NFTs as Collateral- Here is How It Works:
Non-fungible tokens have reached a public awareness level that one cannot ignore. Despite recent declines, NFT sales may reach $90 billion this year (up from $40 billion in 2021). As a result of this breakthrough, a previously untapped segment of the NFT ecosystem — lenders — is now showing keen interest. This success has attracted a new type of interest from a new group of NFT ecosystem participants: lenders. With a new player in the NFT market comes a new term for NFTs: collateral.
Can NFTs Be Used As Collateral?
NFTs can be used to secure a loan as collateral. First, the lender and borrower must agree on the asset’s value, the loan’s term, and the amount of interest to pay, in addition to the principal. The platform locks the NFT into a smart contract for a predetermined period or until the borrowed amount (plus interest) is repaid. While the NFT is included in this contract, the asset’s technical owner is the smart contract. Consequently, neither the lender, the borrower, nor the smart contract escrow has access to the NFT. The escrow remains the sole owner of the asset until the fulfilment of the terms or the termination of the transaction. If the borrower cannot repay the loan on time, the NFT is sent to the lender’s wallet as collateral for the unpaid amount; consequently, the lender becomes the owner of the asset.
What Are the Best Platforms for NFT Collateral?
There are several NFT collateral platforms, these include:
X2y2 is probably best known as an NFT marketplace. However, your NFT can also be used as collateral to borrow ETH through the platform. It’s important to note that x2y2 currently restricts the use of many NFT collections as collateral.
When it comes to NFT-backed loans, Arcade is a top choice of platforms. Borrowers can post NFT listings with or without conditions, and investors can either accept the listing or make loan offers. Furthermore, only the Arcade protocol enables loan providers to extend their offers across multiple collections. As a result, a wider variety of borrowers will be accessible to lenders.
One of the most reputable peer-to-peer NFT lending platforms is NFTfi, which has attracted backing from prominent investors like Coinfund and Flamingo DAO and formed strategic alliances with Flow blockchain and Animoca Brands. Borrowers can propose their terms through NFTfi, with lenders able to counter. The platform also does a fantastic job of analyzing the NFTs that are listed as collateral.
It is possible to get access to quick funds without selling your NFT by using it as collateral. But there are a lot of dangers for both the borrower and the lender. You should be aware of these dangers and use a trustworthy platform if you intend to collateralize your NFT or loan someone crypto.