Ethereum NFT-Backed Lending Market Heats Up As CryptoPunks Owner Borrows $8.3M

In short

  • Loans that use high-value NFTs as collateral are gaining traction.
  • An owner of 104 CryptoPunks NFTs took out an $8.3 million loan from the land.

Auction house Sotheby’s was to offer a lot of 104 high-value pieces CryptoPunks NFT in February, with an estimated haul of $20-30 million for the set. Instead, the owner of the Ethereum NFT removed the lot a few minutes before the start of the auction– and were delighted to “roar” Sotheby’s on Twitter.

Instead, 0x650d – the pseudonymous owner of these NFTs – has now taken out an $8.3 million loan using all of CryptoPunks as collateral, the largest such loan reported to date.

The April 1 loan tops one backed by a separate batch of 101 CryptoPunks from another holder, which secured $8 million in early March. Both loans were executed by NFT fian NFT-backed loan market, with a liquidity provider CAD (or decentralized autonomous body) called MetaStreet offering the funds on both occasions.

“Thanks to chads [at MetaStreet] for unlocking 8.32 million in liquidity on my CryptoPunks while allowing me to maintain upward exposure to my collection”, 0x650d tweeted. Decrypt contacted 0x650d for additional information about the loan and Sotheby’s earlier decision to cancel the auction, but did not receive a response.

The loan sees 0x650d borrow 8.32 million Stablecoin DAI with a refund window of 90 days and an APR of 10%, according to the details provided by NFTfi. It’s the biggest example yet of the growing trend for NFT collectors to mine their precious holdings to unlock short-term cash, rather than selling the NFT for a one-time payment.

As the value of the NFT market has exploded over the past year, some holders of “blue chip” NFT collections have looked for ways to profit from their increasingly valuable assets in the short term. This is where NFTfi comes in, as a peer-to-peer marketplace that connects NFT owners to liquidity providers who can offer Wrapped Ethereum (WETH) or DAI loans. Other lending platforms supported by NFT include Arcade and Drops.

Stephen Young, CEO of NFTfi, said Decrypt that its market has now processed more than $110 million on more than 6,500 loans, including $70 million in 2022.

An NFT holder can connect a wallet to NFTfi and choose which NFT(s) they wish to request a loan from, and specify the desired terms. From there, suppliers can make offers. If accepted, the on-chain transaction sees the funds sent from the liquidity provider to the NFT holder, while the NFT is held in an escrow smart contract for the duration of the loan period.

There is a risk on both sides. If a borrower fails to repay the loan within the specified time, the loan is in default and the lender can seize and reclaim the asset. And for vendors, with the NFT market notoriously volatile, there is always the possibility that a seized asset could fall in value.

The default rate for transactions is around 11%, Young said, while the default rate, measured by loan volume, is less than 7%. This means that loans against low-value NFTs are more likely to default, possibly due to declining asset values. It is entirely possible that NFT holders could benefit more simply by defaulting on the loans.

Anyone can borrow, anyone can lend

NFTfi supports over 150 Ethereum NFT collections, including the Bored Ape Yacht Club, Art blocks, VeeFriendsand Mutant Monkey Yacht Club. The largest single NFT loan to date on the platform was for an Autoglyph, a limited-run project from CryptoPunks creator Larva Labs. This loan earned the borrower more than $1.4 million in October, again via MetaStreet.

However, it is not just businesses and organizations that provide liquidity for NFT-backed loans. Anyone with a reserve cryptocurrency can log into the platform and provide a loan, Young said, to earn extra returns on their funds or try to secure the default NFT collateral.

The space is getting “much more professionalized,” Young explained, especially around blue chip assets like CryptoPunks, Autoglyphs, and Bored Apes. More institutional parties are offering liquidity, he said, while some traders are building AI-powered bots that automatically price assets and make offers.

And while some borrowers can take out NFT-backed loans to purchase even more NFTs or conduct crypto transactions, others free up funds for real-world uses. Young shared the story of someone who used a Doodles NFT to take out a loan of 4 ETH to buy a truck to help Ukraine’s relief effortsand he was able to get a 0% APR loan from a lender to help the cause.

It’s still relatively early for the NFT market, and even earlier for the NFT-secured loan market, but Young said he expects the market to reach 10% penetration based on total NFT transaction volume. It is currently estimated at 0.5%.

“As more and more of our lives are digital, as more and more value rises in the digital space, and as more and more physical things are represented as NFTs, I don’t really see that valve backfiring. “added Young. “As more and more value increases in these assets, people are going to need financial tools.”

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Priscilla C. Carnegie