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NFT Lending is on rise, raising concerns of ‘Predatory’ Platform Behavior

During the crypto winter, Blur, Binance, and Astaria have added loan options to increase liquidity in NFT trading. NFTfi has both supporters and opponents.

NFT lending is increasing while NFT trading volumes decreased in May. There are conflicting reviews.

Combining NFTs with decentralized finance (DeFi), NFTfi is expanding. NFTfi provides NFT-collateralized loans, fractionalized tokens, and the rental or lending of NFTs to enhance the utility and liquidity of NFTs.

What began as an opportunity to capitalize on the 2021 NFT bull run has gained traction as large Web3 companies have entered the market. Blend (Blur Lending), a peer-to-peer lending platform that allows users to borrow against their NFTs, was introduced in May by Blur, a prominent NFT marketplace. In three weeks, the Blur-inspired platform captured 82% of the NFT loan industry.

Later, additional NFT lending systems emerged. Holders of Binance NFT Loan can use NFTs as collateral to borrow ETH. Joseph Delong, CTO of SushiSwap, founded Astaria, which employs a third party to facilitate its loan market.

These platforms have been flooded with traders “pawning” tokens for yield. Traders who previously could not afford Bored Ape Yacht Club (BAYC) or Azuki blue-chip NFTs may now lease them for a fraction of their original price.

NFT lending has advantages and disadvantages. Blend’s lending mechanisms were questioned by Blur traders and NFTfi-native users, who advised novice traders to learn how to borrow NFTs securely before beginning.

Traders may like the idea of lending out their idle tokens, but concerns persist regarding liquidation, platform-specific lending processes, and decentralization.

NFT lending makes “lazy” traders rich

As a result of market conditions, the number of P2P lending platforms is increasing. In declining markets, NFT holders who purchased tokens during the bull market want to earn more ETH. They can lease their NFTs for ETH to a trader. The creditor joins an NFT ecosystem or receives additional advantages.

“I just keep stuff long-term,” Khan said. “I don’t use them daily … fundamentally, I like [NFT lending] because it gives me more capital.”

Khan warned of the possibility of liquidation if the value of the assets dropped below 30-40%. He emphasized that he is optimistic about the business and that he sees potential in financing assets besides blue-chip NFTs.

Khan stated, “I have so many PFPs and I want to use them somewhere, but this vertical can become much bigger because homes can also be NFTs and mortgages can be can be denominated as [ERC-721]( “‌”)s. I think people are people are severely underestimating how much we can do with NFTs.”

NFT lending markets have primarily courted JPEG traders seeking a larger return on their tokens, but they operate similarly to non-crypto lending markets, such as the real estate market, which could attract many more traders and companies to Web3.

“Predatory” behavior targets new traders

Different NFT lending platforms exist. Mason Cagnoni, chief operating officer of NFT lending platform Wasabi Protocol, and Karan Karia, vice president of business development, told CoinDesk that while the primary risk of NFT lending is early liquidation if a token’s price falls, Blend’s “down payment” feature permits traders to make multiple payments on an NFT purchase over time, which can be confusing to new NFT traders.

“It’s pitched as a ‘buy now, pay later’ that uses a perpetual lending on the back end, which is super predatory to the borrower,” said Karia. “Have you ever heard of a loan where you can get called instantly and you have 24 hours to repay? Like, the only person that does that is the mob.”

According to Cagnoni, novice traders are more likely to take risks without understanding the consequences.

“Lending platforms were already in existence – if you go look at a Dune dashboard with the overlap of users, the Blend users are all new,” said Cagnoni. “Like, they’re not NFTfi users.”

Blend’s first three weeks accounted for 46.2% of Blur’s trading volume, according to DappRadar. Cagnoni and Karian observed that Blend’s points cultivation system may have attracted a large number of new traders. Blur is not the only cryptocurrency that rewards traders, but its rapid growth and market dominance are commonly attributed to the success of its BLUR token airdrops.

Karia suggested that Blur users may plummet when they receive their long-awaited tokens through an airdrop. To maintain NFT lending as close as feasible to DeFi, developing platforms must prioritize decentralization.

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About MahKa

MahKa loves exploring the decentralized world. She writes about NFTs, the metaverse, Web3 and similar topics.

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