An anonymous borrower put up two rare CryptoPunks as collateral for a 1200 ETH loan from crypto-lender Nexo.
Nexo issued a loan of over $3.3M at a 21% annual interest rate to a CryptoPunk owner who put up two CryptoPunks with the rare “Zombie” trait as collateral. The transaction involved multiple parties, including decentralized finance (DeFi) marketplace and NFT lending platform Arcade, and investment manager Meta4Capital. “With this multi-lateral partnership, we are demonstrating the merge between traditional, decentralized, and crypto finance,” said the chief of DeFi strategy at Nexo, Kiril Nikolov. This transaction is an example of how sophisticated the NFT-financing market has become, says Bloomberg.
You can get instant liquidity of between 10 and 20% of the value of your Bored Ape Yacht Club or CryptoPunk NFT, which must exceed $500K, without selling the NFT. The application process may be longer if the NFT doesn’t belong to the CryptoPunks or Bored Ape Yacht Club collections. The liquidity can be obtained in ETH or stablecoins, and should the value of the NFT vary while funds have been borrowed, they won’t be liquidated. The annualized borrowing rates range from 12 to 15% but depend on market conditions and the NFT being offered, not on your credit history.
NFT lending is a riskier financial transaction than traditional lending because of the volatility of NFTs compared with traditional collateral required by conventional finance lenders. The primary purpose of NFT loans is to increase NFT liquidity by giving users access to capital that can be spent on other projects and services. The NFT-backed loans can also be used to purchase multiple NFTs, purchase tokens that can be converted to fiat, or purchase other tokens that can be implemented in DeFi protocols for returns to generate income.
Appetite for NFT loans growing
If you are an investor, you can lend cryptocurrencies to individuals seeking credit. Suppose the borrower is unable to repay the loan and interest by the end of the loan period. In that case, the lender is eligible for the underlying NFT.
Despite the associated risks, however, it seems like the appetite for NFT lending is growing.
NFTfi, a South African crypto lending company, recently lent $8M to the owner of over one hundred CryptoPunks, who, in February this year, withdrew the CryptoPunks from a Sotheby’s auction. Lenders like Genesis have also granted NFT-collateralized loans.
NFTs tied to people’s identities
For many owners of NFTS, the digital collectibles become irrevocably tied to their online identities, signifying their unique “brand.” Take, for example, owners of the Bored Ape Yacht Club NFTs, who are granted membership in an elite community. Platforms like Nexo offer the opportunity of generating liquidity without losing your NFT and hence membership to the associated community. “Like many collectors, people became attached to their NFTs; they become part of the persona, particularly online and in Web3,” said Meta4 Capital’s founder Brandon Buchanan.
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