The savvy holder’s guide to NFT lending

Fuelled by early movers such as NFTfi and Blend, NFT lending is one of the hottest sectors in the crypto market, attracting outsize attention and funding. Everyone’s betting on the growth of this niche.

The NFT lending market has grown to account for more than $100 million per week in loan volume, with more than $95 million in outstanding book value.

Despite these impressive numbers, NFT lending still only represents 2% of the total NFT market cap of $5 billion. To increase adoption, protocols must be more efficient, well-designed and safer. The future of NFT lending looks bright, even without considering revolutionary new applications like real-world assets.

Even by crypto standards, the NFT sector is full of risks, volatility, and tempting potential returns. And the NFT lending sector in particular, is often defined by terms nearer to payday loans than mortgages.

The next time you need liquidity, ask the following questions:

1) How long do I need the loan? Generally, you only want to borrow funds for as long as you need them. While the loan is out, you need to consider factors such as interest accrual, risks of liquidation, price volatility, impact on NFT rewards, etc. Estimate how long you need the loan, but add some buffer in case of unexpected events to avoid unforeseen consequences.

2) How does the interest accrue? Some protocols, such as Gondi and Zharta, only charge interest while loans are outstanding. Others charge interest for the full duration of the loan, even if you repay early. Understand how interest accrues. If you think you might repay early, follow a protocol that only charges based on how long the loan was outstanding.

Example: You secure an 8 ETH loan on your Chromie Squiggle for 1 year at 10% APR. The total interest for the year is 0.8 ETH (~$1,500). If you were to repay the loan within 6 months, some protocols will charge you 0.4 ETH in interest, while others the full 0.8 ETH. That’s a difference of ~$750.

3) How do liquidations work? Some protocols liquidate your position if the floor value of your NFT drops, while others will liquidate based on the due date. Peer-to-peer lending platforms like Gondi are usually time-based, while peer-to-peer platforms are based on price oracles.