Lending
NFT Loans allow holders to collateralize their NFTs to borrow funds (usually SOL or stablecoins) thereby unlocking a lot of value from the NFTs they hold, and for lenders to lend funds to earn interest on loans. Borrowers lose their NFT collateral in the event of default, either directly to the lender or to the lending pool, depending on the protocol.
There are relatively simple basic concepts to understand:
LTV (Loan-to-Value) - amount of the loan relative to the value of the NFT (usually determined by floor price of the NFT collection)
The lower the LTV, the safer it is for lenders as the likelihood of borrower default decreases with the lower likelihood that total repayment amount (loan amount + interest) would be more than the value of the asset at the time of repayment due to floor price volatility.
The quality of collateral can be an important factor for LTV. Higher quality NFTs (e.g. bluechip projects) could experience lower lower price volatility (or perhaps even higher upside potential) and hence lenders are usually more comfortable with higher LTVs.
Loan Duration - how many days the loan is offered for
The shorter the loan duration, the lower the risk of borrower defaulting because of floor price volatility.
Borrow Interest - % of the loan amount that the borrower has to pay at the end of the loan period, often expressed in annual terms
Borrowers like cheaper loans.
Deposit Yield - % of the loan amount that the lender will earn by the end of the loan period
Lenders like higher deposit yield.
In a perfect world, borrow interest and deposit yield represent the amount of risk in a loan, based on LTV, quality of collateral, and loan duration.
Lenders are only willing to lend if the deposit yield is equal to or more than the risk of the loan.
Borrowers are only willing to borrow if the borrow interest makes sense for the loan terms (LTV and duration), and if they are confident that they would be able to repay the loan with interest when its due (supposedly).
There are mainly three types of loan offers:
Offer from Lenders - where lenders can dictate the terms of the loan such as NFT collection, loan amount, interest, and duration, but this ultimately depends on the platform as some have mostly fixed terms and allow lenders to only state loan amount they are willing to offer. Prospective borrowers evaluate these offers to decide if the terms are acceptable.
Offer from Borrowers - where borrowers can list their NFT that they want to borrow against, and state the amount they want to borrow and at what interest rate. Prospective lenders then evaluate these offers to decide if the terms are acceptable.
Lending pools - where a pool is set up for specific NFT collections with fixed terms (loan amount, interest, duration). Borrowers simply decide if they are willing to borrow at those terms (and deposit their NFTs if so), while lenders simply deposit funds into the pool to earn the stated deposit yield. In this case, lenders and borrowers are not specifically paired together.
Tip:
Be especially careful lending at high LTVs as many borrowers use loans as exit liquidity (to sell their NFTs). Before making a loan offer or depositing into a lending pool, always ensure that the LTV is lower than the (floor price - creator royalties % - marketplace fee) with a reasonable buffer to account for floor price volatility. Otherwise, you will likely experience a high loan default rate.
Main Lending Platforms:
Be sure to read each protocol's documentation thoroughly if you are looking to participate in NFT loans to fully understand their mechanics, which differs widely from protocol to protocol.
Kyzzen has built a simple tool to help users track NFT loans across Solana on Sharky, Citrus and Frakt.
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