NFT Finance: Unlocking your liquidity
You bought some NFTs. Now, what can you do with them?
In this blog post, we will dive into your options as an NFT holder, whether wanting to sell the asset or use it as collateral for a loan. We will dive into the different marketplaces configurations, NFT lending protocols, and options you can use to unlock liquidity without selling the asset.
Overview
You really liked the art or utility of several NFT collections and went on a buying spree. Now you have assets you like, but you are short on cash, not allowing you to catch on to new opportunities. Or maybe you bought several items in the same collection and want a practical way to manage their listing.
From a financial point of view, there is more to the NFT market than only buying and selling assets in your favorite marketplace. More sophisticated financial options are available with new protocols, not only on Ethereum but in other chains as well. Different listing options, payment options, lending strategies, and an increasing number of other utilizations are available in the current market.
Marketplaces
Marketplaces are the most common way to buy and sell NFTs. While OpenSea is still the most popular marketplace, competitors are bringing new ideas and features to the arena.
Magic Eden is available on Solana and Ethereum blockchains. Being Solana native, one feature it brought when it expanded to Ethereum was the possibility to buy an NFT at Ethereum blockchain and pay for it using the Solana blockchain. In Magic Eden, you can use the token of one blockchain to pay for an NFT in the other or use a credit card.
Why it matters: Magic Eden is one step ahead by making cross-chain buys possible when the competition only covers the basics options (crypto + credit card). This makes it possible to reach users and collections in different chains that weren’t available before, increasing the addressable market, as the user/collection is no longer limited to one blockchain.
Sudoswap offers a different mechanic for buying and selling NFTs. It uses an AMM (Automated Market Maker) approach, where each NFT collection is traded on liquidity pools. These liquidity pools let their owners (the liquidity providers) set the amount in which the NFT value will vary when a buy or a sell is done on it.
The average user can interact with it in the same way as with OpenSea or Magic Eden when selling or buying assets. What is different is the possibility of earning trading fees by depositing both the NFT and the tokens in a pool where other users can trade them.
This innovative concept is already being introduced in other blockchains, as Sudowap is only available in Ethereum. One example is Hadeswap, in Solana.
Why it matters: By bringing the AMM approach to NFTs, Sudoswap is improving the liquidity of NFT collections, as the pools created have an NFT/token ratio that provides an instant selling opportunity for the NFT owners that want to accept the current price offer in the pool. It also provides an extra source of revenue to the NFT owner.
Lending Protocols
A Lending Protocol offers the following basic options:
- Borrowing: NFT owners of selected collections (usually the most popular ones) can ask for a loan using the NFT as collateral. The value that the owner can borrow, as the interest on the loan, is different on each platform.
- Lending: Users can provide liquidity to the protocol in exchange for interest. They can do this on a P2P basis, where the lender chooses a specific NFT which he will provide the loan against. Another way is to deposit their crypto (usually the network native token or a stablecoin) into a lending pool and receive yield from it.
NFTfi is one of the leading protocols in this sector, having transacted more than USD 276 million since its launch.
This type of protocol can be used in innovative ways. One example is SquiggleDAO using it to allow Squiggle NFT holders to get loans by placing loan offers on items available at NFTfi.
In this segment, the protocols are also trying to differentiate themselves by providing unique features.
BendDAO offers a collateral listing function. This works like an instant loan of up to 40% of the NFT listed for sale. When someone buys the item, the price paid takes into account the interest accrued. The borrower also can repay the loan and release the asset.
Why it matters: Usually, an NFT seller has to list the asset and wait for someone to make a bid or buy it. With the collateral listing, the seller gets 40% instantly and will receive the rest when the piece is bought.
Pine Loans has a “Pine Now Pay Later” option, where a buyer can take a loan to purchase an NFT through their platform. This NFT is sent directly to the platform’s Smart Contract as collateral for this loan, which will remain locked until the loan is paid.
Why it matters: If a buyer wants a piece but doesn’t have all the money at the time, he can use this loan to secure the NFT, gaining more time to raise the rest of the funds to pay the loan and withdraw the collateral. This type of financing helps to improve the overall market liquidity, as it enables purchases that wouldn’t be done in a different way.
Debt positions
JPEG’d is an NFT version of MakerDAO (the protocol that mints DAI) that enables users to take a volatile asset (an NFT) and use it as collateral to mint a stable one ($PUSD, the protocol’s stablecoin coin pegged to USD). It is different from the typical lending protocol, as it is minting a new asset and backing it with the NFT.
The protocol also offers Staking and Liquidity Providing options for PUSD, which offers a higher APY than the interest paid for minting the stablecoin, making a net positive financial operation to provide the NFT as collateral and take the stablecoin and use it to LP at the pool or stake it (farming it).
Why it matters: There is no need to find a lender willing to take your asset as collateral, as the ones on the platform are pre-approved. JPEG’d also allows a higher % utilization of the NFT value than most lending protocols and is increasing the crypto-related monetary base as a new asset was minted.
NFT rental
ReNFT is a marketplace where an NFT holder can make the asset available for rental. The rental model is especially suitable for in-game items or those NFTs that provide access to gated communities or features, unlocking this access to the tenant that took it.
Why it matters: While incipient, the addressable rental market is massive, especially for in-game items. This has the potential to unlock a revenue stream for the NFT holder that is currently unavailable.
Conclusion
As the NFT economy has a considerable value locked in it, the search for different ways to use the NFT collections as a financial asset and improve the capital efficiency of this type of investment is growing. As an asset with low liquidity, the appearance of lending and rental models is natural, as they enable the capital flow to different venues.
In an eventual resurgence of a bull market, this narrative will become more robust. The protocols presented are worth keeping an eye on, as they will be well-positioned to take advantage of it.
About Liquality
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