Lending against NFTs is now a $1 billion industry – what’s next?

Borrow Boring monkeys and Doodles flourish.

Per data sourced from Dune, the cumulative volume to borrow against NFTs just hit $1 billion.

This measures the dollar value of lending activity across several notable projects, including market-leading NFT liquidity providers NFTfi and BendDAO, but also newcomers like Paraspace.

As of April 6, NFTfi facilitated more than $390 million, BendDAO boasts nearly $298 million, and Paraspace has already reached $236 million. The number of cumulative users has also risen well above 40,000.

Cumulative loan volume in dollars. Source: Dune.

Borrow against yours Bitcoin is one thing, but how has a market meant to borrow jpeg files found such traction?

“NFT holders are increasingly looking for ways to unlock the value of their assets without selling them, and lending and borrowing platforms like JPEG’d offer a solution to this need,” said JPEG’d Marketing and Community Manager Derrick Nguyen Decrypt. “Additionally, reduced volatility has been another result of the maturing of the NFT market, which has made the use of NFTs as collateral more and more viable and attractive.”

Nguyen also cited the platform’s liquidation insurance, which allows users to buy back their repo’d NFT from the JPEG’d DAO instead of being immediately resold on the secondary market.

Rival NFT liquidity provider NFTfi has its own unique liquidation mechanism that leverages its peer-to-peer design.

“The only way for borrowers to lose their security is to fail to repay the loan at maturity,” said NFTfi’s CMO Andrej Skraba Decrypt. “P2P lending allows for more tailored loan agreements between borrower and lender. This includes terms such as interest rates, collateral and the duration of the loan, which can be negotiated (and renegotiated) on a case-by-case basis.”

BendDAO’s co-founder Crylipto called the business proposition “simple.”

“We only use lending and borrowing services to improve NFT asset liquidity,” they said. “Once you have an NFT, you don’t need to sell it, instead you can use the NFT as collateral to borrow Ethereum for your liquidity needs.”

How do NFT loans work?

The various NFT liquidity providers have minor differences in their respective offers, but the basic premise is the same across the board: To squeeze liquidity out of illiquid jpeg files.

JPEG’d, for example, allows users to do just this, with a few extra bells and whistles.

For example, users who unlock an NFT in the platform’s vault can borrow up to 60% of the NFT value in synthetic versions of Ethereum (pETH) or dollars (PUSd). These synthetic tokens can then be exchanged for a larger token stable coins over to Curve, or continue to earn returns there as well.

BendDAO allows users to make prepayments on specific blue-chip NFTs with a minimum of 40% upfront, with the rest covered by a flash loan from Aave. In many ways, it resembles the financialization of the real estate market, with hopeful NFT owners taking out a digital mortgage to get their very own Bored Ape.

Likewise, Paraspace builds on the model, but adds even more additional features, including allowing users to stake their APE tokens on the platform.

“With that security, credit and capital expansion users can access even more liquidity, and we’re seeing many of them actually leverage our Buy Now, Pay Later feature on the platform to buy more NFTs,” a Paraspace representative said Decrypt.

Going beyond unicorn status

Accumulated volumes and users are all well and good, but a closer look at the data shows that it’s still pretty early days for lending against NFTs.

Per Dune data, the number of daily users across all platforms has only crossed 400 people twice. Daily loan volumes are also quite low, with numbers rarely crossing more than $1 million per platform.

Daily users across NFT lending platforms. Image: Dune.

As for how the space will continue to grow, JPEG’s Nguyen said “the market needs to harness the potential of NFTs as digitized property rights and recognize that virtually anything can become an NFT.”

Others, like NFTfis Skraba, suggest that beyond building out the infrastructure needed to continue unlocking illiquid NFTs, the industry should also focus on “raising awareness” of these types of tools.

“Currently, many holders of digital assets are either unaware of the existence of credit markets or are unfamiliar with the various types of lending protocols available,” the CMO said. “As an industry, we still have a lot to accomplish in terms of educating the market and raising awareness. This increased understanding will pave the way for new NFT verticals and integration opportunities.”