When people talk about crypto loans, they do not typically think of NFTs. However, under some circumstances, you can use them as collateral. Let’s take a look at what exactly it means to collateralize an NFT, and why it might appeal to some people.

What Are NFT Collateralized Loans?

An NFT collateralized loan is a loan that is backed by an NFT that you own. In exchange for temporarily handing over the ownership of the NFT, somebody else lends you assets (either in the form of crypto or fiat).

How Do NFT Collateralized Loans Work?

Collateralized NFT loans operate in a very similar way to using physical art or other artifacts as collateral. Essentially, you hand your NFT over to a third party, and after assessing its worth, they choose to take it as collateral and give you something monetary in return. Just like with regular lending, if you are unable to pay your loan back, then the third party has the right to sell the NFT to repay the outstanding loan balance.

Benefits of Using NFTs as Collateral

There are several reasons why somebody would consider collateralizing their NFTs. Let’s take a look at some of the main factors that are often at play.

Potential for Undercollateralization

Undercollateralization is where more is lent to you than what the asset is worth. It is extremely rare to come across undercollateralized loans in most cases (with the exception of student loans and mortgages), however, there is a chance that an NFT can lead to an undercollateralized loan. This is because it is not as easy to get an accurate price on an NFT compared to fungible assets.

While some projects might value one NFT highly, others might not. This comes down to the way they calculate the price, whether they are appraising it using humans, whether they determine value exclusively via an algorithm, or whether they even have the capability to understand its value whatsoever.

There is also the unique, perhaps rare, chance that you run into a peer-to-peer lender who is particularly interested in one of the NFTs that you own, and is willing to issue loans that are higher than what others have valued it at. Overall, the point here is that value is extremely subjective, and so this means there are opportunities for undercollateralization to occur. Whether they are easy to come by, or even possible to directly seek out, is sadly a different matter.

Put Your NFTs to Use

Most NFTs are bought and then left alone, essentially laying dormant. While some might get applied as profile pictures, or as digital tickets for a single use, after that they often just get stashed away. If you are not using your NFTs, or if you are comfortable parting ways with them for a brief time, then they can become a fantastic source of temporary income.

NFTs Can Be Loaned to Galleries For a Premium

There are some select locations in the world that have physical NFT galleries. These are usually places that have digital screens where they display some art-NFTs. For instance, there have been popup NFT galleries opening up across the US and Europe. If you own a renowned or historically important NFT, then you may be able to loan it to a gallery. This is great as it could not only lead to a beneficial undercollateralization situation (where the gallery is open-minded to paying a premium to build an exhibition), but you also get to contribute to the art scene and allow others to appreciate the importance of your piece.

Plus, it may not just be NFT-focused galleries that are looking to do this– as we move further into the blurred edges of mixed reality, traditional galleries are looking to get more experimental with their exhibitions. With that being said, it can be hard to find the right companies who are interested in your NFTs, as this might require a significant amount of research and perhaps even approaching galleries directly.

The risks of NFT loans

While there are many exciting benefits to collateralized NFT loans, there are also some significant risks to keep in mind.

The NFT Market is Small

NFTs are not worth what they used to be, and so you might not get a loan that even somewhat reflects the price you paid for it. Of course, as mentioned, there are definitely occasions where lenders will pay above the odds, but these are very rare circumstances. Unless you have an NFT that is extremely high-value, in that it has a strong historical significance, you might find that it is tough to get a price that works well for you.

The NFT Market is Volatile

The worth of your NFT may fluctuate while it is being used as collateral. If it spikes in price while you do not have access to it, you could end up missing out on making a significant profit. If you never plan to sell (perhaps because your NFT has sentimental value or you believe it will be meaningful in the future), then this should be negligible. However, if you are more of a non-fungible trader, then this can be deeply disheartening if it happens.

NFTs Could Get Stolen

Just as with the fungible lending sector, there is a chance of collateralized NFTs getting stolen or disappearing. If the project you use falls into bankruptcy or the decentralized protocol you use gets hacked, then your assets could go missing. This is tremendously problematic when it happens with fiat and cryptocurrency, however, the law is relatively clear and etched out, meaning that you have a good chance of using legal channels to try and get your money back.

When it comes to NFTs, you are not so lucky. Most countries are still grappling with the nature of NFTs and ownership, and so there are very few static or direct rules for how to treat them. Therefore, it could be hard to retrieve them, or their equivalent value through the courts.

Top NFT Loan Platforms 2024

While the NFT lending sector is nowhere near as expansive as the fungible crypto market, there are several projects out there that accept them as collateral. These are some of the top platforms to keep an eye out for.

NFTfi

NFTfi is one of the longer-standing NFT-lending services on the market. People are able to list their NFTs on the protocol and define their ideal terms for a loan. Potential lenders can browse all the NFTs available and see if any of them are of interest. They can then make an offer and negotiate, or match the terms of the potential borrower.

NFTfi has built-in metrics from NFTBank and Upshot, both being used to provide automated appraisals. These give an estimate of how much an NFT might be worth, which is useful for both borrowers and lenders. However, it is worth keeping in mind that both services are using machine learning and/or algorithmic data to provide suggested prices, therefore you should definitely take them with a grain of salt. Suppose you are listing an NFT that has an aesthetic component or is historical in nature. In that case, there is always room for subjectivity, as no machine will ever be able to give a fair rate for something that evokes human emotion and curiosity.

These services might be great for figuring out the cost of a CryptoPunk or Bored Ape against the price points of previous sales with similar rare features, but if an artifact speaks to someone on a personal or meaningful level, then there is no saying what they would be worth giving. Or, if an NFT is perfect for a gallery exhibition, someone may pay above what these algorithms suggest.

Arcade

Arcade is a peer-to-peer NFT lending platform, similar to NFTfi. Its aim is to allow people to gain additional liquidity on their NFTs that they have lying around being unused. Arcade is revered for its ability to allow lenders to offer collateral to multiple NFT holders at once, so long as they own NFTs they are interested in that belong to the same collection. This is great for organizations who want to build mini-exhibitions.

Caviar.sh

Caviar.sh is an NFT AMM (automated market maker). This means it is a service that lets you automatically buy and sell NFTs without a traditional order book. The program itself makes the connections between buyers and sellers. It is a little unconventional, but if you distribute your NFTs into one of Caviar.sh’s pools, adding liquidity to the network, then you will receive a monetary reward. This technically counts as lending, as you are handing your NFTs over and getting something back, with the possibility of retrieving the NFT by pulling it out of the pool later.

However, there is one huge caveat– when adding your NFTs to a liquidity pool, there is a chance that they may actually get bought. While the benefit of a return for adding liquidity is great, there is no surety that your assets will not leave your possession for good. This is very much unlike traditional lending. 

Essentially, the best-case scenario is to add your NFT to a pool, wait for others to buy NFTs from that pool (but not your specific NFT), and then later pull your NFT out of the pool. This way, you would be rewarded for contributing to the pool regardless, and you would get to keep your NFT later as well. However, there is no way of actually ensuring that will happen.

NFT AMMs have existed for a few years, but they are an extremely novel and experimental approach. The nature of non-fungibility seems to almost be antithetical to the nature of AMMs. However, some projects are working hard to make them functional. They are worth checking out, at the very least due to their uniqueness, although you should proceed with a huge amount of caution.

OpenSea

While you cannot actually get an NFT loan from OpenSea, they are still worth a mention, as they run the largest NFT marketplace in the industry. If you have decided that, instead of trying to collateralize your NFT loans, you would rather sell them, then OpenSea is a very popular choice. Plus, collateralization through them could become a possibility in the future, if OpenSea ever decides to build this feature.

Is an NFT Collateralized Loan Right For You?

NFT collateralized loans are great if you have a reserve of prestigious (sometimes referred to as “blue-chip”) assets. Lending them out gives you a fantastic opportunity to put them to use, so they are not simply being ignored. 

However, they are not right for everyone. For starters, low-quality NFTs may not fetch very much, or worse, there might not even be anybody who is willing to take them as collateral.

Secondly, most collateralized NFT services are DeFi-focused, meaning they do not have fiat options. This is fine if you are only looking for fungible cryptocurrencies, but if you want legal tender like USD, then you would need to find a CeFi lending service, which is extremely hard to do when trying to seek collateral with an NFT.

The Best Alternative To An NFT Collateralized Loan

Collateralized NFT loans are not exactly easy to obtain. While they can be great when they work, the shrunken size of the NFT market has made them a rarity. Not only this, but figuring out fair appraisals and rates is particularly frustrating.

For this reason, many people stick to simply going for fungible crypto loans, such as those offered by Ledn. Here, you can get a fiat loan backed by your BTC or ETH. It has a simple application process where you can currently borrow at  14.4% - 16.5% APR at a loan-to-value ratio of 50%, depending on whether you go with their Standard or Custodied loan options. This is a highly competitive option for people who are looking for a quick means of accessing fiat liquidity without losing their crypto positions. Plus, it is much more straightforward and direct than obtaining an NFT loan.

Conclusion

The NFT lending space is extremely fascinating, but there is no denying the simple fact that it is still very much in its infancy. The sad reality is that the NFT market only really bloomed for a short period of time, which meant that it was never given enough energy or breathing room to etch out some of its more fringe aspects, such as lending and borrowing. Of course, this could change in the future, as there are definitely projects pushing boundaries and setting standards, but it is a slow and complex process.

For this reason, it might make sense to stick to fungible crypto loans. If you assess the NFT landscape and decide that collateralizing BTC or ETH is a better option, then Ledn is a fantastic choice to pick from. This is a company with a strong track record for transparency and risk management, which also offers highly competitive rates within the market. Be sure to check it out and see if it suits your needs. 

Disclaimer

This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.