In the last few years, the world of digital assets has seen a phenomenal development — the emergence of non-fungible tokens, or simply NFTs (picture above), which can now even be used to take loans (Photo: Pixabay).
These unique, blockchain-based tokens have taken art, gaming, and the entertainment segments by storm.
But NFTs are not just a way of owning digital collectibles or artwork. They also offer fresh opportunities for financial innovation.
We will look at the basics of NFTs, and how you can secure loans with them.
What are NFTs?
NFTs are cryptographic tokens that represent ownership of a unique item, whether it’s digital art, music, videos, virtual real estate, or even tweets.
Unlike cryptocurrencies such as Bitcoin or Ethereum, which are fungible and can be exchanged on a one-to-one basis, NFTs are indivisible and cannot be exchanged on a like-for-like basis.
The uniqueness and scarcity of NFTs are guaranteed by blockchain technology.
This means that if you own an NFT, you have a verifiable claim to the specific digital asset it represents.
The value of NFTs
NFTs have gained significant value because they allow creators and artists to monetize their digital creations in a way never seen before. Here’s how it works:
Owners and sellers
Artists and creators can mint their digital creations as NFTs and they can be sold at decentralized marketplaces.
Buyers, in turn, receive a token to prove their ownership of this digital item.
Royalties
Creators can programme their NFTs for getting a percentage of future sales every time the token changes hands.
This allows artists to benefit from the gains of their work over time.
Costliest five NFTs
The costliest five NFTs are Merge (priced at $91.8 million), followed by The First 5000 Days, priced at $69.3 million, then there is the Clock at $52.7 million, fourth is HUMAN ONE ($29 million), and after that, it is CryptoPunk #5822, priced at $23.7 million.
So, if you have a high-value NFT, you can imagine the amount of crypto currency loan you can take.
One thing to note is that you can only obtain a crypto loan through NFTs, but there is no hope for any funding under a legitimate financial system of any country.
Scarcity of NFTs raises prices
Collectors are attracted to NFTs because of their uniqueness and scarcity, leading to increased demand and higher prices.
Now, let us see how you can leverage NFTs to secure loans.
Securing loans with NFTs
NFTs can be a collateral for loans through a process known as ‘NFT lending.’ Here’s how you can secure a loan:
Find a reputed NFT lending platform
Initially, you’ll need to identify a reputable NFT lending platform (some names given below).
Look for a platform which offers transparent terms, reasonable interest rates, and has a secure escrow system.
Assess your NFT portfolio
Before you use your NFTs as collateral, make an assessment of the value of your NFT portfolio.
Lenders ideally need borrowers to provide a certain percentage of the NFT’s value as collateral.
Create an account
Sign up for an account on the NFT lending platform of your choice.
You must then complete all the necessary KYC (know your customer) requirements, as these are crucial for securing a loan.
Deposit your NFTs
Once your account is set up, deposit the NFTs you want to use as collateral into the platform’s secure wallet.
The platform will verify the authenticity and determine the value of your NFTs.
Determine loan terms
Specify the loan amount you need and the terms you’re okay with, including the loan duration and interest rate.
Ensure you read and understand the terms and conditions of the loan agreement.
Secure the loan
After approval, the lender will provide you the loan using your NFTs as collateral.
This process often involves locking your NFTs in a smart contract (digital) until you repay the loan.
Repay the loan
Make timely payments as per the agreed schedule. If you fail to repay, the lender may liquidate your NFT collateral to cover the loan.
Retrieve your NFTs
Once you have repaid the loan in full, your NFT collateral will be returned to you.
Advantages of NFT lending
Liquidity without selling
NFT lending allows you to access money without selling your valuable digital assets.
Tax benefits
Depending on your country’s tax laws, borrowing against your NFTs may have tax advantages over selling them.
Portfolio diversification
You can also benefit from the potential appreciation of your NFTs while using their value for other investments.
NFT lending platforms
Some NFT lending platforms are:
NFTfi: It is one of the pioneering NFT lending platforms. Borrowers can lock up their NFTs and get loans in cryptocurrency.
Aavegotchi: It is a decentralized finance (DeFi) platform on the lines of the Aave protocol.
It allows users to deposit NFTs as ‘gotchi’ collectibles as collateral to borrow against them.
NFT20: It is a protocol that allows users to create fungible tokens (NFT20 tokens) indicating ownership of a collection of NFTs.
These tokens can be traded or used as collateral for loans within the NFT20 ecosystem.
NFT Bank: It is a platform in development, which aims to provide NFT lending services.
Users can lock up their NFTs as collateral to borrow cryptocurrency.
NIFTEX: It is a platform that permits users to fractionalize NFTs, turning them into fungible tokens that can be traded.
It is not a traditional lending platform, and provides liquidity to NFT owners, who can sell fractional ownership of their tokens.
NFTs are finding several uses beyond their status as digital collectibles and art.
With the rise of NFT lending platforms, you can now use your NFT assets as collateral to secure loans, and as NFT technology continues to evolve, the financial possibilities for holders of these assets are endless.
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