Firstly, Merry Christmas and a Happy New Year to all! Happy to be back smashing the keyboard again; had a busy year building with one of my favourite projects being the NFT Course but one thing I always like the do is to create and educate and thus looking forward to creating more content for you all again; we are going to start with the biggest hype of the year “NFTs”. This was one of the most searched terms of 2021 as well as the Collin’s Dictionary word of the year.
Well, we have all heard about decentralized finance or “Defi” as some may call it. This is a very powerful section of the cryptocurrency world because it redefines the idea of finance for a lot of people; for example, easy access to credit with favourable and transparent rates. Furthermore, loans that in the traditional finance world would have taken weeks to months are now collateralized and released within minutes.
Now let’s take a step further and imagine a world where you can provide another kind of token as collateral for a loan…NFTs as collateral? Most of you may think of that as an impossible task and far away from being a reality, however, since July NFTFi has been running and providing a platform for NFT holders to gain financing offers with NFTs used as collateral. Of course, this is done through the good old smart contract language that is behind all the Web3 solutions we love and growing to love.
The platform was founded in South Africa by Stephen Young in February 2020 and has received around $5 Million in Venture Capital funding. Early-stage crypto fund 1kx led the round, with Ashton Kutcher’s Sound Ventures, Maven 11, Scalar Capital, Kleiner Perkins and others participating.
How does such a platform work?
As each lending/borrowing market; there is a need for three parties;
The lenders are incentivized by the probability of a loan default as the NFT is usually worth more than the value of the loan and thus are willing to take the risk in order to gain possession of a valuable NFT; thus lenders are often looking for offers with a high probability of default as there is a high chance they can regain an NFT for 50% of its value.If an NFT is worth $80,000 then the lender would offer usually not more than $40,000, with varying interest rates with NFTfi usually taking about 5% of the interest rates of the loan. Borrowers, if confident that they can repay the loan take such offers for short term liquidity and as a way to leverage their portfolio if they are illiquid but do not want to liquidate their art.
Lastly, the intermediary in comparison to olden days is then simply the smart contract which will then have the repayment date programmed in and if there is a default; transfer the ownership of the NFT to the lender.
Bored Ape offered as Collateral on NFTfi Platform
What will this change?
Firstly, this shows a growth in the NFT space in a short period of time; furthermore, it will allow for further growth as the illiquidity risk of heavily investing in art is eased by the potential of such assets being used as collateral for loans. This can encourage more people to invest in high-value NFTs as they know they can still gain access to a form of liquidity without selling their assets.
For example, someone holding a Bored Ape NFT can now access loans worth up to $500,000; without having to sell their NFT; whilst in normal circumstances that NFT would be illiquid.
How can you use NFTs to leverage your portfolio?
Therefore, if you hold NFTs and do not want to sell them you can use them to grow your portfolio through using your NFTs as collateral to gain loans to invest in other areas or to use for expenses/business ventures.
Enjoyed this article and want to learn more about NFTs, how to trade them, hold them, understand their value; then check out our course here!
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Written by Rodrick Chattaika © Crypto University 2021