Instant NFT Loans: Where NFTs Meet DeFi
NFTs (Non-Fungible Tokens) have completely taken the cryptocurrency space by storm, introducing a new way to collect and trade digital artwork, videos, and other multimedia on the blockchain. Their unique qualities of immutability, ownership, and scarcity have raised investor eyebrows, reeling them deeper into this new and blossoming space.
In 2021, the total volume in NFT sales almost reached an astounding $25 billion — many say that the party’s just getting started, with this uptrend projected to continue into 2022 and beyond. At the time of writing, the total market capitalization of all NFTs exceeds $10.2 billion.
Additionally, major NFT collections have become extremely popular and vastly grown in size. For example, the top 5 NFT collections have collectively amassed a total market capitalization of around $9.5 billion.
However, as NFTs have continued to explode in popularity, their utility has still been quite limited in many regards, particularly due to their non-fungibility. For example, many NFTs have millions of dollars in daily trading volume, meaning they’re relatively liquid and have captured the interest of a very wide user base. This demonstrates tremendous promise for their usability as collateral, turning them into far more attractive financial vehicles.
NFTs & DeFi
DeFi has now come into the picture and demonstrated a stronger presence, now merging with NFTs in order to broaden their overall utility and application. One major way they’re enhanced is through the concept of NFT loans, creating an entirely new blockchain-based lending market that’s taking the world by storm.
Although the idea of NFT loans has existed for a few years, growing global communities and NFT analytical tools have ignited increased liquidity and more accurate valuations. As a direct result, the link between NFTs and DeFi has strengthened — oracles can now be created and NFTs can be evaluated in a more accurate manner, fostering greater utility and confidence.
Why are Instant NFT Loans Important?
Various DeFi and CeFi (centralized finance) platforms have allowed users to take out loans by putting up their crypto assets as collateral. NFT loans are the next iteration of lending, letting you do more with your idle tokens and opening the floodgates to greater liquidity.
In particular, blue-chip NFTs can be used as collateral to instantly borrow digital assets in a decentralized, permissionless manner due to higher liquidity and the deployment of oracles to power price feeds. This provides greater utility to lenders and borrowers in the NFT space, letting them put their assets to work in different ways for a potential financial benefit while also removing friction.
As an example, ETHLend was a P2P (peer-to-peer) lending platform running on Ethereum, created in 2017 that allowed users to transact with one another through loan requests. Shortly after in 2018, it was rebranded to Aave, which officially launched in 2020 — this is where its original P2P lending model was switched to its current decentralized liquidity market protocol. The ETHLend team realized that their P2P model contained several inefficiencies, a major one being the potential lack of users on the other side of transactions.
Aave’s new model allowed users to borrow and lend using assets stored in liquidity pools rather than transacting directly amongst people on the network, allowing its smart contracts to do the work and maximize efficiency.
When ETHLend was first released, its lending volume hit around 1,293 ETH, or over $4 million at current prices. Within a month, this number quickly rose to over 2,500 borrowed ETH, or over $8 million at current prices, proving tremendous growth and demand. The total number of users prior to the protocol’s rebrand was in the hundreds.
Aave’s permissionless model has helped cement it as a DeFi lending powerhouse. This is evident through its remarkable growth, jumping from around $1.53 million at the beginning of January 2020 to now over $11.97 billion in TVL, representing more than a 782,000% increase in 2+ years. Additionally, the protocol has over 93,000 users at the time of writing.
NFTfi is an example of a platform that lets you collateralize your NFTs and receive wETH or DAI in the form of a loan using this permissionless model. To date, it’s amassed over 1,028 borrowers and over $100 million in cumulative loans.
As a whole, the permissionless model allows for greater composability with other DeFi applications while turning NFTs into more useful and powerful assets that are more liquid and yield-generating, fundamentally elevating their use case. With such high volume achieved by NFTfi as an example, it’s clear that the permissionless model is working and has even greater potential — it reduces the barrier to entry for more users to pour into the space and allows assets of all shapes and sizes to be added to pools, driving higher liquidity.
Collateralizing NFTs to instantly acquire loans has several general advantages for lenders and borrowers. Let’s take a look at some of the key benefits and use cases:
- Instant Available Liquidity: Acquire capital whenever you want through collateralizing your NFTs via DeFi smart contracts, giving you instant access to liquidity
- Major NFT Value-Add: Instant loans means the NFTs you hold in your wallet are far more productive, turning them into the new metaverse asset class with a plethora of financial benefits, including greater composability with DeFi and the potential to create yield aggregators
- Yield-Farming Opportunities: With their loan provided by the NFT locked in as collateral, users can use the loan funds to purchase other assets (i.e. more NFTs or cryptos) to further engage in and earn via the DeFi ecosystem
- No Middleman: Given the permissionless and trustless nature of DeFi, no centralized middleman is needed to facilitate or approve transactions
- Limited Barrier to Entry: Since platforms use smart contracts to enable lending and borrowing, no screening process or credit checks are required to take out loans, meaning capital is available to anyone with the necessary collateral
Drops DAO: Seamless & Instant NFT Loans
At Drops DAO, our goal is to make the lending process as simple as it can be. We provide various lending pools that users can browse through to see which will accept their particular NFT. These isolated lending pools offer a key competitive advantage, as they minimize exposure to pools that contain multiple assets while also allowing for higher capital efficiency.
The underlying architecture is built in a permissionless and trustless fashion, allowing the protocol to support any NFT collection.
Whenever a user provides their NFT to our protocol in order to acquire a loan, our Chainlink NFT floor price oracle is able to generate and provide the collateral value required. In regards to the loan itself. users can borrow up to 60% of the NFT’s value, giving them instant access to capital with a few clicks of a button.
The loans users received don’t expire and, if the borrowing limit isn’t surpassed, stay liquid.
But this is just the beginning — our platform is taking things to a whole new level by advancing the mechanisms in which our users can leverage NFTs for various financial means.
Key Use Cases
Here are some examples of other key uses cases we’ll unlock:
- Power Your Loans with Yield: Loans obtained using your NFTs as collateral can be used for other DeFi purposes, such as using stablecoins to generate yield or earning $DOP as a direct reward for borrowing (users who supply liquidity earn interest + $DOP)
- Vaults: Our vaults will allow you to elevate your newly-acquired portfolio by enabling automation. This means that the infrastructure and technology built into our Vault will help users power their loans with yield, leveraging your borrowed funds in order to generate the most optimal returns by turning your NFTs into yield-generating assets
- NFT Perpetuals: Maximize utility for your NFTs by enabling margin/leverage on the most popular NFT collections (i.e. CryptoPunks), in addition to futures (perpetual) to bet on the future value of these assets
Even better, users can acquire loans without having to sell their underlying NFT, giving them more flexibility and options. We’re introducing new types of features to the NFT lending market, striving to create lucrative financial opportunities for everyone.
Benefits for NFT DAOs
NFT DAOs can benefit from participation in the Drops DAO ecosystem in the following ways:
- Higher NFT liquidity: DAO members can not only select new lending pools but also dictate which ones will be incentivized with rewards through DOP. There will be a fixed emission of a certain number of DOP per week to all lending pools — members of the DAO cast their vote in order to incentivize these pools. For lending pools that receives 10% of the vote, it will receive 10% of the weekly DOP rewards (which increases the supply of stablecoin APYs). This directly drives further liquidity while simultaneously decreasing interest rates for NFT collections, making them far more attractive and viable for the average user.
- Less NFT sell pressure: When users leverage their NFTs as collateral (borrowing), there’s less sell pressure on these assets given that they need to remain within the pool until the loan is repaid
- Yield-generation: When users receive loans with lower interest rates by collateralizing their NFTs, they have the flexibility to use these funds to pursue yield opportunities elsewhere. For example, they can take out stablecoin loans and deposit them into other DeFi protocols with APYs greater than the interest rate on the loan
These three elements combine together to make Drops DAO lending pools flourish with higher liquidity and better rates to enhance borrowing opportunities across the board.
About Drops DAO
Drops DAO provides loans for NFT and DeFi assets, supplying them with much-needed utility.
The protocol uses lending pools that enable any type of NFT asset to be used as collateral — from collectibles and metaverse items to financial NFTs. Users can leverage their idle NFTs and DeFi tokens to obtain loans and earn extra yield.