Overview
DeFi has taken the NFT space by storm over the last year, in hopes to address one of its core weaknesses: a lack of liquidity for NFT collections. NFT lending protocols are a part of the new DeFi wave coming to NFTs and have been around for the last year, typically offering perpetual or flip loans.
- Perpetual loans: Loans in perpetuity, accruing daily fees. Typically lower cost than flip loans, but with a risk of defaulting when the asset value dips below the loan value.
- Flip Loans: Time-based loans with an agreed-upon fee for the duration of the loan.
With these new lending options, NFT holders are able to get liquidity on their assets by collateralizing their NFTs for loans; however, much like the traditional lending sector, terms are not in the control of the users in a peer-to-peer manner. The lending platforms still act as intermediaries that dictate terms.
Key Terms
- Loan to Value Ratio: The max ratio between loan to collateral that the users are allowed to borrow
- Liquidation Threshold: The ratio between loan to collateral at which the collateral can be bought by the liquidator at a discount
- Borrow Fee: The fee that is charged to the protocol
- Total mortgage loan power: The total NFT value in USDC or SOL that the users are allowed to borrow.
- Risk factor: This represents the safety of the collateral against borrowed assets, the higher the risk factor the riskier is your loan. When the risk factor reaches 100%, your loan will be liquidated.
- Interest rates: For loan fees generated by borrowing
- APY: Annual percentage yield, how much % your are making per year based on your principle investment.