Lending markets have provided extensive utility to crypto assets within the DeFi space. In the same way, lending markets will provide additional utility and value to NFT assets.
One useful innovation has been the pooling and conversion of NFT assets to ERC20 tokens — a mechanism seen in platforms such as NFT20 and NFTX. These work by adding NFT assets to a pool and minting corresponding ERC20 tokens. At any time, users may use the ERC20 tokens to redeem NFT assets from the pool.
Extending to Loans
The same mechanism can now be applied to facilitate trustless lending, using NFTs as collateral. Since the corresponding ERC20 tokens have a quantifiable market value, this can be used to track loan-to-value ratios and trigger any necessary liquidations.
Drops will use the NFT20 protocol for the pooling of NFTs and conversion to ERC20 assets behind the scenes for the loan generation process.
Multiple NFT assets may be staked as collateral at the same time.
Working Example
User Y wants to borrow against an NFT that they own. They send their NFT to the appropriate pool, which values the NFT and supplies them with the corresponding number of ERC20 tokens via the NFT20 protocol.
These tokens represent User Y’s stake in the pool and quantifies the value of their collateral. Funds are then borrowed against this collateral, with up to a 150% LTV ratio.
Repaying the Loan
A borrower may repay their loan at any time, in order to retrieve the NFT asset that they staked.
In the case that the LTV value drops below the minimum requirement, the ERC20 tokens are liquidated and sold on the open market to repay the loan.
Alternatively, liquidators may choose to repay the loan and keep the NFTs instead.
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