Innovating with Trustless NFT Loans
If you’ve been keeping up with Drops developments, you’ll know that trustless NFT loans are one of our main objectives.
As NFTs continue their parabolic advance in terms of adoption and sales volumes, the community needs an effective and sustainable way to get the most out of these assets. Although peer-to-peer NFT loan solutions exist, they’re slow and lack the liquidity and interoperability needed to be truly useful.
Let’s take a look at the current landscape for NFTs and loans, and how our trustless NFT loans will change the game:
NFT figures continue to soar into 2021
As we move further into 2021, NFTs also continue to excel in their adoption and transaction volumes.
Monthly sales volumes are still growing significantly, with new data points dwarfing those of last year. Total sales volume for tracked platforms has reached over $8.2 million for the month of February 2021 — more than 45 times higher than just one year ago.
This isn’t just from more NFT artworks being sold, either. The average price of an NFT sale has also skyrocketed, most notably on the SuperRare platform. Last month, SuperRare sales fetched an average of $5,232 per NFT, compared to an insignificant $227 in February 2020.
With more high-value NFT assets in infinitely more sets of hands, these assets need to be put to work — but how?
Peer-to-peer NFT loan markets — why don’t they work well?
One solution that is currently available is peer-to-peer NFT loan markets.
These markets allow users to stake their NFTs as collateral for loans, one asset at a time. Unlike DeFi markets with fungible tokens, borrowers and lenders must negotiate terms on a case-by-case basis.
Unfortunately, this case-by-case system can result in painfully long waiting times to find a lender, while also greatly amplifying risk and liquidity issues. Part of this is due to the mechanism lacking any interoperability with existing DeFi infrastructure, such as decentralized exchanges or insurance protocols.
Our solution: Instant NFT loans with high liquidity
To improve the speed and liquidity of NFT loans, we are leveraging state-of-the-art NFT20 and NFTX solutions for our NFT Loans.
What does this mean?
The NFT20 and NFTX protocols bring fungibility to non-fungible tokens. It enables the pooling of NFT assets, which are then represented by newly-minted ERC20 tokens. These ERC20 tokens, each having a claim on a share of the pool, are fungible and can be freely traded on the open market via decentralized exchanges like Uniswap.
By implementing this NFT20, NFTX mechanism within our Vaults, platform users will be able to stake their NFT assets and instantly convert them to an ERC20 equivalent, which can in turn be staked as collateral. This eliminates the need for a case-by-case evaluation by lenders and spreads individual NFT valuations and risks across the NFT20, NFTX pools.
The newly-found interoperability in these ERC20 tokens also opens the doors for further use of the assets throughout the rest of the DeFi ecosystem — with virtually endless possibilities.
Get the same NFT back once used as collateral
One of the issues we are facing is that NFTs deposited into tokenization pools become accessible by anyone. We are working on a solution that would extend the functionality of NFT20, NFTX protocols to allow users return the same NFT that was used as a collateral.
As long as user’s LTV is healthy, deposited as a collateral NFT will remain locked in the contract and not accessible by anyone. That is possible by creating a separate NFT pool for loans and having it whitelisted within protocols.
Instant NFT loan use-cases
With the new speed and liquidity found in this instant NFT loan system, funds can be rapidly acquired by borrowing against NFTs for a variety of use cases.
One key use would be acquiring funds for yield farming opportunities. In a sense, a user would be able to indirectly stake their NFTs for yield from a protocol of their choice.
Other use cases are those which require instant access to a credit line, especially for temporary needs or opportunities that arise in times of market volatility.
- Avoiding margin calls on collateralized debt positions
- Arbitrage opportunities
- Opening synthetic margin trades
- “Buying the dip”
All of these uses can be executed without needing to sell NFT assets — unlike fungible tokens, once you let a collectible NFT go, you may never be able to buy it back!
More updates on the way
To stay in the loop with all of the latest Drops developments, follow the links below: