This is indeed a mechanism that has not been used by existing competitors. However, this model is not without its own risks.”&nbsp;&nbsp;</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">Initial reactions from reading the whitepaper.<a href="https://twitter.com/blur_io?ref_src=twsrc%5Etfw">@blur_io</a> announcing NFT lending with several innovations: no oracles, perpetual loan rollovers (in theory), and Dutch auctions to rollover/settle.<br><br>Is this good or bad?<br><br>🧵 <a href="https://t.co/0oJEAgicvP">https://t.co/0oJEAgicvP</a></p>&mdash; Matthew Liu (matthewliu.eth) (@matthewliu) <a href="https://twitter.com/matthewliu/status/1653107748597559298?ref_src=twsrc%5Etfw">May 1, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>Blur representatives were not available for an interview and did not return a request for additional comment on Tuesday.&nbsp;</p>



<h2 class="wp-block-heading">The case for NFT collateral&nbsp;</h2>



<p>Retail and institutional interest in buying, holding and trading NFTs has waned since floor prices and volumes plunged in the fourth quarter of 2022 — with <a href="https://blockworks.co/news/november-nft-sales-volume-drops">sales dropping by about 20% in the month of November alone</a>,</p>



<p>More recently, floor prices of blue chip collections and their associated volumes that feed into overall NFT market capitalizations have stabilized, traders say. And the outlook on the sector has been shifting. </p>



<p><strong>Read more:</strong> <a href="https://blockworks.co/news/how-to-sell-nft">How to Sell an NFT — The Investor’s Guide</a></p>



<p>Protocol participants can use NFTs they own as collateral to secure crypto loans. And NFT buyers using the Blend platform can obtain a loan to purchase fresh Web3 collectables. Loan terms, including duration and interest rates, are set by lenders via the <a href="https://www.investopedia.com/terms/d/dutchauction.asp">Dutch</a> auction setup.</p>



<p>Dutch auctions set a high water mark price for a given asset — in Blend’s case, generally a line of credit tied to crypto assets — and stay open for a predefined period wherein issuers can lower their asking price until a buyer or counterparty is found. It’s essentially the eBay model for digital assets.&nbsp;</p>



<p>Gabriella Kusz, the chief executive officer of Global DCA, told Blockworks in a statement that she is “not surprised at the innovation we are seeing with Blur,” adding that “for a long time people made fun of or underrated the power and utility of NFTs.”</p>



<p>“What we are seeing now is on trend with the overall maturation and evolution of the digital asset space – a heavy focus on utility and value,” Kusz said. “The use of Blur for NFT lending is just one possibility.&nbsp;</p>



<h2 class="wp-block-heading">But what’s an NFT worth, anyway?</h2>



<p>The auction system appears designed to tackle one big standing problem among NFT traders and market makers: how to accurately value inherently illiquid non-fungible assets.</p>



<p>Aaron Rafferty, the co-founder of StandardDao, told Blockworks that Blur’s auction system is a “great solution to previous NFT lending protocols and should attract more lenders to a traditionally risky space” considering that “NFT valuations are extremely subjective.”&nbsp;</p>



<p>But there are risks. Including the risk of an NFT losing all of its value.&nbsp;</p>



<p>Or going to zero.&nbsp;</p>



<p>That “edge case,” according to Rafferty, was “previously unlikely,” has lately been “on the back of the minds of many with the recent events in crypto.”&nbsp;</p>



<p>Blur is widely expected to subsidize Blend users via incentives — perhaps extending to the airdrops that have been a recurring feature for the exchange to win market share.&nbsp;</p>



<p><strong>“Blur will be highly aggressive in subsidizing usage with the BLUR token,” Liu said. This is what they have done to enable order matching on their core marketplace, and I expect that they will spend heavily on this new initiative.”</strong></p>



<p>It’s possible that Blur doubling down on its growth-oriented spend, spend, spend strategy could create an arms race of shelling out crypto assets among NFT marketplace competitors.&nbsp;</p>



<p>Competitors should be prepared to subsidize usage with their own tokens,” Liu said. “Blur is notorious for spending money to generate volume and does not seem to care about generating protocol revenues at this time. They are going for growth and market share even as the overall NFT market contracts.</p>



<p>Coupled with the heavy usage of Blur airdrops: the possibility of market manipulation. A number of research reports have <a href="https://mirror.xyz/neah.eth/F6Sdhqq_Plf5uBkYSs3Qf2QYIq4hUmccWbVh0g243V0">found</a> uneven airdrop effects and related purported wash trading.&nbsp;</p>



<p>Loan originators on Blur can, in turn, employ another Dutch auction to establish a secondary market for lenders — who can demand higher interest rates as a result of taking on risk from a distressed loan.&nbsp;</p>



<p>But if a given NFT loses all of its value, “not even 1,000% APR would bring in a new lender,” Rafferty said.&nbsp;</p>



<h2 class="wp-block-heading">Upside for tokenized assets?</h2>



<p>Still, according to Rafferty, “Blur is a value add to the market” because the protocol is “extremely light weight to run and maintain,” especially considering it does not employ oracles or expiries.&nbsp;</p>



<p>On the whole, there have been mixed results for peer to peer crypto lending efforts — especially when it comes to the liquidity they provide to illiquid assets. Some of Blurs’ key competitors are expected to be “NFTfi, PWNDAO, BendDAO, and ParaSpace,&#8221; The Defiant <a href="https://thedefiant.io/blur-nft-lending">reported</a> Monday.</p>



<p>The outcome of those efforts heavily hinge on NFT buyer, seller and lender interest in markets that are still stagnant, according to Liu of Origin protocol.&nbsp;</p>



<p>“In the current NFT market [downturn], my main worry is whether there will be sufficient liquidity on the lender side,” Liu said. “Many NFT holders are looking for liquidity as their assets have declined in value, so the demand side for these loans should be reasonable. I’m more skeptical of lenders wanting to step up to the plate at reasonable interest rates.”</p>



<p>In one possible upside, Rafferty said that Blur’s lending platform “sets a base for collateral provision for the growing tokenized asset market and should attract some previously illiquid assets.”&nbsp;</p>



<p>If all goes well.&nbsp;</p>



<p>“NFT lending is not for the faint of heart,” he said. “Even though Blur mitigates many of the risks of losing one&#8217;s NFT, repayments and loan amounts could skyrocket for borrowers if they are not tracking the status of their loan.”</p>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



<p><strong>Get the news in your inbox. Explore Blockworks newsletters:</strong></p>



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/thebreakdown"><strong>The Breakdown</strong></a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/empire"><strong>Empire</strong></a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance"><strong>Forward Guidance</strong></a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch"><strong>0xResearch</strong></a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed"><strong>Lightspeed</strong></a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop"><strong>The Drop</strong></a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock"><strong>Supply Shock</strong></a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>


NFT Loans on Blur Could ‘Skyrocket’ if Borrowers Don’t Pay Attention

John Gilbert


<p>NFT marketplace Blur.io launched a new peer-to-peer NFT lending platform, cleverly called Blend, on May 1.</p>



<p>Within 24 hours, it facilitated over 500 loans worth over a total of 5,700 ETH. To put that in perspective, industry leader NFTfi’s daily loan volume was 328 ETH. Within just 3 hours of the launch, the platform’s trading volume doubled from 5,175.99 ETH to 11,010.77 ETH.&nbsp;</p>



<p>The question on everyone’s mind: How does NFT lending work, and is this sustainable?</p>



<p><strong>Key takeaways</strong></p>



<ul class="wp-block-list">
<li>NFT lending is a way for NFT holders to borrow money using their non-fungible assets as collateral.</li>



<li>This financing mechanism promises creators and owners new monetization opportunities.</li>



<li>Market volatility and collateral pricing challenges have historically made it difficult for borrowers to get favorable terms.</li>



<li>The latest perpetual peer-to-peer NFT lending model is an attempt to make the lending market more competitive for borrowers without exposing lenders to too much risk.&nbsp;</li>



<li>Concerns of increased financialization in an already hyper speculative market have many worried that the market will not be able to sustain a rush of borrower demand.</li>
</ul>



<p><strong>Read more: </strong><a href="https://blockworks.co/news/blur-nft-lending">Peer-to-peer NFT Lending Is the Way to Go, Blur Says in Protocol Launch</a></p>



<h2 class="wp-block-heading">How NFT loan platforms work</h2>



<p>Prior to the <a href="https://blockworks.co/news/blur-nft-lending">launch of Blend</a>, the majority of <a href="https://dune.com/impossiblefinance/nft-lending-aggregated-dash">cumulative loans</a> borrowed from NFT lending platforms came from 2 models: peer-to-peer lending (NFTfi) and peer-to-pool lending (BendDAO).</p>



<p>There is an endless list of model variations, but they all work to balance the needs of lenders and borrowers in a way that increases economic activity and liquidity in the NFT market. This mission is particularly difficult with NFT-backed loans because of the inherent non-fungibility of the NFT collateral. As a result, loan terms tend to impose higher interest rates on the borrower and stricter collateral health requirements.&nbsp;</p>



<p>It is a classic chicken or egg conundrum – where liquid markets are needed to support NFT lending and markets need financing to increase liquidity.&nbsp;&nbsp;&nbsp;&nbsp;</p>



<p>For the purpose of this explainer, we will compare these top models to the latest rivals of perpetual peer-to-peer (Blend) and three actors (Astaria).</p>



<h2 class="wp-block-heading">Peer-to-peer&nbsp;</h2>



<p>A peer-to-peer NFT lending model is a financial system that enables direct lending and borrowing of cryptocurrencies using unique, indivisible digital assets (NFTs) as collateral.<br><br>As the unique quality traits and value proposition of an NFT is by definition indivisible, its appraisal can’t be reduced by the sum of its parts. Peer-to-peer NFT lending models like NFTfi are built on this assumption. They need lenders to individually appraise the value of NFT collateral when offering a loan.&nbsp;</p>



<p>The borrower and lender then enter negotiation to find the fairest possible terms. This process is inefficient compared to the automation of decentralized lending platforms like Aave – where price oracles are able to reliably measure collateral value and enforce LTV requirements. These user experience expectations have made it difficult for NFT lending platforms to acquire the same level of adoption. Here is a step-by-step guide to how it works with <a href="https://nftfi.com/how-it-works/">NFTfi</a>:</p>



<h3 class="wp-block-heading">How NFTfi lending works&nbsp;</h3>



<ol class="wp-block-list">
<li>Borrowers connect their wallets to the platform and list their NFT as collateral, setting their desired loan terms such as loan amount, duration and interest rate.</li>



<li>Lenders browse through NFT collections and propose term offers based on their appraisal of the NFT&#8217;s value.</li>



<li>Borrowers can review and accept an offer for wETH or a stablecoin transferred from the lender&#8217;s wallet.</li>



<li>The NFT is then automatically transferred to a smart contract, which holds the asset for the duration of the loan.</li>
</ol>



<p>NFTfi generates revenue by charging lenders a 5% fee on the interest earned once the loan is paid back. If a borrower fails to repay the loan, the lender can initiate foreclosure. The platform then liquidates the NFT collateral from the smart contract and burns the promissory note, allowing the borrower to keep the loan amount.</p>



<h3 class="wp-block-heading">Pros and Cons</h3>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Pros</strong></td><td><strong>Cons</strong></td></tr><tr><td>&#8211; Both parties can renegotiate loan terms if they mutually agree.<br>&#8211; There are no automatic liquidations before the loan expiration date, offering some stability to borrowers.<br></td><td>&#8211; Interest rates are typically higher due to the lack of liquidation if the floor price of the NFT drops below the loan amount.<br>&#8211; Lower LTV ratios can make the loan terms less attractive for borrowers.<br></td></tr></tbody></table></figure>



<h2 class="wp-block-heading">Perpetual peer-to-peer&nbsp;</h2>



<p>The perpetual peer-to-peer NFT model is a lending system that facilitates direct loans between lenders and borrowers without set expiration dates. The model introduced by <a href="https://blur.io/">Blur</a> does not use price oracles to enforce liquidations like the peer-to-pool model. Instead it lets the lender exercise the right to sell the loan in a dutch auction or trigger liquidation when they feel their principal is at risk. The protocol also maintains the borrower’s right to repay the loan and interest at any time.&nbsp;&nbsp;&nbsp;&nbsp;</p>



<p>The philosophy behind this model maintains the assumption that loan terms of NFTs need to be set individually. A key difference with the peer-to-peer model though, is that lenders make offers on an NFT collection basis instead of an individual case-by-case basis.</p>



<h3 class="wp-block-heading">How Blur Blend Lending works</h3>



<h4 class="wp-block-heading">Steps for borrower</h4>



<p>For borrowers in the perpetual peer-to-peer NFT lending model, the process begins with choosing between two options: &#8220;Buy now, pay later&#8221; to purchase an NFT, or borrowing ETH directly from Blend using an NFT as collateral.</p>



<ol class="wp-block-list">
<li>Borrowers connect and fund their wallets, then select the NFT collection and list of items they want to purchase, or the NFT to use as collateral for borrowing ETH.</li>



<li>The protocol aggregates loan offers by price and interest rate, allowing borrowers to review their options.</li>



<li>They can then select the price they want to pay now for a selected NFT and an interest rate that suits them. Or they submit an NFT and request a loan amount and interest rate through their inventory page.</li>



<li>The loan doesn&#8217;t have an expiration date; borrowers can pay it off at any time, and lenders can request payment at any time.</li>



<li>If a lender requests payment, the Dutch auction style refinancing process begins.</li>
</ol>



<h4 class="wp-block-heading">Dutch auction style refinancing and liquidation</h4>



<p>Dutch auction style refinancing involves the loan being automatically sent to a Dutch auction if the lender requests payment. In this competitive process, the auction starts at a 0% interest rate and gradually increases until a buyer accepts the offer, with the interest rate climbing up to a maximum APR of 1,000%. If a buyer picks up the loan, the borrower can retain the NFT at the new interest rate, as long as both parties are satisfied. However, if no buyer is found after 6 hours, the auction closes, and the borrower has 24 hours to pay back the loan. Failure to repay the loan within this period results in liquidating the NFT used as collateral.</p>



<h4 class="wp-block-heading">Loan repayment options:</h4>



<p>When it comes to loan repayment options, borrowers have two main choices. They can either sell the borrowed NFT on the platform to automatically pay back the loan plus interest, or they can choose to pay off the loan in its entirety and keep the NFT. In either case, the borrower fulfills their repayment obligations, and the loan is considered closed.</p>



<h4 class="wp-block-heading">Steps for lender</h4>



<ol class="wp-block-list">
<li>The process starts with connecting the lender’s wallets and funding them with the necessary assets.</li>



<li>The lender then chooses the maximum amount they&#8217;re willing to lend using a single NFT within a specific collection as collateral. This decision will impact the lender&#8217;s Blur Points, a user loyalty rewards system.</li>



<li>Lenders then set their desired annual percentage yield (APY) for the loan, keeping in mind that lower interest rates may result in more rewards.&nbsp;</li>



<li>Once their offers are set, they wait for borrowers to review and accept the loan terms.&nbsp;</li>



<li>After a borrower accepts a loan, the lender can close it at any time and claim the interest accrued.</li>



<li>If the lender requests repayment, the borrower has 30 hours to pay back the loan. During this period, the Dutch auction style refinancing process may take place to help the borrower find new loan terms, as previously explained.</li>
</ol>



<p>This system of no expiration dates and collection specific loan offerings have so far resulted in a more efficient market. But to get a deeper understanding into its ability to gain substantial long term market share keep an eye out for our outlook on the model.&nbsp;</p>



<h3 class="wp-block-heading">Pros and Cons</h3>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Pros</strong></td><td><strong>Cons</strong></td></tr><tr><td>&#8211; Flexibility for borrowers and lenders due to the absence of loan expiration dates.<br>&#8211; Dutch auction refinancing can help borrowers find new loan terms.<br></td><td>&#8211; Higher risk for lenders since they need to monitor the value of NFTs actively.<br>&#8211; The process can be more complex than traditional peer-to-peer NFT lending.<br></td></tr></tbody></table></figure>



<h2 class="wp-block-heading">Peer-to-pool&nbsp;</h2>



<p>The peer-to-pool NFT lending model enables borrowers to directly obtain loans from a protocol by using their NFTs as collateral. With platforms like <a href="https://www.benddao.xyz/en/">BendDao</a>, anyone can borrow ETH from a pool of liquidity providers. Borrowers can access up to 40% of the floor value of their NFT collateral.&nbsp;</p>



<p>They can also use these loans to buy NFTs at a fraction of the cost and pay later. First, borrowers use Aave flash loans to acquire the NFT. Next, they leverage the obtained NFT as collateral to secure an instant NFT-backed loan. This loan is then used to repay the initial flash loan.</p>



<p>This model is a departure from the philosophy of peer-to-peer lending platforms. Like Blend, these loans don’t have an expiration date. But inorder to incentivize more liquidity providers, the protocol aims to make the process as passive as possible. Here&#8217;s how it works with BendDao.&nbsp;&nbsp;</p>



<h3 class="wp-block-heading">How BendDao lending works</h3>



<ol class="wp-block-list">
<li>Borrowers begin the process by connecting their wallets and selecting an NFT to use as collateral.</li>



<li>The protocol automatically calculates the loan amount a borrower can obtain by using price oracles to determine the NFT&#8217;s floor price.&nbsp;</li>



<li>An algorithm calculates the interest rate based on available liquidity. It increases the rate when liquidity is low to attract more lenders.</li>



<li>The protocol also sets a health factor, determining the conditions under which the NFT collateral may be liquidated before the loan&#8217;s duration ends.</li>
</ol>



<p>The process for lenders is intended to be straightforward and passive. They can deposit and withdraw funds from the liquidity pool at any time. No lockups are required. Yield will fluctuate with the demand for lending.&nbsp;&nbsp;</p>



<h3 class="wp-block-heading">Pros and Cons</h3>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Pros</strong></td><td><strong>Cons</strong></td></tr><tr><td>&#8211; Provides a more streamlined borrowing experience with automatically calculated interest rates and loan amounts.<br>&#8211; No repayment deadline offers flexibility for borrowers.<br></td><td>&#8211; Risk of collateral liquidation if the health factor conditions are met.<br>&#8211; May not be suitable for NFTs with fluctuating floor prices, as it could lead to premature liquidations.<br></td></tr></tbody></table></figure>



<h2 class="wp-block-heading">Three-actor model</h2>



<p>The three-actor model is a hybrid alternative to peer-to-peer and peer-to-pool NFT lending, incorporating a third party, known as a strategist, to facilitate loan transactions between borrowers and lenders. <a href="https://astaria.xyz/">Astaria</a> was the first platform to implement this model, which simplifies the term agreement process.</p>



<h3 class="wp-block-heading">How Astaria lending works&nbsp;</h3>



<ol class="wp-block-list">
<li>Borrowers connect their wallets and choose NFTs to use as collateral.</li>



<li>Strategists, acting as third parties, create public vaults designed to attract liquidity, similar to lending pools. However, unlike lending pools that use universal loan terms for every NFT, strategists customize the terms for each collateral.</li>



<li>Liquidity providers search for a vault offering terms that align with their investment strategy.</li>



<li>When borrowers list their collateral, the strategist employs a set of oracles to automatically appraise the loan and match it to a public vault with sufficient liquidity.</li>



<li>Borrowers then select the loan amount, APR, and duration available in the chosen vault.</li>



<li>Finally, borrowers review and approve the loan, executing the transaction.</li>
</ol>



<h3 class="wp-block-heading">Pros and Cons</h3>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Pros</strong></td><td><strong>Cons</strong></td></tr><tr><td>&#8211; Instant liquidity without back-and-forth negotiations with lenders.Option to refinance when better terms become available.<br>&#8211; Liquidations only occur after the loan expiration date if the borrower fails to repay the loan.<br>&#8211; Liquidity providers can evaluate the risk and return of different vaults, allowing for greater choice.</td><td>&#8211; The strategist&#8217;s involvement adds an extra layer to the loan process.<br>&#8211; Success hinges on the strategist&#8217;s expertise and efficiency.<br>&#8211; As a newer model, it may face challenges gaining widespread use.<br><br></td></tr></tbody></table></figure>



<h2 class="wp-block-heading">NFT lending sustainability concerns</h2>



<p>The power of NFT loans are in the eye of the beholder. Like any financing mechanism, it can be used to generate capital and economic activity or to leverage speculative investment.&nbsp;</p>



<p>At a time when the <a href="https://blockworks.co/news/nft-investing-guide">NFT investing narrative</a> is driven by a trader-first ethos, there is a concern that lower rates will spark a tinderbox of degen flippers starving for momentum. But as with all concerns wrapped in fear and uncertainty, context is needed.&nbsp;</p>



<p>The NFT market is inherently illiquid and difficult to quantify, so the mechanics of cheap debt play out differently from its more fungible counterpart. It is hard to predict the impact it can have on demand.&nbsp;</p>



<p>Many prominent creators argue that the NFT industry needs a divorce from price speculation incentives. Instead of optimizing projects for a dwindling audience, they need to build for new use cases in media, physical goods and experiences, gaming and so on. They believe these innovations will attract the audience needed to kick off a new cycle. If this is the case, the NFT market may not need this type of leveraged investing to reach its market fit.&nbsp;</p>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



<p><strong>Get the news in your inbox. Explore Blockworks newsletters:</strong></p>



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/thebreakdown"><strong>The Breakdown</strong></a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/empire"><strong>Empire</strong></a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance"><strong>Forward Guidance</strong></a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch"><strong>0xResearch</strong></a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed"><strong>Lightspeed</strong></a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop"><strong>The Drop</strong></a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock"><strong>Supply Shock</strong></a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>


How Does NFT Lending Really Work? A Deep Dive

Ornella Hernandez

<div id="highlights-block_62a8c3cc3fc60" class="highlights">
        <ul>
                <li>NFT-backed loan risk is higher amid falling NFT floor prices and ETH’s price</li>
                <li>Bored Ape Yacht Club NFTs have the highest cumulative total loan volume on NFTfi</li>
            </ul>
    
</div>



<p>Celsius Network’s <a href="https://cms.blockworks.co/celsius-lending-platform-suspends-withdrawals-and-transfers/" target="_blank" rel="noreferrer noopener">move</a> 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.&nbsp;</p>



<p>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.&nbsp;</p>



<p>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.&nbsp;</p>



<p>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.&nbsp;</p>



<p>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), <a href="https://www.bloomberg.com/news/articles/2022-05-03/crypto-lender-nexo-issues-loan-backed-by-cryptopunks-zombies#xj4y7vzkg" target="_blank" rel="noreferrer noopener">according</a> to Bloomberg.</p>



<p>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.</p>



<p>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.&nbsp;</p>



<p>Brandon Buchanan, Meta4’s founder and managing partner, told Blockworks he remains long-term bullish on the NFT market.&nbsp;</p>



<p>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.&nbsp;&nbsp;</p>



<p>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 <a href="https://cms.blockworks.co/nft-whale-who-ditched-auction-of-104-cryptopunks-lands-8m-loan/" target="_blank" rel="noreferrer noopener">8.3 million DAI stablecoin on his CryptoPunks in April</a>. The loan, which was facilitated by NFT lending protocol MetaStreet on the NFTfi marketplace, has a 10% APR with a 90-day duration.</p>



<p>In the <a href="https://cms.blockworks.co/in-largest-ever-nft-backed-loan-101-cryptopunks-put-up-as-collateral/" target="_blank" rel="noreferrer noopener">second-largest NFT-backed loan at 8 million DAI stablecoin</a>, 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.</p>



<p>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, <a href="https://dune.com/rchen8/NFTfi" target="_blank" rel="noreferrer noopener">according</a> to Dune Analytics.&nbsp;</p>



<p>The firm <a href="https://twitter.com/NFTfi/status/1536412783398494208?s=20&amp;t=by-2-l6Tq61QSFveJOEvHw" target="_blank" rel="noreferrer noopener">tweeted</a> Monday that NFTfi users have unlocked over $30 million in loan volume using CryptoPunks.</p>



<p>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.”&nbsp;</p>



<p>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.”</p>



<p>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.</p>



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr"><a href="https://twitter.com/hashtag/BAYC?src=hash&amp;ref_src=twsrc%5Etfw">#BAYC</a> <a href="https://twitter.com/hashtag/NFTs?src=hash&amp;ref_src=twsrc%5Etfw">#NFTs</a> officially have the highest cumulative total loan volume on our platform! <a href="https://twitter.com/BoredApeYC?ref_src=twsrc%5Etfw">@BoredApeYC</a> holders have borrowed more than $41M in wETH and DAI by collateralizing their <a href="https://twitter.com/BoredApeYC?ref_src=twsrc%5Etfw">@BoredApeYC</a> NFTs!<br><br>Here is a 🧵about <a href="https://twitter.com/BoredApeYC?ref_src=twsrc%5Etfw">@BoredApeYC</a> on <a href="https://twitter.com/NFTfi?ref_src=twsrc%5Etfw">@NFTfi</a> so far👇 <a href="https://t.co/SkuiGb3Qr0">pic.twitter.com/SkuiGb3Qr0</a></p>&mdash; NFTfi.com (@NFTfi) <a href="https://twitter.com/NFTfi/status/1535328442224369666?ref_src=twsrc%5Etfw">June 10, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<p>Nexo extended a formal <a href="https://cms.blockworks.co/nexo-knew-celsius-was-in-trouble-before-lenders-withdrawal-freeze/" target="_blank" rel="noreferrer noopener">offer to buy assets from Celsius</a> on June 13, claiming it was already aware of the lender’s troubles.</p>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



<p><strong>Get the news in your inbox. Explore Blockworks newsletters:</strong></p>



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/thebreakdown"><strong>The Breakdown</strong></a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/empire"><strong>Empire</strong></a>: Crypto news and analysis to start your day.</li>



<li><a href="https://blockworks.co/newsletter/forwardguidance"><strong>Forward Guidance</strong></a>: The intersection of crypto, macro and policy.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch"><strong>0xResearch</strong></a>: Alpha directly in your inbox.</li>



<li><a href="https://blockworks.co/newsletter/lightspeed"><strong>Lightspeed</strong></a>: All things Solana.</li>



<li><a href="https://blockworks.co/newsletter/thedrop"><strong>The Drop</strong></a>: Apps, games, memes and more.</li>



<li><a href="https://blockworks.co/newsletter/supplyshock"><strong>Supply Shock</strong></a>: Bitcoin, bitcoin, bitcoin.</li>
</ul>
