In an exciting development, a decentralized finance (DeFi) borrower used a Non-fungible Token (NFT), backed by a luxury watch, as collateral for a loan. The story was shared by a pseudonymous DeFi project advisor, CirrusNFT, where an anonymous user was able to borrow $35,000 by collateralizing an NFT that represented a physical item, a Patek Phillipe luxury watch, which was sent to 4K Protocol, a firm specializing in NFTs backed by physical assets.
For those in the dark, DeFi refers to the digital assets and financial smart contracts, protocols, and decentralized applications (DApps) built on Ethereum. Similarly, NFTs or Non-Fungible Tokens are a type of digital asset that represent ownership of a unique item or piece of content, unlike cryptocurrencies like BTC, which are fungible and can be exchanged on a like-for-like basis.
The interaction works as follows: the watch was sent to 4K Protocol, and in return, an NFT representing ownership of the luxurious timepiece was sent back to the user. The user subsequently listed the NFT on the DeFi lending protocol, Arcade. This move eventually led to lenders pitching their offers, and the user accepting the best loan offer. The intriguing part of the anecdote is that if the borrower defaults on the loan, the lender can claim the luxury watch.
The said method, albeit unconventional, offers anonymity to both lenders and borrowers, who need not disclose their identities for the transaction process. Additionally, this novel lending mechanism gives access to global liquidity, possibly offering competitive rates. However, on the other side of the coin, the system introduces an element of centralization, as skeptics believe it involves unnecessary addition of NFTs where their use isn’t crucial.
The practice is seen as a significant step towards the Web 3.0 lending process. Part of the community has embraced this new way of lending and borrowing, while others remain hesitant. For instance, one community member shared their positive sentiments saying it “piqued the interest of their father.” Time will tell if the anonymous nature and the potential access to global liquidity will outweigh the concerns about centralization. The daring creation of a potentially safer ecosystem that maintains user privacy is indeed forging a new pathway in the world of digital financing.
Source: Cointelegraph
