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Game changer for NFTs?

DeFi applications for non-fungible tokens are becoming increasingly popular.

By Mike Hesp
• 4 min read
Game changer for NFTs?

DeFi applications for non-fungible tokens are becoming increasingly popular. Lending in particular could bring fresh capital into the NFT market.

In recent months, NFT integration into the DeFi space has progressed rapidly. The combination of NFTs and decentralized financial applications opens up new possibilities in the crypto space: fractions of NFTs can be traded on decentralized exchanges or NFTs can be used for staking. One DeFi sector where NFTs have become particularly popular: lending.

What is NFT lending?

NFT lending describes someone lending an NFT to earn interest, or someone using an NFT as collateral to secure a loan. The process is similar to lending money, with the difference that it involves digital assets in the form of NFTs.

To illustrate the concept, a simple example: Anna owns a non-fungible token. To have enough money to buy a new laptop, she wants to use the value of her NFT without selling it. She goes to a platform where she can lend NFTs. She deposits it as collateral and receives a loan in crypto, such as Ethereum or stablecoins, in return.

During the loan term, Anna pays interest to the lender. If she can fully repay the loan, she gets her NFT artwork back. If Anna can’t repay the loan, the lender has the right to seize and sell the NFT to cover losses.

Another lending use case for NFTs is in crypto gaming. A player could lend their in-game items to another player and earn interest. Players could, for example, borrow skins for a short period or lend rare weapons to other players.

NFT lending thus opens up new ways to unlock the value of digital assets and boost flexibility for NFT holders.

NFT lending is booming

Interest in NFT lending has surged lately, with ParaSpace and NFTfi currently leading the field. ParaSpace has grown its user base the most and is currently #1 in the NFT lending space.

Overall, the number of users in the entire NFT lending sector remains relatively low, at just over 2,000 users per week. It has nearly increased tenfold since the start of the year. Moreover, loan volume has nearly tripled from the mid-2022 trough, to more than $200 million in the past six months. NFTs from Bored Ape Yacht Club, Mutant Ape Yacht Club, and CryptoPunks accounted for the bulk of trading volume.

Additionally, the recent uptick in trading activity across the NFT sector likely had a positive spillover into the credit market. As more NFTs trade hands with corresponding gains in value, NFT owners are looking to unlock liquidity by using them as collateral for loans. However, lending with non-fungible tokens also carries some risks. Borrowers can eventually have the collateral seized and sold if they default on the loan. Many NFT lending platforms therefore support lending only for well-known and valuable collections.

Disclaimer: This content is for informational purposes only and does not constitute financial, investment, legal, or tax advice. The information provided may be incomplete, inaccurate, or outdated and should not be relied upon as such. Nothing on this website should be considered a recommendation to buy, sell, or hold any cryptocurrency. Investing in crypto-assets involves risk of loss.