Crypto: pledged in an NFT, the future of decentralized finance?

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Decentralized credit platforms backed by NFTs are proliferating: With the rise of the digital art market, is a new economic lever emerging?

© DR

– NFT from the Cryptopunks collection

And if the possession of a NFT allowed you to have a loan without having to show bank proof or identity? Entrepreneur and textile creator, the American GMoney announced at the beginning of the year that it had raised a million dollar loan on the Gondi platform by pledging its Cryptopunk, one of the most popular collections in the NFT sector. “And all this, only at a rate of 9%. It’s crazy!, he exclaimed In february near Capital. In the real estate industry, people mortgage properties at higher rates! And last week I received a message explaining to me that my loan had been refinanced! I saved something like 7.5% (…) This is the future of finance.”

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A vision that currently translates into a global NFT loan market of around $100 million in debt.

How does it work in practice? A programmable blockchain which Ethereum allows the creation of “smart contracts”, in short, an independent program which performs operations according to conditions predefined by its author. These smart contracts, which have revolutionized the blockchain world, today form the basis of decentralized finance: they enable disintermediated exchanges to be carried out with full trust. NFT lending platforms especially rely on this technology to perform these operations.

NFT loans: how does it work?

These platforms are called Gondi, NFTFi and Lenders. The process is done automatically: a user just needs to connect using their wallet (cryptoasset wallet) and the platform will recognize the NFTs eligible for a loan. Subsequently, the user will receive a multitude of loan offers in the form of stablecoins (cryptocurrencies indexed to currencies) with different duration and rate conditions: for example, from 3 days to 3 months, from 0.1% to 150% annually, or more. To take out a loan, you simply sign a transaction, which places the NFT into a smart contract that acts as an escrow. NFT returns to the wallet when the loan is repaid. Otherwise, it falls to the creditor, who then gets the full benefit of it.

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To do what?

The emergence of this market is far from surprising: in fact, in the traditional art market, the practice of mortgages against a work is common. According to the specialist publication The art newspaperthis market was worth between 24 and 28 billion dollars in 2021. The auction house Sotheby’s also stated to have issued $1.6 billion in loans by 2023 and a total of more than $10 billion since 1988. Much more modestly (with about $100 million in debt, therefore), the NFT art market responds to the same mechanisms: “There are several motives, explains Aristide Bui, head of communications for the NFT.Fi platform. The first essentially concerns everyday needs: some users will, at the end of the month, while waiting for their salary, use one of their NFTs as a kind of bridging loan. There are others who use it as part of a real financial strategy: they recover liquidity to seek returns with other financial operations, or as leverage to take advantage of ether price volatility (cryptocurrency of the Ethereum blockchain, ed. note).” And this without selling the base asset: NFT.

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The lender is guaranteed to benefit from a return at the rate he chooses. In case of default by the creditor, he will automatically recover the digital asset thanks to the smart contract. Only risk: the possible decrease in the value of this NFT. This is why most of these platforms only accept relatively popular NFTs. “We observe a concentration of loans and liquidity in collections of our own choosing (Cryptopunks, Bored Ape Yacht Club, etc.) and digital art at high prices, continues Aristide Bui. JI’m thinking of Chromie Squiggles (by the artist Snowfro, editor’s note), hasux works by artist XCopy, at Autoglyph (from the Larva Labs studio, also responsible for Cryptopunks, editor’s note), or Fidenza (by artist Tyler Hobbs, editor’s note).” Works whose prices range between 15,000 and several hundred thousand euros tend to calm the inherently volatile market. “These are works that lenders are prepared to undertake for relatively long periods of time. Furthermore, unlike traditional art, NFT works are still much more fluid and can be resold much faster, in just a few hours or days.adds Aristide Bui.

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Competition between lenders

Another consequence of this market supported by blockchain technology, and therefore open and transparent: the NFT lending sector is driven by competition between lenders, who fight to offer the most attractive rates. They can sometimes even refinance a loan on more favorable terms, as in the case of entrepreneur GMoney. Depending on the platforms, this can be done automatically, without any action from the debtor, or through a simple transaction, with a single click. Far from the long processes of bank renegotiation of property loans…

A facility that could give ideas to the “Real World Assets” sector, which can literally be translated as real world assets, in short, tangible assets (real estate, luxury watches, wines, etc.) tokenized, therefore represented on the blockchain, so that they can be more easily tracked and transferred. Could we see the NFT lending market expand into this type of asset? Even if Aristide Bui remembers it “digital assets have the advantage of being native on the blockchain, therefore by nature natively disintermediated unlike “real world assets” which always require a trusted third party to certify and preserve them”, he confirms that his NFTFi platform itself is in discussions with players in real estate and luxury watches. The revolution in financial applications enabled by blockchain is far from over…

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