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One of the main challenges with the current NFT landscape is the limited liquidity of the market and the challenge of finding buyers.

In less than 1 year, a new breed of platforms has emerged: NFT lending platforms.

The leader on Ethereum, BendDAO has a current TVL of 220 million of dollars ($184 m available to loan), with a 26% utilisation rate, meaning that 26% of this amount is currently locked in loans. 

This TVL has almost quadrupled since early November.

In terms of dynamics, this amount is close to its all-time high in USD dollars.

So who are the current actors, what are the mechanisms behind lending, and what does it mean for the long term for both the DeFi ecosystem and the NFT ecosystem?

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Why do users use NFT lenders?

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From the lender side, lending platforms offer 2 main objectives

• It provides attractive yields ranging from 10% to 240% APR.
• In case of default, the lender may pay for an NFT below its floor value, acquiring it at a discount,

From the borrowers' side, lending platforms offer 3 main objectives:

• Free some capital capacity without having to sell the NFT
• In a bearish environment, reduce its exposure to the underlying asset.
• Finally, borrowing can also be seen as floor price insurance, where the amount borrowed is a guaranteed future price of the NFT asset.

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Who are the main actors?

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On Ethereum, the different NFT lenders are BendDAO, NFTfi, X2Y2.

Those 3 platforms account for 90% of the cumulative loan volume on Ethereum, a little over 600 million USD.

While NFTfi is still the leader with 50% of the cumulative loan volumes, it is just a matter of time before it loses its first place to BendDAO, who is capturing most of the volume in recent months and is currently second with 35%, but growing twice as fast since October.

On Solana, the space is dominated by two platforms, Sharky and Frakt. The leader Sharky just crossed 69 millions of dollar in cumulative loan volume. It is an impressive number knowing that Solana has only recently reached 10% of 30-day sale volume in dollars. 

There are network effects in the NFT lending space as the leaders attract most of the liquidity, allowing better rates for borrowers and therefore attracting borrowers, increasing capital utilisation.  

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What are the different mechanisms in the NFT lending ecosystem?

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There are two main ways to do NFT lending: Individual loan (peer-2-peer lending) or pooled lending (peer-2-pool).

1. Pooled lending 

This is the method used by BendDAO and Frakt.

Lenders deposit their tokens in a pool and receive a yield on the amount they have deposited, no matter what.

Their deposit APR is linked to the utilisation rate of the pool; the more the pool is used, the highest the APR is.

On the borrower side, the user deposits its NFT in an escrow account and immediately receives an amount, usually up to 40 to 50% of the collection floor,. (also called the Loan To Value rate).

Loans are not limited in time.

Because of the default risk on the protocol side, pooled lending only works with blue chip collections at a reasonably low Loan To Value.

In case of default, if the NFT floor goes below the amount borrowed for 24 hours, the NFT is seized and auctioned. 

Pooled lending allows flexible financing mechanisms like flash claims (receive an advance on your NFT sales) or buy now, pay later.

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2. Individual loan

This is the method used by NFTfi and Sharky.

This method looks more like an OTC loan.

Borrowers list their NFT, sometimes expressing their preferred terms.

The lenders make a loan offer with 3 parameters:

• Amount
• Duration of the load and interest rate
• Creating one "order book" per asset

It is up to the borrower to accept a loan offer.

Once accepted, the borrower must repay the loan before the end of the loan. In case of default, the NFT will be transferred to the lender.

As the risk is on the borrower side, this method allows to cover more NFT collections and offers a higher APY.

However, it also means that access to liquidity can take more time as it needs both the lender and the borrower to agree on the terms of the loan.

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Challenges and risks regarding NFT lending platforms

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The NFT lending market is still in its early stages, and NFTs are still a risky asset.

One Dune dashboard tracking NFT lending platforms counts only 5307 unique active wallets across all the Ethereum platforms, indicating that the initiative is still very early.

Not only does it mean that APY is high because the perceived risk is high, but also because the market is very concentrated in terms of assets covered.

The Bored Ape Yacht Club concentrates most of the loans in volume and value.

For example, on BendDAO, 27% of the loans are BAYC loans, accounting for 65% of all the collateralised value. 

If you add Mutant Ape Yacht Club to the mix, we look at 61% of the loans accounting for 80% of all the collateralised value.

On top of this, the usual smart contract and hacking risks are still present, with no platform offering the option of buying an insurance cover.

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What is next for NFT lender platforms?

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Surprisingly there is minimal overlap between marketplaces and lending platforms, except for X2Y2 on Ethereum.

However, it would be an excellent way to increase the adoption of NFT lending by packaging it as a financial mechanism to buy and sell NFT.

As pointed out before, a loan on an NFT can be seen as a floor price insurance contract between two parties.

On top of this integration, lending actors, especially the peer-2-pool ones, have an excellent opportunity to promote their yield as a diversification mechanism for treasury management.

Finally, NFT lending platforms' success is tied to the adoption of NFT as a viable, usable and financial asset.

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Source of data:

Late of Feb 8th

https://dune.com/wolffly/nft-lending-aggregated

https://dune.com/cgq0123/Bend-DAO

https://app.nftfi.com/stats

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