NFT-Backed Loans: The Future of Finance?

NFT-backed loans, or NFT-Fi, are emerging as a popular way for NFT owners and collectors to increase the utility of their NFTs and unlock liquidity. But with critics claiming NFT-Fi fuels malpractice and wash trading, are NFT-backed loans here to stay?

NFT-Fi was borne out of NFT holdersā€™ frustration that they possess something that represents a lot of value, but short of selling it, they cannot access any of the capital. This lack of liquidity prompted people and platforms to develop protocols and ways for NFT owners to harness the maximum capital potential of their NFTs. Enter NFT-backed lending, which enables NFT collectors to keep their NFTs, while accessing some of the liquidity they represent ā€” not at all dissimilar to taking a loan out against your house.

Collectors can put up their NFT as collateral and request a loan, while prospective lenders then assess the value of the NFT and offer capital in exchange. If the terms are accepted by the owner, the loan is granted and the platform takes a percentage. 

Like all borrowing; however, NFT loans come with risks. If the borrower fails to meet the terms, for instance, missing a repayment, the lender can take the NFT. An Elevated Deconstructions NFT was listed as collateral for a loan, valued at $39,600, and the borrower took a loan of $12,000. Within a month, the borrower had defaulted on the loan despite the NFT value exploding to over $300,000.

But critics have pointed to NFT-backed loans as enabling wash trading and wider malpractices. Wash trades are when the buyer and seller of an NFT are the same person/people colluding. The purpose of wash trading is to inflate the value by falsifying demand and misleading others into buying. CyptoSlam ā€” a data aggregator ā€” investigated the NFT marketplace, which launched in October 2022 and is one of the largest sites for trading by volume and now lending. In April alone, CryptoSlam estimated that more than $635m worth of wash trades were completed.

Do you think NFT-backed loans are here to stay? Let us know what you think below. 

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