Borrowing against NFTs
From illiquid to liquid
"Are you winning son" meme
Liquidity is one of the most difficult things to manage for an NFT investor. Too much liquidity and the investor is not exposed to the market enough. Too little liquidity and the investor is over exposed. Providing loans against NFTs is a fundamental piece of the market. Just like money market funds are an essential piece of the traditional finance markets, NFT money markets will become an essential piece of Decentralized Finance.
We are trying to follow a quantitative approach around NFTs as they relate to DeFi. It allows a better understanding for the challenges faced by the industry and how they can be solved. We have shown as well that we can rethink the way NFTs can become more liquid and financialized by rethinking the models behind DeFi and bring them to the NFT world. Having discussed fair price models for NFTs, this might be one of the solutions for borrowing against NFT assets on chain in an efficient and seamless manner. This can be done in two different ways. They are both sufficiently decentralized and secure. However one exposes the users for more risk, and the second one exposes the protocol to additional risks:
- Borrowing against NFTs Peer-to-Peer: This system allows users to choose an adjustable amount of risk they are comfortable with. It gives the full power for users to make the Peer-to-Peer agreement as they wish on chain. Each money lender decides which NFT they would be ready to keep as collateral. In addition, each money borrower decides exactly on the lender offering the best percentage and interest rate.
- Borrowing against NFTs through a shared pool:One other way to make this possible is through creating a pool which makes it possible for a portion of the users to borrow against NFTs, while allowing a second portion of the users to lend their money against NFTs as collateral. As opposed to the P2P method, this makes it so the protocol controls all of the borrowing interest rates and collateralization ratios.