NFT Lending: Flourishing Market or Risky Business? Debating Pros, Cons, and Main Conflicts

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Non-fungible token (NFT) trading may have experienced a slump in May, but the NFT lending sector is flourishing, with reviews somewhat divided. NFTfi, the intersection of NFTs and decentralized finance (DeFi), comprises a variety of tools that aim to provide broader utility and liquidity for NFTs.

In May, the leading NFT marketplace, Blur, launched Blend, a peer-to-peer lending platform that enables users to borrow against their NFTs as collateral. Within its first three weeks, Blend quickly captured 82% of the entire NFT lending market share. Other NFT lending platforms soon followed, such as Binance NFT Loan and Astaria, founded by former CTO of DeFi protocol SushiSwap, Joseph Delong.

These platforms allow traders to earn yield by “pawning” their tokens, and also enable those who could not previously afford high-value NFTs to lease them at a fraction of the cost. However, despite the potential benefits, several risks have emerged. Some Blur traders and NFTfi-native users have questioned Blend’s lending mechanics and encouraged new traders to learn how to borrow NFTs securely before participating.

Concerns about platform-specific lending mechanisms, decentralization, and the risk of liquidation persist as well. NFT lending platforms appeal to NFT holders looking to earn additional income in down markets, as they can lease their NFTs in exchange for Ethereum. Borrowers, in turn, gain access to NFT ecosystems or perks they may not have been able to afford otherwise.

Polygon director of growth Hamzah Khan, for example, views NFT lending as a profitable venture, despite acknowledging the risk of liquidation if the asset price drops significantly. He also sees potential in lending assets beyond just high demand NFTs, envisioning a future where homes can be represented as NFTs and mortgages denominated as ERC-721s.

While NFT lending markets have so far mainly attracted JPEG traders, their potential growth extends to the broader lending market, which could onboard thousands of new traders and businesses to the Web3 landscape.

However, not all NFT lending platforms operate in the same way. Blend’s “down payment” feature can be confusing for new traders as it allows payments on an NFT purchase to be made over time. Wasabi Protocol COO Mason Cagnoni and VP of business development Kararan Karia argue that this feature is “super predatory to the borrower” and new traders may engage in high-risk behaviors without fully understanding the consequences.

Emphasizing decentralization, these platforms hope to keep NFT lending close to DeFi ideals. Karia advocates for decentralized open permission protocols that create an open NFTfi system, rather than siloing everything in centralized exchanges like Binance or pseudo-centralized platforms like Blur.

Source: Coindesk

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