In February, auction house Sotheby’s was set to auction an auction with CryptoPunks NFTs with high value.The auction was expected to bring an estimated value of between $20 and $30 million for the entire set.
Instead, the seller of Ethereum NFTs withdrew the set moments before the auction’s beginning and boasted over “rugging” Sotheby’s on Twitter.
Instead, 0x650d, the pseudonymous holder of these NFTs — has now obtained an $8.3 million loan, with the collection of CryptoPunks as collateral. This is the biggest loan of this kind reported to date.
The loan of April 1 was atop one that was secured by a distinct collection made up of 101 CryptoPunks from another holder, who secured $8 million in the middle of March. Both loans were made via NFTfi, an NFT-backed lending marketplace that provides liquidity, and DAO (or decentralized autonomous organization), known as MetaStreet, offers the money at both times.
“Thanks to the chads [at MetaStreet] for unlocking 8.32m in liquidity on my CryptoPunks while allowing me to retain upside exposure to my collection,” 0x650d tweeted. Decrypt has reached out to 0x650d for more details about the loan and the decision to pull the auction from Sotheby’s; however, I didn’t receive an answer.
The loan will see 0x650d get 8.32 million DAI stablecoins with the option of a 90-day loan period and a 10-per cent APR as per the information that NFTfi provided. This is the most significant example of the growing trend of NFT collectors tapping their precious reserves to access liquidity in the short term instead of selling off the NFT for a one-time payment.
While the NFT market surged in value during the year, some owners of “blue chip” NFT collections were looking for ways to profit in the near term from their ever-growing assets. This is where NFTfi comes into play as a peer-to-peer marketplace that connects NFT owners to liquidity providers that offer loan options in Wrapped Ethereum (WETH) and DAI. Other lending platforms that NFT backs are Arcade as well as Drops.
Stephen Young, CEO of NFTfi Stephen Young, CEO of NFTfi, said to the Decrypt that the company’s marketplace has already handled over $110 million of 6500 plus loans. Of that, $70 million will be in 2022.
An NFT user can connect their account to NFTfi, select which NFT(s) they’d prefer to obtain for a loan, and specify the terms they’d like. After that, liquidity providers can make offers. If they are accepted, the on-chain transaction is when funds are transferred by a liquidity service provider back to the NFT owner, and the NFT is stored within an escrow contract for the loan.
There’s a risk on both sides. If the borrower fails to repay the loan within the agreed time frame, the loan will default, and the lender can be forced to foreclose and take possession of the asset. For those who provide the service, with the NFT market being notoriously volatile, there’s always a chance that the value of seized assets could drop.
Young said that for transactions with default, the rate is approximately 11 per cent, while the default rate, determined by loan volume, is lower than 7.7%. This means that loans made against smaller-value NFTs will be much more likely to fail, possibly due to the asset’s declining value. NFT holders may gain from having to pay back loans.
Anyone can borrow money, and anyone can lend
NFT is a platform that supports more than 150 Ethereum NFT collections, including collections like the Bored Ape Yacht Club, Art Blocks, VeeFriends, and Mutant Ape Yacht Club. The biggest single NFT loan that has been made to date on the platform was an Autoglyph Limited-run project created by CryptoPunks creator Larva Labs. This loan brought the borrower more than $1.4 million in October via MetaStreet.
It’s not only companies and institutions that offer the liquidity needed for loans backed by NFT. Young explained that anyone who has spare currency could connect to the platform and offer a money loan to get a higher yield from their money or protect the collateral NFT in a default.
The market is getting “way more professionalized,” Young said, focusing on blue-chip assets such as CryptoPunks, Autoglyphs, and Bored Apes. Institutional parties are increasingly giving liquidity to investors, he explained, and some traders are creating AI-driven bots that automatically assess assets and offer offers.
While some borrowers might use NFT-backed loans to purchase more NFTs or to engage in crypto-related trades, others are using the funds to fund applications in the real world. Young has shared an account of a person who utilized a Doodles NFT to take a loan of 4 Ethereum to purchase an aid truck for Ukraine aid efforts. In addition, it was possible to obtain an APR-free loan from a lender to assist in supporting the cause.
It’s early for NFT trading in the NFT market, and it’s earlier for the loan market backed by NFT. However, Young believes that the market to expand to 10% of the market’s share based on the total NFT transactions. The market is currently estimated to be 0.5 per cent.
“As more and more of our lives are digital, as more value accrues in digital space, and as more physical things get represented as NFTs, I don’t see that floodgate turning around,” Young said. “As more and more value accrues in these assets, people will need financial tools.”