Compilation of the original text: The Way of DeFi

Compilation of the original text: The Way of DeFi

The NFT lending platform allows users to borrow liquid assets by collateralizing their NFTs. In this post, we'll delve into peer-to-peer, peer-to-pool, and CDP lending in NFTs to understand this growing trend.

One of the challenges of long-term investing in NFTs is money management. Holding an NFT means locking up a large amount of money in an illiquid investment whose price could drop within days.

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peer-to-peer lending

In peer-to-peer lending, borrowers are directly matched with lenders. This is currently the main method of NFT lending. Peer-to-peer lending platforms include NFTfi, TrustNFT, Pawnfi, and Yawww.

These platforms usually require users to lock an NFT as collateral in an escrow contract, and then provide a loan within a certain period of time. Users then receive bids from others on the collateral and interest rate parameters.

Such bidding typically results in various loan-to-value and interest rate combinations, allowing NFT owners to choose what works best for them. This is why peer-to-peer lending is the perfect option for hedging NFT risk.

The loan is equivalent to a put option (if the NFT price falls below the borrowed amount, then the user is better off defaulting), by owning the NFT (in the contract) and owning the put option, the user creates a return situation of the call option, avoiding exceeding the specified price Loss.

Additionally, sophisticated traders also leverage in peer-to-peer lending. For example, a user can borrow $50,000 by locking one BAYC NFT and purchasing two MAYC NFTs. If their price goes up, they only need to return the $50,000 plus interest, making a profit.

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Peer-to-pool platform

Drops DAO operates a Compound-like money market that allows users to mortgage NFTs to lend USDC and ETH. NFTs are priced by Chainlink oracles, adjusted for outliers, and averaged over a period.

From a user perspective, they deposit NFTs as collateral and borrow funds from the pool at variable interest rates. These funds are provided by lenders who earn interest from borrowers.

Like Compound and Aave, Drops uses a sharded interest function, which targets a specific utilization rate and starts dramatically increasing the interest rate borrowers pay if there are not enough funds available for withdrawals.

For a more in-depth explanation of how the peer-to-peer currency market works, check out this post.

To limit liquidity provider risk, Drops separates the protocol into isolated pools, each with its own collection of NFTs. This is similar to how Fuse works with Rari Capital, ensuring that lenders pick a collection they're happy with.

Drops currently has $2.6 million in supply capital and $388,000 in outstanding loans. They offer modest LTV ratios to ensure solvency and relatively low interest rates (~10% APR for Yuga Labs vaults).

Other peer-to-pool NFT mortgage lending protocols, including BendDAO and Bailout, have iterated on this design. While BendDAO provides borrowers with 48-hour liquidation protection, Bailout limits loan terms to 30 days to ensure solvency.

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Collateralized Debt Position (CDP)

Pioneered by MakerDAO, CDP is the ultimate model for the NFT collateralized currency market.

JPEG'd is a lending protocol that utilizes CDP to lend to NFT.

After users deposit NFTs into their vaults as collateral, they can mint PUSd, a stablecoin pegged to the U.S. dollar. JPEG'd allows PUSd debt positions up to 32% of collateral value, priced through Chainlink oracles. The agreement charges only 2% annual interest.

On JPEG'd, when a user's debt/collateral ratio exceeds 33% (or 40% with a collateralized Cigarette NFT card), liquidation is performed entirely by the DAO. The DAO pays off its debts and keeps or auctions off the NFTs, thus building up its treasury.

Users can purchase insurance against liquidation at the time of loan, and pay 5% of the loan amount in one lump sum, which is non-refundable. With insurance in place, users have the option to repay the debt themselves (with penalty) within 72 hours of liquidation.

JPEG'd raised $72 million in February 2022 through a "donation campaign". It looks like an ICO, it sounds like an ICO, but it's not an ICO.

Summarize

Summarize

NFT mortgages are still nascent, and in my opinion, will thrive in a bear market.

However, caution must be exercised when experimenting with these protocols, as they are very dependent on oracle performance and market stability.

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