NFTFi is based on the use of NFTs for financial transactions in order to access greater liquidity. The undivided nature of NFTs brings some drawbacks compared to fungible tokens in terms of liquidity.
Its main objective is to solve the liquidity problems that exist in the NFT field, resulting in the birth of DAPPS and financial tools to combat them.
This combination of DeFi with NFTs brings a variety of possibilities for NFT holders with the possibility of converting them into more liquid assets.
Connection between NFT and DeFi
In practice, the relationship between DeFi and NFT has been gathering a lot of interest among users. Currently, DeFi protocols are designed similarly to traditional finance, so NFT/DeFi projects leverage the strengths of each technology, resulting in a product with greater value than the sum of its parts.
Where appropriate, the existence of liquidity pools and splitting protocols allows NFT holders to get liquidity in their portfolios; while offering illiquid investors the opportunity to gain exposure to high-value tokens.
We will see some of the services included in NFTFi:
I) NFT Lending and Borrowing Protocols (Lending and Borrowing Protocols)
In general terms, NFT lending and borrowing involves the act of pledging the NFT property as collateral or guarantee for receiving a given loan as liquidity. Lending and borrowing is the direct and convenient solution to provide liquidity to such land.
On the other hand, lending protocols can be classified as follows Peer to Peer (P2P), o Peer to Pool (P2POOL). P2P is the traditional method where users carry out transactions directly between them in full. In contrast, in P2POOL, borrowers borrow from a pool, while lenders inject tokens into the pool and receive profits, interest and rewards.
NFTfi for example, is one of the world’s largest P2P lending and borrowing platforms. Both parties rely on pricing published by Upshot and NFTbank. Borrowers deposit NFT and lenders propose an offer, and both arrive at the final terms of the agreement by mutual consent. There are different terms for the loan, and it can be 7-14-30-90 days, or it can also be determined by the parties.
BendDAO is one of the most widely used P2Pool platforms launched in March 2022. The list of assets accepted as collateral is determined by community vote. Only “blue chip” NFTs such as BAYCs, CryptoPunks, etc. are allowed. The minimum price is determined through an internal OpenSea and LooksRare oracle, and the collateral rarity rate varies depending on the various assets being posted as collateral. Liquidation protection is offered for 48 hours so that users can repay the requested loan, and redeem the collateralized NFT in time, prior to its liquidation in the market.
Most used platforms: NFTfi, BendDAO, Arcade, Themis, Trustnft, among others.
II) Fractionation of NFT
Fractionating an NFT is the process by which it is split from the original form of an ERC-721 and ERC-1155 token, to an ERC-20 token through smart contracts. Then, the holder of the ERC-20 token represents the ownership of the NFT, each with the representation of the respective part of the original NFT.
Pros: NFT splitting allows less capitalized investors to access higher-cost NFTs in the market. Therefore, it allows more liquidity to enter the market.
Cons: The process of recomposing the NFT. In order for it to be removed from where it was deposited for fractionation, all part owners must sell their tokens, which means that all fractions have to be put back together again.
Most used platforms: Unic.ly, Fractional.art, NFTX.io.
III) Rental or Lease of NFT
There are very expensive NFT projects such as BAYC or Cryptopunks, which are not accessible to most investors. As in the case of fractionation, NFT leasing is another solution to the liquidity problem, but in a different way.
As with renting or leasing a car or house, renting an NFT provides access to the NFT for a limited time and can be done in 2 ways:
Collateralized rental: the owner of the NFT lists its asset on a marketplace. The NFT is deposited in a smart contract with the terms and conditions of both parties. This includes the rental price and the collateral, which will be priced higher than the NFT to protect the loan. Once the contract expires, the NFT and collateral are returned to the original owner.
Rent without collateral or guarantee: The main difference with the previous one is that here you will never receive the original NFT. In this case you will get a new version of the deposited NFT.
Most used platforms: IQ Protocol and Vera.
IV) NFT derivatives
Derivatives within the NFT field are very similar to fungible token derivatives. They represent contracts that allow betting on the future prices of NFT collections.
Pros: Helps a lot in liquidity issues for NFTs. Opens many doors, such as access to trade on high value NFTs. Users can also trade on the NFT price by trading longs and shorts.
The derivatives market at TradFi is much larger than the spot market.
Cons: Like conventional market derivative transactions, NFT derivatives are extremely risky, especially when trading using leverage, which can maximize losses.
Most used platforms: NFTures, Fuku.
Written by Luciano Garriga (TW:@luchogarriga) for NFT Express.