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NFT Lending Track Industry Research Report
TL;DR
NFT lending is an NFT financial product that occurs during the holding phase. Its core mechanism is to allow holders to use idle NFTs as collateral to lend short-term funds without selling NFTs , Gain liquidity in exchange for cryptocurrency or fiat currency, while being able to enjoy the benefits of holding NFT rights and interests, and improve the efficiency of capital utilization.
In the NFT loan agreement, it is mainly divided into two forms: mortgage loan and unsecured loan
It is suitable for NFT market users who have the willingness to purchase but temporarily lack the ability to purchase the full amount.
The profit model of the NFT lending business mainly comes from the loan interest paid by users for mortgage loans. If there are functional services such as lightning loans, it will also bring corresponding *functional handling fees *.
The main risks of NFT lending:
1. Industry structure
In the past few years, two fields in the encryption industry have developed rapidly. One is the decentralized finance of Defi Summer in 2020, and the other is NFT Boom in 2021.
The overall market size of NFT on Ethereum has grown from US$61 million at the beginning of 2021. After just over two years of development, the peak value has reached around US$32 billion**. Even though the overall market value has fallen sharply, the market size still reaches 75 The industry has grown by more than 120 times.
Ethereum NFT market size and transaction volume source: NFTGo.io (2023.5.31)
Now, NFT-Fi, as a track combining NFT and Defi, has rapidly developed from a niche field to an indispensable part of the encrypted world.
The significance of NFT financialization is to help users expand and enhance the consensus and demand for NFT in a financially deepened way. Its industrial structure can be vertically divided into three layers:
**1) Direct transaction: that is, through the trading market, aggregators, AMMs, etc., conduct valuable exchange transactions through cryptocurrencies. **
Representative projects: Opensea, Blur
**2) Indirect transactions: services that provide attributes such as NFT mortgage lending and financing custody. **
Representative projects: BendDAO, ParaSpace
**3) Financial derivatives: products that provide options, futures, indices and other high leverage and trading risks. **
Representative project: Openland
Since direct transactions have developed relatively maturely, financial derivatives are relatively still at an early stage. Deposits, loans and loans involved in indirect transactions as the middle layer have the most basic attributes of the financial system and are still in the stage of rapid development. Therefore, this article will mainly focus on the current focus of the industry in NFT indirect transactions - the direction of NFT lending.
2. Industry Market Value
**First we answer a question: Why is there a market demand for NFT loans? **
As we all know, NFT, the full name of which is Non-Fungible Token, refers to non-homogeneous tokens. It is a type of encrypted asset that cannot be copied or replaced. It has the characteristics of uniqueness, indivisibility and irreplaceability. The pricing is mainly based on individual subjective judgment, or group consensus.
And it is these characteristics of NFT, although considering its own appreciation and collection value (and possible project empowerment), but because it does not have a standard value anchor to anchor, it often leads to the audience that NFT faces Compared with ordinary homogeneous encrypted tokens, it will be relatively limited, so the liquidity of NFT is relatively poor in the entire encrypted market.
The way for general NFT investors to realize profits on NFT is usually to sell when its price rises. And this approach is greatly affected by the current market environment. When the Web 3 environment is in a bear market, market confidence is insufficient, and transaction activity is low, liquidity will shrink further, resulting in the fact that in most cases, these NFT assets are idle and capital utilization is extremely inefficient. In the absence of lending services, users may be forced to sell their unique NFTs to gain valuable liquidity.
NFT lending is an NFT financial product that occurs in the holding stage. Its core mechanism is to allow holders to use idle NFT as collateral to lend short-term funds to obtain liquidity without selling NFT In exchange for cryptocurrency or fiat currency, you can enjoy the benefits of holding NFT while earning income, and improve the efficiency of capital utilization.
As a solution to NFT liquidity problems, NFT lending is becoming more and more in demand in this innovative market. NFT liquidity solutions with a smooth user experience and a sustainable transaction model will quickly stand out in the entire NFT-Fi.
3. Industry barriers
The industry barrier of NFT lending business is how to realize the feasibility of the core business model, which mainly includes:
1) How to effectively match the system mechanism of NFT lending demand users
Since NFT is unique by definition, users usually need to have professional knowledge of specific assets and related financial knowledge to link NFT assets and lending business. How to design a reasonable business model that is attractive to both lenders and borrowers is the basis for effectively matching user needs.
2) Reasonable pricing mechanism for NFT assets
An important part of the NFT lending business is pricing. When estimating the value of NFT assets, calculating LTV (Loan To Value Mortgage Loan Ratio) and liquidation, how to effectively, quickly and relatively accurately provide a reasonable quotation to the system is NFT The most important link in the operation of the lending business. Especially when the number of users in the agreement increases and the business needs that occur within the same period of time increase, the mechanism and efficiency of system quotation, retrospective update data will directly affect the customer experience of the entire agreement.
4. Competitive Landscape
At present, in the NFT lending business, there are two forms of mortgage lending and unsecured lending.
Among them, mortgage lending can be mainly divided into:
That is, the mode of matching between users and users to achieve a loan. The lender and the borrower match in terms of interest rate, term, and NFT collateral type, etc., and the loan transaction is realized after the demand is matched. Representative projects: NFTfi, Arcade, Blur(Blend)
That is, the loan model is reached between the user and the agreement pool. The lender mortgages NFT to the agreement pool to obtain loans quickly, and the depositor provides funds to the agreement pool to earn interest income. Representative projects: BendDAO, DROPS
That is, a protocol that combines point-to-point and point-to-pool modes. In this mode, the lender sets a series of parameters such as interest rate, term, and loan amount. When requesting a loan on the platform, it is equivalent to establishing a separate agreement pool. Multiple borrowers can deposit funds into the agreement pool to earn interest income. . Representative project: ParaSpace
Pioneered by MakerDAO, it is the ultimate model for the NFT mortgage lending market. Representative project: JPEG'd
And unsecured loans can be divided into:
Buy Now Pay Later BNPL (Buy Now Pay Later), representative projects: CYAN, Paraspace, Blur(Blend)
Flash loan (buying with down payment) Flash loan, representative project: BendDAO
Source: Dune Analytics@goyem ( 2023.6.12)
Source: Dune Analytics@goyem ( 2023.6.12)
As can be seen from the above two figures, peer-to-peer and peer-to-pool protocols dominate the entire NFT lending scale.
It is worth noting that after Blur launched Blend in May, thanks to Blur's own position as the head of the NFT trading market and the advantages of user volume, Blend has rapidly occupied the head position of mainstream lending agreements, and has been away for several weeks. Much larger than the sum of the transaction volumes of several other protocols. At present, its cumulative lending business volume has leapt to the top of the industry.
5. Technology implementation path and its advantages and disadvantages
Based on the different protocol types of the NFT lending business mentioned in the previous chapter, they have their own different characteristics.
5.1 Mortgage lending
5.1.1 Point-to-point
The user valuation method is mainly used in peer-to-peer lending, and the pricing of NFT is obtained based on the price estimate matching given by the user. Based on the particularity of each single NFT, users give corresponding specific quotations. It has the following characteristics:
Summary: The peer-to-peer model is more suitable for the bear market where liquidity is scarce, and we are not afraid that extreme market conditions will affect the security of the platform.
5.1.2 Point-to-pool
Time-weighted average prices (TWAPs) are widely used in peer-to-pool type lending agreements. Oracles like Chainlink can take and publish a time-weighted average of sale prices and floor prices, creating such a mixed price to value NFTs. Such a model can reduce the impact of abnormal events on prices by taking the average of multiple prices within a predetermined period of time, thereby increasing the difficulty of potential malicious price manipulation.
Its main features are:
Summary: The point-to-pool model is more suitable for a bull market with sufficient liquidity.
5.1.3 Hybrid
The lending business at the bottom of the hybrid protocol also adopts the Peer-to-Pool model. Users can act as a borrower to mortgage NFT for real-time lending, or provide funds as a lender to earn interest paid by the borrower. Its innovation is to create a cross-margin credit system, rather than using the segregated margin pool design adopted by existing platforms, which will allow users to lend against all collateral with one credit line.
To illustrate with an example:
Suppose you have 61 BAYC, you decide to mortgage 5 to borrow, and then buy one. Using the existing lending agreement and its isolation deposit model, you need to use these 5 BAYCs to borrow ETH, and then go to the market to buy new BAYCs.
This process has at least two disadvantages:
User experience. A user would perform 5 different on-chain transactions and then manage these 5 separate lending positions.
If any of your borrowing positions are about to be liquidated, you must repay the loan immediately to avoid being liquidated by the auction.
The hybrid agreement will generate a credit line for you by mortgaging your NFT assets, and will generate a health factor for your entire mortgaged asset portfolio. As long as the health factor of your entire collateralized portfolio stays above 1, any of your NFTs will never trigger a liquidation auction. To reduce risk, you always have the option to deposit more collateral (NFT or ERC-20 Token) to maintain a high health factor.
This credit system is similar to a valuation system that assesses the value of all your collateral and automatically approves loans based on that assessment. As long as your collateral is the type of collateral supported by the credit system, you can borrow against their total value. This is the cross-margin cross-margin model.
It is easy to understand that this mode is characterized by higher operational convenience on the basis of the standard point-to-pool mode.
5.1.4 Collateralized Debt Position CDP
After users deposit NFT as collateral in the vault, they can mint the corresponding protocol currency, and the project agreement using CDP allows the protocol currency debt position to reach a certain percentage of the collateral value, and collect a certain annual interest from it.
When a user's debt/collateral ratio exceeds the liquidation threshold, liquidation will be performed by the DAO. The DAO pays off its debts and keeps or auctions off the NFTs, thus building up its treasury.
Users can purchase insurance against liquidation at the time of loan, and pay a specified percentage of the loan amount in one lump sum, which will not be refunded. With insurance, users can choose to repay the debt themselves (with penalties) within a specified time after liquidation.
CDP loans are a great option for those looking to get some liquidity out of their blue-chip NFTs without paying high interest rates.
5.2 Non-collateralized lending
5.2.1 Flash loan (buy with down payment)
Flash loan (buying with down payment) is a variant of the traditional lending function. Users can pay a certain down payment on the agreement to purchase NFT in the trading market, and the rest of the funds are provided by third-party Defi protocol flash loan services (such as Aave). It is equivalent to the down payment paid by the user and the balance obtained by the third party through the flash loan to buy the NFT together. The buyer owns the NFT and carries out a mortgage loan on the NFT loan agreement, and the agreement fund pool will return the loaned funds. Flash loan, the rest of the interest calculation, repayment mechanism, and liquidation mechanism are based on the provisions of the loan agreement. When the order price is higher than the floor price of the NFT in the agreement, the down payment ratio will also increase accordingly. The fee usually includes the down payment fee and the lightning loan function fee.
Its work flow chart is as follows:
Source: BendDAO
5.2.2 BNPL Buy Now Pay Later
A brief explanation of how it works from a buyer's perspective:
Bob wants a Pudgy Penguin. First, he initiates a BNPL program on the platform to buy any Penguin currently listed on Opensea, LooksRare or X 2 Y 2 .
The platform then provides Bob with an installment plan with a pre-quoted interest rate that he needs to pay back over 3-month installment periods. Regardless of how the NFT price fluctuates, the installments will not change and are fixed for three months.
If Bob accepts the plan, he will get ETH from the platform treasury to buy NFT, which will be escrowed according to the platform's smart contract.
When Bob completes all his installments, the NFT will be transferred to his wallet and he can have full ownership. (Hint: If the price of the NFT appreciates during this period, Bob can pay for the BNPL plan in full upfront and sell the NFT.)
Overdue payment will be regarded as a breach of contract, and NFT will be kept in the corresponding platform vault for liquidation.
The BNPL feature provides a "pawning" service that allows users to temporarily post their NFTs as collateral in exchange for a loan. The loan is then repaid with interest, which goes directly to the treasury. In order to prevent planned defaults, the platform will adopt various risk management measures, such as increasing interest rates to regulate loans, and prevent the accumulation of high-risk NFT products.
It can be seen that the business model of non-mortgage lending, whether it is flash loan (down payment to buy) or BNPL buy first and pay later, actually puts the mortgage behavior in the order of the purchase behavior. Allow users to obtain NFT with a small initial capital investment under the condition of paying a part of the down payment in advance and repay the corresponding loan within a subsequent framed period of time. It is suitable for NFT market users who have the willingness to purchase but temporarily lack the ability to purchase the full amount.
Therefore, the characteristics of this type of lending model are:
6. Profit model
Generally speaking, the income sources of NFT lending agreements mainly include: (1) loan interest paid by users for mortgage loans, (2) corresponding loan handling fees brought by functional services such as lightning loans, (3) transaction market handling fees.
The profit model of the NFT lending business in the agreement is mainly contributed by loan interest and loan function fees, and the transaction market fees are not related to the lending business.
Depending on the setting of the project agreement, the distribution of project income will also be different. There may be different proportional distributions between project treasury and token holders/users.
7. Industry Valuation
The top-down valuation method is used to estimate the size of the Defi lending market. The growth logic mainly lies in the fact that the size of the NFT market will continue to grow with the development of the entire Web 3 industry. As a track that is still in its early development stage, NFT lending still has considerable room for overall track growth.
7.1 Valuation Assumptions
The encryption market is cyclical and is currently in a phased bear market. The overall size of the NFT industry will fluctuate with the market cycle. The penetration rate of NFT lending (asset lock-up TVL) will rise relatively quickly.
(a) Annual growth rate of industry market value
Referring to the development of the Defi lending market in the past four years from 2019 to the present, it can be seen that in the first two years of rapid development of the industry and the market environment is relatively healthy, due to the small market base, the overall market size will increase by dozens of times In 2022, due to the weakness of the overall market, the overall market value will retrace sharply. The changing trend of the NFT market in the past two years is similar. Since the first half of this year, the overall Defi market value has recovered on the basis of 2022. If the recovery continues slowly, it is expected to recover last year's retracement after a full year.
Therefore, it is assumed that the overall market value of the industry's NFT industry will increase by 60% this year. And referring to the bull-bear cycle, assuming that 24 years is also a stable period, the growth rate is the same as that of 23 years, and 25 years is a bull market outbreak period, which is 3 times the growth rate of the stable period.
Treat the above assumptions as neutral assumptions. The conservative assumption takes 50% of the annual growth rate of the neutral assumption, and the radical assumption gives a high expectation based on the neutral assumption.
(b) TVL ratio of NFT loans
Referring to the TVL lock-up penetration rate of the lending business in the overall Defi market in the last 3 years in the range of 25% to 30%, the TVL of NFT lending is expected to reach a similar proportion in 25 years, and 30% is taken as a neutral assumption. Take 25% as a conservative assumption and 40% as an aggressive assumption.
(c) NFT collateral LTV
After synthesizing the LTV data of several current mainstream NFT lending agreements, 50% is taken as the LTV assumption for valuation.
(d) Borrowing Rate APR
Referring to the annual interest rate of Defi lending and current NFT lending, 15% is taken as the APR interest rate assumption for NFT borrowing.
7.2 Market Valuation Forecast
In the next 3 years, if the estimation is based on the neutral assumption in the valuation model, the market value of the overall NFT industry will grow steadily in 23/24 (annual growth of 60%), and may enter a bull market cycle in 25 years with a substantial growth (annual growth of 200%) ). NFT lending TVL accounts for 30% of the overall industry market cap. LTV= 50%, loan APR= 15%.
Based on the above assumptions, it is estimated that within 3 years, the overall market value of NFT can reach about $60 Bils, the TVL of NFT loans can reach about $18 Bils, and the loan demand that can be met is about $9 Bils (estimating with an average LTV of 50%). The operating income of the overall NFT lending industry is expected to reach $1.3 Bils, a scale of nearly 10 billion RMB (estimated at an average annualized lending rate of 15%).
Note: The operating income here only considers the loan interest income that currently accounts for the absolute majority in the industry, referring to the historical lending data of several major NFT lending platforms (interest rates are relatively stable in the range of 15% to 30%) and combined with the evolution of Defi lending rates According to the trend, 15% is taken as the average annualized interest rate assumption for NFT loans.
8. Introduction of major companies/protocol products
This chapter introduces the main company products under the mortgage lending model.
8.1 Peer-to-peer
8.1.1 NFTfi
NFTfi.com is a mature P2P NFT lending platform in the form of an auction house. Its bidding, interest rate calculation and time are jointly determined by the fund provider and the NFT mortgage party. It is the leading platform in the peer-to-peer lending business.
Since its launch in 2020, more than 45,000 loans have been released, reaching a loan amount of approximately US$450 million (as of the end of May 2023). Since April 2022, the monthly ETH loan volume has remained above 10,000, and the monthly peak reached nearly 18,000 in January 2023. From March to May 2022, the monthly revenue will exceed $1 Mils, with the peak in May exceeding $1.5 Mils.
Source: Dune Analytics@rchen 8 (2023.6.12)
Source: Dune Analytics@rchen 8 (2023.6.12)
8.1.2 Arcade
Arcade is also a peer-to-peer platform that provides a liquid lending market for NFT. Its predecessor is Pawn.fi. The project is built on top of the Pawn protocol, an infrastructure layer for NFT liquidity that consists of a set of smart contracts deployed on the Ethereum blockchain that enable the financialization of non-fungible assets. NFT holders can apply for loans through the Arcade app using one or more of their assets as collateral. Then ask for a loan on the specified terms.
Source: Arcade ( 2023.6.12)
The platform uses smart contracts to create a wrapped NFT (or wNFT), which represents a borrower's loan collateral, to be used when applying for a loan. The wNFT is locked in an escrow smart contract that records when the principal of funds is sent to the borrower and repaid to the lender.
As of June 12th, Arcade has issued more than 2,000 loans in total, lending about 100 million US dollars in loan funds, and the monthly loan amount has basically remained above 5,000 ETH in a single month in the past six months. The cumulative loan interest income exceeded US$1.3 million.
Source: Dune Analytics@arcade_xyz ( 2023.6.12)
8.1.3 Blur (Blend)
In May, Blur, the leading NFT transaction platform, and Paradigm launched Blend, a P2P NFT lending agreement, and the function of purchasing NFT with loans based on this.
The core features of Blend are:
Source: Blur
The core advantage of Blend is to unify non-essential elements, reduce the complexity of the system, realize the flexible migration of loan relationships within the system, price risks and benefits through market games, and maximize user needs.
Compared with the traditional peer-to-peer model, Blend unifies the three elements of borrowing, the mortgage rate, interest rate, and the term of the term, into a sustainable and flexible model, which greatly improves the liquidity of the lender.
Blend unifies the lender's exit and liquidation. The oracle machine is used to determine the timing of service liquidation. Blend will give the lender the flexibility to handle the exit option in a unified manner.
Blend unifies non-essential elements in the traditional peer-to-peer lending model, improves efficiency, and fully integrates with the Blur transaction module, which has greatly improved the product level. It has been recognized by the market in a short period of time after it was launched on the market, and the loan transaction volume has risen rapidly. At the beginning of May, the loan volume has surpassed NFTfi.
In just over a month since its launch in early May, Blend has achieved nearly 50,000 lending transactions, the loan amount has exceeded 700 million US dollars, and the cumulative number of users has reached nearly 20,000. Since June, the business scale has grown further compared to May. The daily loan transactions have basically remained at around 2,000. The loan amount has steadily exceeded 20 million US dollars in a single day, and the peak reached 34 million US dollars in a single day on June 6.
Source: Dune Analytics@goyem ( 2023.6.12)
Source: Dune Analytics@impossiblefinance ( 2023.6.12)
8.2 Point to Pool
8.2.1 BendDAO
The peer-to-pool model is led by BendDAO. BendDAO is the industry's first "Peer-to-Pool" model (Peer-to-Pool) NFT lending agreement, mainly serving blue-chip NFT holders. (Pool) Mortgage blue-chip NFT to quickly lend ETH in the fund pool, and depositors (points) provide Ethereum to the fund pool (pool) to obtain interest denominated in ETH, and both borrowers and lenders will receive BEND mining rewards. When the mortgaged NFT Liquidation will be triggered when the price falls to a certain level. Currently, BendDAO supports mortgage lending NFTs including 10 mainstream blue-chip NFTs.
Source: BendDAO
BendDAO interface:
Source: BendDAO
BendDAO blue chip NFT collateral amount:
Source: Dune Analytics@cgq 0123 ( 2023.6.12)
The floor price data of NFT is obtained through the Bend oracle machine, which is jointly developed by the BendDAO team and Chainlink. The original data of the oracle comes from the floor prices of Opensea, X 2 Y 2, and LooksRare. At the same time, the original data will be filtered, and the low price will be calculated according to the transaction volume of each platform, and TWAP (time-weighted average price) will be used to ensure that the data will not be manipulation.
Source: BendDAO
Since the agreement was launched in March 2022, the functions have been continuously updated and iterated, and the team has continued to develop new businesses to serve market needs. At present, in addition to the main lending business, BendDAO has also launched a built-in trading market, supporting the new functions of "Flash Loan" and "Collateral Pending Order", as well as "Peer-to-Peer" lending (Peer-to-Peer) function and pledge for Yuga Labs Functional asset pairing function "Bend Ape Staking".
Source: Dune Analytics@cgq 0123 ( 2023.6.12)
The sources of fees for the BendDAO protocol are related to the lending business (1) loan interest, (2) lightning loan function fee (paid by the buyer, rate 1%). There is also a transaction market fee (paid by the seller, the rate is 2%), but it is not related to the lending business. Among them, the part that goes into the national treasury as the agreement income is (1) 30% of the interest paid by the lender, and (2) 50% of the lightning loan service fee.
Source: Dune Analytics@cgq 0123 ( 2023.6.12)
As of June 12, BendDAO has accumulatively lent over 170,000 ETH, of which the single-day lending peak reached 4,340 ETH in May 2022. The total income of the project was 1669 ETH, of which the loan interest income was 1563 ETH, accounting for about 94%. As a peer-to-pool project, BAYC / MAYC / Cryptopunks are the three most important blue-chip mortgage targets, currently accounting for more than 70% of the collateral. Since the beginning of this year, the annualized interest rate APR of project loans has remained in the range of 25 to 30%, and the daily interest income is about 3 to 6 ETH.
Source: Dune Analytics@cgq 0123 ( 2023.6.12)
8.2.2 DROPS
DROPS operates a Compound-like money market where users can stake NFT portfolios for loans in USDC and ETH. NFTs are priced by Chainlink oracles that adjust for outliers and averages over time.
Like Compound and Aave, DROPS uses a segmented interest function that targets a specific utilization rate, with borrowers paying significantly higher rates when there are not enough funds available for withdrawals.
To limit liquidity provider risk, DROPS separates the protocol into isolated pools, each with its own NFT holdings. This is similar to how Fuse works with Rari Capital, ensuring that lenders pick a collection they're happy with.
Source: DROPS
At present, DROPS has accumulated more than 11 million US dollars in loan funds (as of 6.12).
Source: Dune Analytics@metastreet / @goyem (2023.6.12)
8.3 Hybrid
8.3.1 ParaSpace
ParaSpace is an NFT lending protocol that uses a peer-to-pool as the underlying model, allowing users to mortgage and lend NFT and homogeneous tokens. ParaSpace allows users to package the asset portfolio of ERC-721 tokens or ERC-20 tokens, and then mortgage and borrow the packaged assets, and use underutilized funds for further investment to improve the capital efficiency of assets on the user chain Not high problems, and earn money from them.
Source: ParaSpace
ParaSpace's innovative mortgage lending model is pioneering the first cross-margin credit system, rather than using the segregated margin pool design adopted by existing platforms, which will allow users to lend against all collateral with one credit line.
Source: ParaSpace
Mortgaging your NFT assets through ParaSpace will generate a credit line for you and a health factor for your entire mortgage portfolio. As long as the health factor of your entire collateralized portfolio stays above 1, any of your NFTs will never trigger a liquidation auction.
This credit system is similar to a valuation system that assesses the value of all your collateral and automatically approves loans based on that assessment. You can borrow against their total value as long as they are a type of collateral supported by ParaSpace.
This is the cross-margin cross-margin model.
In addition, ParaSpace has also designed a "hybrid Dutch auction" liquidation mechanism, "buy first, pay later" under the credit system, high-value NFT loans with high rarity, and short-selling functions to meet the needs of users in the current NFT market.
Since its official launch in December 2022, it can be seen that the business scale of ParaSpace has grown rapidly, and the growth rate is significantly higher than the overall NFT lending market data. In the past six months, the lending data has completely surpassed BendDAO. At present, the cumulative loan funds of the project have reached nearly 300 million US dollars (2023.6.12 data), and the cumulative number of users exceeds 13,000. In April this year, it reached a peak of more than 20 million U.S. dollars in single-week borrowing, and the data for the most recent month has basically remained at a weekly borrowing scale of 5 million U.S. dollars.
Source: Dune Analytics@goyem ( 2023.6.12)
8.4 Collateralized Debt Position CDP
8.4.1 JPEG'd
JPEG'd is an improved lending protocol of NFT P 2 Pool, which adopts MakerDAO's CDP (Collateralized Stable Coin) model in the lending mechanism. Protocol users pledge NFT to enter the protocol, lend the stable currency PUSd generated by NFT mortgage, and can borrow up to 32% of the reserve price of PUSd. The first NFT that allows JPEGd to be mortgaged is CryptoPunks. The initial borrowing annual interest rate is 2%, and the one-time borrowing fee is 0.5%. JPEG'd sets the LTV (Loan Value/Collateral Floor Price) at 32%, and liquidation will be triggered when the LTV reaches 33%.
Source: JPEG'd
Due to the large fluctuations in the price of NFT floors, JPEG'd uses Chainlink as its data source, and the core is the time-weighted average price. It is worth mentioning that JPEG'd has designed a novel insurance mechanism, users can choose to pay 5% of the borrowing cost of their loans for insurance, once they are liquidated, they can pay off debts, accrued interest and 25% The NFT will be repurchased after the liquidation penalty, but the debt must be repaid within 72 hours, otherwise the NFT will belong to JPEG'd DAO.
Another innovation of JPEG'd is to provide a platform-defined weighted valuation for the rarity of a given blue-chip NFT (CryptoPunks, BAYC, Azuki). For each specific attribute, after different weighting, the valuation will get a corresponding weight promotion reward. At present, there are relatively few platforms that provide valuations for rarity attributes in the market.
In addition, the pETH generated from JPEG'd, its ETH-pETH assets have a relatively good rate of return for pledging on Convex, and the peak once reached about 30-45% in early 2023.
At present, the cumulative loan funds of the project exceed 36 million US dollars (2023.6.12 data). From January to February this year, it reached a peak of about 770,000 US dollars in lending in a single week. CDP-type NFT lending agreements account for a relatively small share of the overall market.
Source: Dune Analytics@goyem ( 2023.6.12)
9. Risks and Outlook
Although the current NFT lending track is developing rapidly, some major risks cannot be ignored at the same time:
1) NFT collateral valuation fluctuation risk (bad debt risk)
For lending projects, the worst-case scenario is that the liquidity of the capital pool dries up, and those who borrow against the collateral assets are insolvent and unable to repay.
For NFT lending agreements, how to delineate high-quality NFT collateral objects is particularly important. When the floor price of mortgaged NFT series drops sharply, many lenders may voluntarily give up NFT assets and choose to default and not repay the loan.
(Review of historical events—BendDAO liquidity crisis: From August to September 2022, the floor price of blue-chip NFTs fell as a whole, multiple collateral assets triggered liquidation, and no one bid, the market panic caused the fund pool to withdraw a large number of ETH, resulting in The pool liquidity dried up, loan and deposit rates soared, and the BendDAO protocol faced a potential collapse crisis. In response to the crisis, the team initiated a proposal to modify some parameters. In the next few days, the funds in the protocol pool gradually recovered, market sentiment eased, and the capital utilization rate and Borrowing rates return to normal levels.)
2) High concentration of business target users
NFT lending itself does not have a wide audience. Although the industry as a whole is developing rapidly, it can be seen from the operational data of some projects that top users account for a relatively large proportion of the business, and the business volume of the project to the target key customer groups There is a certain dependence.
Example:
BendDAO protocol: As of June 12, 2023, the cumulative loan amount is 178,820 ETH, and Franklinisbored.eth, the user with the largest cumulative loan amount, has lent a total of 45,447 ETH, accounting for more than 25% of the total business volume
Source: Dune Analytics@cgq 0123 ( 2023.6.12)
3) The growth space of track business volume may be limited
In order to ensure the healthy development of the business, NFT lending projects often focus on selecting high-quality blue-chip NFT targets as mortgageable assets, with strong price consensus and risk resistance. However, the types of blue-chip NFTs that meet such conditions are limited, and the amount of NFT issued by each project is fixed. In the current market environment, the high-quality NFT mortgage targets included in the increment need to go through a long period of market testing, and it is difficult to predict and judge in advance. This has certain limitations on the overall NFT lending market size and business growth space, which may be a potential risk point.
Regarding the development of the overall NFT market, at present, sub-categories including blue-chip PFP (Profile Picture), high-quality GameFi assets, and NFT assets with unique project empowerment will be an important part of future industry development. As the industry matures, more and more users will accept and invest in the NFT field, and the links between NFT and real life will become more and more diverse, and the influence of NFT will continue to diverge along with various derivatives . With the growth of the overall NFT market size, the opportunities for NFT segments in various segments will also increase simultaneously. For NFT lending, the diversity of protocols can meet the needs of different users. If the overall lending agreement can achieve high activity and When the popularity is high, it will be able to better provide two-way liquidity solutions between NFT and Defi users.
10. Conclusion
In the current NFT market, most users are still concentrated in the market and aggregator fields with the lowest operating threshold. However, these two fields have not fully demonstrated the greatest capital efficiency. As more and more users join the NFT field, how to use NFT financialization to more effectively improve the capital efficiency of the market and attract users' attention may be a continuous explosive point of Web 3 business growth.
NFT lending is an important part of NFT financialization. The improvement of oracle machine and liquidation mechanism has gradually revealed the efficiency advantage of P 2 Pool in the competition with P 2 P. The update and iteration between different products has also made the product form of this market more and more mature. How to independently rate different NFTs, accurately price them, and establish liquidity are key issues in how to better improve customer experience.
It is believed that NFT liquidity solutions with reasonable and accurate pricing mechanisms, smooth user experience, sustainable trading models and profit models, and complete risk control mechanisms will become an important cornerstone of the progress of the NFT-Fi industry.
11. References
-BAYC's price cuts reappear: A comprehensive analysis of the "danger" and "opportunity" of BendDAO, the leading NFT lender
-Explain in detail how NFT lending works and the lending platform
-NFT financialization ushers in a systematic opportunity? An overview of the track's 152 events
-Galaxy Digital researcher: Peer-to-peer, peer-to-pool and CDP types in NFT lending
-Project Research Report丨BendDAO: NFT Mortgage Lending Agreement Adopting Peer-to-Pool Model!
-Unlock NFT liquidity, comprehensively interpret the operation mode and representative projects of the NFT lending track
-In-depth analysis of NFTFi: Looking at the future development of NFTFi from the current market
-NFTFi Ultimate Guide丨At a glance projects worthy of attention in the fields of lending, leasing, fragmentation, etc.
-Is the cross-margin leveraged NFT lending agreement ParaSpace a "BendDAO killer"?
-Introducing ParaSpace Pt.1 — Universal Liquidity, Instantly Unlocked
-Overview of NFT lending platform ParaSpace
-Brief analysis of the features and advantages of the NFT lending agreement Blend launched by Blur and Paradigm
-Road to Financialization of NFTs
-Dune Analytics (@cqg 0123)
-Dune Analytics (@metastreet @goyem)
-Dune Analytics (@rchen 8)
-Dune Analytics (@arcade_xyz)
-Dune Analytics (@impossiblefinance)
-Dune Analytics (@beetle)
This article was published on 2023.06.22, the original link:
NFT Lending: An In-depth Analysis of Market Dynamics, Risk Landscape, and Future Prospects