Remarkably, the advancement that is greeting today’s digital economy knows no bounds. Thus, providing bountiful opportunities for participants to explore. One of the opportunities availed by the advancement in the digital economy is NFT loans, an offering that allows people to leverage their collections to borrow cryptocurrencies. With NFT loans, holders harness their digital collectibles as collateral to borrow crypto assets. Before the introduction of this offering, users willing to borrow a particular crypto asset can only use another form of supported crypto asset as collateral. Now, its introduction brings about the acceptance of NFTs as collateral for loans.
With this new trend, holders of NFTs, in their quest to access liquidity, still retain ownership of their collections. By engaging in NFT loans, participants activate the worth of their collections without selling them. Although, the NFT collection to be explored in this regard must be valuable. If it is, then holders can pawn it into a lender pool in exchange for a loan in crypto.
Platforms Offering NFT loans
Meanwhile, several platforms have launched NFT loan features on their networks. One of these platforms is the Binance NFT marketplace. There, the offering was launched on May 2023 to enable users to harness their collections as collateral to borrow ETH. Although, only a few NFT projects are supported by this offering at this moment. They include Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), Azuki, and Doodles. These collections can be used as collateral to access liquidity on the marketplace. In the future, Binance NFT may decide to add support for other collections.
In NFT loans, the amount that can be borrowed is determined by what is described as the Loan-To-Value ratio (Loan Value / Collateral Value). This is however in relation to the floor price of the specified NFT collection to be used as collateral. NFT loans comes with some risks which will be highlighted in this article.
Advantages
The increasing demands in the virtual asset market and most especially in the NFTs space birthed the introduction of crypto NFTs loans. This feature offers NFTs holders who need access to funds for trading a good solution with reasonable interest rates. Also, it provides a pathway for users to unlock the value of their virtual assets. By this virtue, NFT holders will not have to sell their assets to access their value. Instead, their NFTs will help serve as collateral to obtain a crypto loan. This feature also provides users with instant liquidity while aiding them to keep their NFTs.
Disadvantages
However, NFTs-crypto loans also have their negative sides. Users are likely to lose their valuable NFTs if they fail to repay the loans in due time. Mostly, many platforms offering this service often request NFTs that are greater in value compared to the crypto loans the borrower applied for. This system as obtainable in the orthodox world of finance is to ensure that the lender is well protected financially while giving out the loan. So, the NFT which stands as collateral may be liquidated to recover the loan if the borrower fails to repay.
Meanwhile, some platforms that offer this service still give more extensive opportunities for borrowers to repay their loans. On most platforms, borrowers who failed to service their loans can still reclaim their NFTs as long as there is no bid for it yet. Nevertheless, such a move can prove costly as borrowers may lose their NFT over a loan that’s low in value compared to their assets.
Likewise, the volatility in the price of virtual assets is also a major disadvantage against borrowing crypto with NFTs. The value of the NFTs collateral can drop unexpectedly. Such development can put the borrower on the verge of liquidation. Changes in interest rates can as well prove to be the negative side of NFT crypto loans. An increase in interest rates will definitely hike the cost of the loan. Compelling users to pay more than expected.
Parting Words
Borrowing crypto with NFT can be a game-changing innovation in the virtual assets industry. To some extent, it can help reduce selling pressure on the NFT market. However, investors must be very careful to review the conditions of these loans on platforms that offer them. Agreeing to malicious terms and conditions can result in the permanent loss of users’ assets.