NFT lending is turning out to be the next big business in the digital asset space

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Non-fungible tokens (NFTs) are no longer just JPEGs to hold and set up as profile pictures on social media platforms. While they have been extremely popular among crypto enthusiasts over the last few years, NFTs have found several innovative use cases in 2022. Even as prices of the major, most popular NFT projects continue to tumble, along with the decline in the broader cryptocurrency market, NFTs have continued to grow in terms of use cases. From fantasy sports to social clubs, real estate, and ticketing, innovation has accelerated at a rapid pace in the segment in 2022. Another one among these many use cases is NFT lending, which has now started to gain increasing momentum around the world.

NFT lending, which lets NFT holders lend out their NFTs as collateral for borrowing crypto and fiat money, has emerged as a booming space recently. Many of the large crypto-focused firms, including Genesis Trading and Nexo, have entered the NFT lending ecosystem. These cryptocurrency brokerages are lending against NFTs on Arcade, one of the many decentralized NFT loan marketplaces.

One of the major factors that is driving the growth of the NFT lending market is that many institutions and funds are seeking to drive more value from their NFT collections. These individuals and funds are sitting on large gains in NFT value. Notably, these NFT holders are not willing to sell their collection as they believe in the long-term growth potential of the sector or are not interested in paying taxes on their gains. This has driven them to the NFT lending ecosystem, wherein they can keep their collection as collateral to borrow and buy more NFTs or other assets, thereby targeting a higher return from their NFT collection in the long-term perspective. Another factor that is driving individuals to NFT lending is hedging. For instance,

• In case the value of the NFT collection plummets below the borrowed amount, the borrower gets the ability to default on their loan. This will allow them to walk away with more cash in hand. The fact that these loans are on the blockchain, lenders cannot even go after the other assets held by borrowers.

Of course, NFT lending is a risky proposition for all parties involved. The prospect of NFT lending can be even termed as the peak of overleveraging and overcollateralizing. The volatility in the NFT trading market also makes these propositions even riskier. The steep decline in the value of NFT floor prices, as experienced over the last few quarters, shows how volatile the market can be in the digital assets space. Consequently, the more amount of NFTs are collateralized, held, or traded by larger institutions, the more risk they can bring to the wider market.

While the risks are there and especially evident to all parties involved, NFT lending marketplaces have experienced strong growth in lending volume. For instance,

• NFTfi, another marketplace like Arcade for NFT lending, announced its beta launch in June 2020. Notably, during the first year of its operations, the firm did US$300,000 in loans. However, as the popularity of the asset continued to grow, the NFT marketplace also continued to record strong growth in its lending value. Notably, in 2021, the firm did US$14 million, which further increased to US$150 million, as of May 2022.
• Notably, the duration of the loans offered by NFTfi ranges from a month to a six-month period. On the platform, the loan-to-value ratio is approximately 50%. Furthermore, NFTfi charges lenders 5% of the interest earned on loans that are not defaulted by borrowers. As of May 2022, the largest loan completed by NFTfi was US$8.3 million against 104 CryptoPunks, wherein the loan-to-value ratio was at 30% and the annual percentage rate was at 10%. 

The sharp decline registered in the NFT market, however, has had a significant impact on the NFT lending market. Notably, the drop in NFT valuation has also resulted in a significant increase in loan interest rates. While the NFT market is undergoing a sharp correction, the future growth prospect of the industry remains strong. The growing popularity of the Reddit NFT project and the rising demand for its NFT collection shows the growth potential of the sector.

Banking on these trends and the future prospect of the sector, many new players are entering the NFT lending market and are also raising a funding round to scale and grow their business. For instance,

• In November 2022, NiftyApes, another NFT lending marketplace, announced that the firm had raised US$4.2 million in a seed funding round, which was led by Variant and Fintech Collective. Notably, the marketplace aims to drive more value for the borrowers by facilitating competition among lenders to offer the best loan terms throughout the duration of the lending period. The firm is planning to use the infused capital for further scaling its business and driving its growth from the short to medium-term perspective.
• In October 2022, MetaStreet, a decentralized interest rate protocol, announced that the firm had raised US$10 million in a funding round which included participation from Dragonfly Capital, Ethereal Ventures, and Nascent. The firm is planning to use the capital for the development of a new platform, PowerSweep, which will facilitate NFT lending. Notably, the October 2022 funding round brings the total amount raised by the firm to US$24 million in 2022.

From the short to medium-term perspective, TechInsight360 expects more of these players to raise funding rounds to further accelerate the growth of their business. While the NFT floor prices have declined significantly in 2022, the popular NFT projects are still highly valuable. For NFT holders, these collectibles are an attractive opportunity to derive more value from their investment by using them as collateral in the debt economy. Consequently, TechInsight360 expects NFT lending to become the next big thing in the non-fungible token industry over the next three to four years.

To know more and gain a deeper understanding of the global NFT market, click here.