What Are NFT Loans? Where Can You Get an NFT-backed Loan

May 9, 2022

The world of crypto is a large ecosystem. It goes beyond just buying and selling coins and extends to lending and borrowing, DeFi, NFTs, GameFi, Metaverse, Web3.0, etc.

In this article, we will discuss another aspect that combines two of the previous sections we have mentioned, which is NFT loans. At the end of this article, you’ll know what NFT loans are all about and if you can partake in them.

What you'll learn 👉

HOW DO NFT LOANS WORK?

NFT loans are executed similarly to other financial loans inside and outside the crypto ecosystem. They are ways of tapping some liquidity from your NFTs without having to sell them. This is even more practical in the world of NFTs because you can’t sell fractions of an NFT. You have to sell it as a whole or not sell it at all.

For example, if you have an NFT worth $30,000 and you’re in urgent need of $5,000. It’s either you sell the whole NFT for 30,000 dollars (way more than you need), or you don’t sell it at all and find other ways to fill your need. Thankfully, NFT loans provide a third way out.

Some NFT loan organizations allow users to create permissionless pools to deposit NFTs and other assets into the pool and receive instant loans. Others make it a more personalized experience by requiring you to put your NFT down as collateral and wait for loan offers from interested users.

However it works, the fundamental principle remains the same: Instead of letting your precious NFT sit there accumulating digital dust as it were, you can put it to use by putting it down as collateral for some quick cash. This also comes with its attendant risks, and you should be aware of those before venturing into that field. We will talk about that later. For now, let’s talk about two DeFi protocols that allow you to partake in NFT loans.

WHERE CAN YOU TAKE OUT LOANS AGAINST YOUR NFTS

DROPS.CO

This is a protocol that allows you to partake in NFT loans by means of instant permissionless lending pools. They are big in the DeFi sectors with big-name investors like BitScale Capital, x21, Genblock Capital, etc. They also have partnerships with some big names in the crypto sector, including Polygon, Polkastarter, BGA (Blockchain Game Alliance), among others.

How does it work? Anyone can create an NFT lending pool and set the terms regarding what type of NFT can be accepted and how much they are worth. Therefore, if you are looking for a loan and have an NFT to put down as collateral, look for a pool that accepts your NFT type and deposit it into the pool. Once the NFT is deposited, you can borrow up to 80% of the floor price of your asset and receive instant loans.

Apart from NFTs, the pool also accepts other cryptocurrencies for lending and borrowing. There are no maximum or minimum limits for deposits, nor are there time limits. However, the maximum amount you can borrow depends on how much collateral you put down, of course.

On Drop.co, you can either supply, borrow, or stake with varying APYs. The other coins used on the platform are Enjin, USDC, Ethereum, Matic, DOP, NDR, and WBTC. The APYs range from 0.31% to 17.88% for lending, while the interest rates for borrowing range from 1.31% to 30.45%. If you can’t pay back on time, your NFT asset will be liquidated.

NFTfi

This is a South African company created in 2020 that lends ETH and DAI to borrowers who put down NFTs as collateral. The NFTs are Erc-721 standard tokens and are distributed through the P2P mechanism.

The mode of disbursing and collecting loans differs from that of Drop.co in that the NFTs you put down are added to a smart contract. Then, willing lenders will examine the various NFTs in the smart contract and pick out the one they are comfortable backing. Once they pick out your NFT, the required loan is deposited to your wallet in ETH or DAI, and your NFT collateral is locked till you repay the loan.

Since it is a peer-to-peer system, the interest rate and duration are determined by the individual lender. If you can’t repay the loan when due, the NFT asset will be opened for foreclosure by the lender and could be liquidated.

As a rule, NFTfi takes 5% of all profits that a successful lender accrues except for cases where a loan is foreclosed, or an order is submitted.

WHICH NFT COLLECTIONS ARE SUPPORTED AS COLLATERAL

The NFT collections you can use as collateral depending on the token standard of the lending pool and the general preference of the lender. For NFTfi, Erc-721 tokens are the only tokens accepted on the platform. These are the most common types of tokens. They include NFT articles from SuperRare, tokens sold and bought on OpenSea, Cryptokitties, In-game assets from Axie Infinity, Adorable Aavegotchis, etc.

For Drop.co, there is a greater range of assets accepted across more blockchains. However, the creator of the pool will still determine what NFT assets will be accepted and how much can be taken against them.

DANGERS OF NFT LOANS

There are two main dangers you need to put in mind before partaking in NFT loans. They are:

Smart Contract Bugs: Since the NFTs deposited interact directly with smart contract protocols, there is the ever-present danger that they can suffer bugs or be hacked. If that happens, your assets may be compromised
Liquidation Risks: This goes without saying. Your assets could be liquidated if you don’t repay your loan on time.

FREQUENTLY ASKED QUESTIONS

CAN YOU BORROW AGAINST NFTS❓

Yes, you can. There are protocols in place now that allow you to put down your NFTs as collateral and receive loans in cryptocurrencies. The foremost among them is Drop.co and NFTfi. It comes with its risks, though. Therefore be well aware of those risks before you venture into the world of NFT loans.