Is NFT Lending the Next Big Thing?

NFTs appear to be the next big thing in crypto, and they do not seem to be going away anytime soon. According to Chainanalysis, people spent over $44 billion last year buying and selling NFTs, with popular collections from CryptoPunks and Bored Ape Yacht Club selling for millions. The popularity of these assets has led to the birth of lending protocols that allow NFT owners to lend out their NFTs for a steady fee, for future earnings in a game, or even use them as collateral for loans.

Most individuals find themselves over-committed, in need of funds to cater to other needs, but not willing to have to sell their collections. This is where a platform such as Arcade comes in, helping to connect owners of digital art and collectibles with lenders . One of the beneficiaries of the platform is Chris Ciobanica, who found himself in need of a loan to invest in new crypto projects last month. Instead of using a bank that would require him to put up his home or car as collateral, he opted for Arcade.

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Ciobanica submitted a collection of 10 NFTs by Pak and Fewocious, two well-known artists, worth about $5 million. Shortly after, he was offered a $1.2 million loan with a 7.5% interest rate over six months by Genesis, a firm that lends crypto to borrowers. Ciobanica hopes to turn a profit from the loan before paying it back. He is confident in his assessment before putting money on new projects and is not worried about losing his NFTs if things don't work out.

Growing Need for NFT Lenders:

Ciobanica's case is one of many and highlights the growing number of independent lenders who are using services such as Arcade to connect with NFT owners who want to use their assets as collateral. The goal is to offer NFT owners a way to get some cash without selling their digital assets.

Another driver of this growing market is the potentially high-interest rates. Lenders are interested due to the potentially high-interest rates they can charge, which far exceed traditional loans. This is in addition to the fact that they can take ownership of an NFT offered as collateral if the borrower defaults.

The interest rates for loans on Arcade can vary depending on the type of NFT, the loan duration, and the loan to value ratio, which is calculated based on the difference in the loan amount and the appraised value of the NFTs. According to Gabe Frank , CEO of Arcade, the average annual interest rate for loans transacted on the website, which varies based on the loan duration, is about 20%.

On the other hand, borrowers can get large sums of crypto and still keep their NFTs as long as they repay the loan. This is far better than having to sell their non-fungible tokens, which can be challenging given the scarcity of buyers for highly expensive pieces.

Other than Arcade, borrowers can post their loan requests on websites such as PawnFi, NFTfi, and TrustNFT. These services have come up over the past two years as NFTs became popular. According to Frank, since Arcade began operations four months ago, the service has helped borrowers access over $10 million in loans. While those loans were between a few clients, the service has now opened its doors to the public allowing anyone with highly-valued NFTs to request a loan through its website.

How to Access a Loan in NFT?

Borrowers who use the site must connect their crypto wallets to the loan app. The website will automatically show which NFTs you own and ask you to pick the ones you would like to use as collateral. You will have to enter the desired loan amount, duration of the loan, and the amount you are willing to repay at the end. If you are open to counteroffers from lenders, you can indicate so through the website.

The loan is approved once the lender accepts the borrower's terms, or if a borrower accepts the terms offered by the lender. The next step involves digitally locking the NFT used as collateral, and it can only be unlocked once the borrower repays the loan in full , plus interest through the app, or if the borrower defaults, allowing the lender to claim the locked collateral.

According to Frank, the platform collects a 2% fee from what the borrower will receive for every loan Arcade facilitates. However, larger loan sizes have a tiered fee structure. The CEO adds that 95% of NFTs are worthless, yet, a small number have become “cultural artifacts,” which are the ones that lenders using his service are looking for.