What is NFT lending, and how does it work?

NFT lending explained

NFT lending allows NFT holders to take out loans against their assets. It has grown in popularity as a way for investors to unlock liquidity and access borrowing. 

Nonfungible tokens (NFTs) can be bought and sold, held, or traded, and they are also now part of other decentralized finance (DeFi) arrangements, including NFT lending. Demand for NFT lending has risen in part because the nonfungible, or unique, nature of NFTs makes them difficult to utilize in other DeFi sectors. For instance, it’s not possible to stake or yield farm NFTs in the same way investors can with fungible cryptocurrencies.

There is less liquidity in the NFT market when compared with cryptocurrencies like Bitcoin (BTC). This is because NFTs can be completely unique, and it can take an owner a long time to find an interested buyer for an NFT.

NFT loans allow NFT owners to unlock liquidity, access borrowing and diversify their portfolios. However, NFT loans also carry risks because of price volatility, regulatory uncertainty and other factors. 

There are several types of NFT lending: 

Peer-to-peer NFT lending

In peer-to-peer NFT lending, NFT owners use a platform to list an NFT as collateral to receive loan offers from other users. 

Peer-to-protocol NFT lending 

This refers to NFT lending directly from a DeFi protocol or platform. Borrowers collateralize NFTs by locking them into a protocol’s smart contracts.

Nonfungible debt position

In this method, a unique asset is created on the blockchain by a platform or provider representing a nonfungible debt position (NFDP) as a transparent record of a loan agreement. An NFDP can also be traded, similar to how MakerDAO’s collateralized debt position (CDP) allows users to collateralize Ether (ETH) for the stablecoin Dai (DAI). 

NFT rentals

NFT assets are transferred from one user’s wallet to another via an NFT rental platform for the period of a “tenancy” to access the perks or benefits offered by the NFT.

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