NFT Lending is Trending

A marketplace called NFTfi, which specialises in loans collateralised by NFTs, has seen a surge in lending volume over the last two months. During the weekend of 3rd July, it hit its highest level with $3.5M worth of non-fungible tokens changing hands. However, we have to look deeper to find the real story.

Richard Chen, a general partner at crypto investment firm 1confirmation, took a look at it and discovered something important. Of that $3.5m, the sum of $3.16M was borrowed by just two whale investors, although there are many on crypto Twitter who doubt that it is two people, and suggest it is a single investor.

The ‘two’ investors borrowed 21,500 DAI against a combined collection of 147 CryptoPunk NFTs. The interest rate on the loan is set by a metaverse-based interest rate protocol called MetaStreet, which acted as sole lender for the loans.

NFTfi specialises in short-term loans, with loans lasting 33 days on average. The interest rate on that period of time is around 4%, which equates to 42% per annum. As might be expected, Bored Apes and CryptoPunks dominate the NFTs offered as collateral.

There is now a rumour floating around that this flurry of activity on NFTfi will launch an airdrop for users. Andrew T of wallet analytics firm Nansen tweeted that NFTfi has been quietly raising funds over the last three months, equivalent to $1m in USDC. He tweeted, “Between that and this possible airdrop farming, could be a token on the horizon.” Others aren’t so sure, with some suggesting there is a pattern at play that looks more like money laundering.

NFT lending is soaring

Whatever the truth of that, NFTfi as a business has been doing extraordinarily well in the NFT lending sector. Since it launched in 2020 it has facilitated 13,402 loans worth $217.6m. It even managed to buck the downward trend of the crypto market in 2022, processing a record $48.7M worth of loans in April, although as market conditions became more strained, volume dropped, with only $15.8M worth of loans being taken out during the month of June.

NFTfi’s excellent results over two years have of course prompted other protocols to enter the market. Arcade, which raised $15M in a Series A funding round in December is one of them and has facilitated $25m worth of loans since it went live in January this year.

Emergence of peer-to-protocol lending

Gmoney, a prolific NFT collector, says that while more protocols are coming along that offer peer-to-peer loans backed by NFTs, the next frontier for NFT lending will be “peer-to-protocol lending.” In a podcast with The Defiant, he said, “At the moment, there’s no peer-to-protocol lending, it’s more peer-to-peer. I think the issue that people are trying to solve is how do you make it a peer-to-protocol lending environment… I know a lot of teams are trying to solve this problem.” Indeed, Messari reviews JPEG’d which offers a token-integrated peer-to-protocol approach, and that because of its utility-driven tokenomics, the demand for the JPEG token is correlated with demand to “maximally utilise the platform.” It will be interesting to observe to what extent peer-to-protocol overtakes peer-to-peer NFT lending, and why.

NFTs and DeFi are the keys to a functioning Metaverse

When Facebook announced it was investing $10 billion in the development of a ‘Metaverse’, a platform based on augmented and virtual realities, the term suddenly started appearing in multiple headlines. However, Facebook didn’t invent it: the term first appeared in Snow Crash, a 1992 sci-fi novel by Neal Stephenson. In the book humans interact with each other and with software agents, such as avatars, in a three-dimensional space that acts as a metaphor for the real world. It might have been fiction 30 years ago, but now it’s fast becoming a reality.

What is the ‘Metaverse’?

Broadly speaking, the technologies that make up the metaverse can include virtual reality—characterized by persistent 3-D virtual worlds that continue to exist even when you’re not playing—as well as augmented reality that combines aspects of the digital and physical worlds.

Metaverses, in some limited form, have already been implemented in video games, such as Second Life and Fortnite. It is also a digital economy, where users can create, buy, and sell goods. 

It’s all about Web 3.0

Nobody knows yet exactly what Web 3.0 will be like eventually, but we do know that it will allow individuals to use the Internet without giving up their privacy and valuable personal data. The downside of Web 2.0, which is where we are now, was that users were providing the companies that controlled platforms, such as Facebook, with personal information and data. This contributed significantly to the platforms’ profits, as they sold this data to third parties without the knowledge or agreement of users.

Web 3.0 would remove this theft, as many see it, because it will be made possible by decentralised networks, such as those of Bitcoin and Ethereum. In this system no single entity controls a platform, yet we will be able to trust them because every user and operator on the network must follow a series of hard-coded ‘consensus protocols’. Blockchains with smart contracts, such as Ethereum, EOS and Tron, are leading the way in building this new iteration of the Web.

But Web 3.0 has even more innovations to offer. The networks will allow ‘money’ or ‘value’ to be transferred between accounts. Furthermore, as Decrypt points out, “On Web 3 money is native. Instead of having to rely on the traditional financial networks that are tied to governments and restricted by borders, money on Web 3 is instant, global, and permissionless. “

NFTs are the key to accessing the metaverse

Non-fungible tokens (NFTs) will be critical to making the vision of integrating the digital and physical world by giving a unique identity to avatars or digital items, writes lawyer Michael Tomasulo. He goes on to say: “For example, an NFT-supported avatar would be comprised of all the user’s prior digital interactions and experiences (effectively reflecting their digital “life”) and possessing all the digital items the user has accumulated (which would themselves be backed by NFTs). In effect, NFTs give users and items an “identity” within a virtual space that is completely independent from a developer’s control of the code.”

Due to the explosion of interest in art-based NFTs, there is likely some confusion over their potential use. Chief amongst their potential is NFT-controlled access to the metaverse. In the future world of Web 3.0 all the processes and protocols will coalesce into a central, interoperable space offering finance, communications, game worlds and much more. Crucially, NFTs in the form of real life identities tied to a digital avatar, are one way to access this metaverse world. As Decrypt says, “In time, the metaverse may even develop an independent state of its own, presided over by various DAOs.” (A DAO is a dentralised autonomous organisation).

And in terms of DeFi (decentralised finance), peer-to-peer lending and trading, could take on the role of a virtual financial system while NFTs represent our keys, ID cards, and passports.

The marriage of DeFi and NFTs

It’s important to remember that all NFTs are unique and can’t be swapped/traded or replaced with another NFT of equivalent value. This makes an NFT an illiquid asset, meaning that finding a seller or buyer would be harder compared to traditional cryptocurrencies.

Romi Kumar at Hackernoon points out that although we have seen a meteoric rise in the NFT Market, clocking over 2000% in just a little over a year, the segment still remains highly illiquid. He suggests that problems in the NFT sector may be solved by combining NFTs with DeFi applications (Dapps) and that those working on this have seen “results that are truly splendid.”

Suppose you bought an NFT at a price of 2 ETH during a specific period when that NFT was popular. A year later you decide to sell it, but your NFT is now unfashionable, and you struggle to find a buyer, let alone make a profit. The problem is that you can’t exchange it for anything else because it’s non-fungible, whereas ETH or BTC can be exchanged for fiat currency or products, because they are fungible.

DeFi can solve this NFT problem. With Defi in play, NFT owners can fractionalise the asset so more than one person can own fractions of it. Furthermore, it will create a liquid environment for NFTs because you can use fractional selling.

For example on Werewolf, a DeFi platform with Dapps, including yield farming, a decentralised exchange (DEX) and a blockchain game, users can access a dedicated NFT marketplace. Here there is an auction system and a raffle-style competition pool. An NFT holder can start a competition, deciding the minimal entry price, minimum and maximum number of entrants, and a period to run the pool. The seller sells the NFT faster, and the winner only has to pay a fraction of what the NFT was worth.

While many may still see NFTs as a passing fad, industry leaders have realised that incorporating blockchain technology with NFTs for integration into the Metaverse is the missing piece in the creation of a ‘Functional Metaverse’. This is one where the way people interact with and transcend the digital world, merges with the real world. And DeFi will play a central role in making that fully functioning Metaverse happen.