Illustration: Brendan Lynch/Axios
Keep your gaze fixed on non-fungible token (NFT) pawn shops.
- Protocols and platforms that allow folks to post their NFTs as collateral for a crypto denominated loan are on the rise. Yet for many, price discovery is a persistent problem in search of a holy grail to resolve it.
Why it matters: For those holding NFTs that trade frequently and are considered more liquid, like those in the Bored Ape Yacht Club, CryptoPunks, or Pudgy Penguins collections, collateralized loans allow them to "hodl" and have coin on-hand.
- For the industry, NFT lenders are another piece of crypto plumbing that would support consumer-facing "NFT financialization."
Be smart: NFT holders have been weathering declining coin prices and falling prices by "freezing" portfolios, according to Chainalysis' market report.
Driving the news: Lenders are pivoting their strategy to either address the issue, or simply stay competitive.
- Arcade.xyz, formerly Pawn.fi, rolled out an update mid-August with a redesign and new features like collection offers. They allow users to post a collection of NFTs as collateral for a loan.
- BendDao.xyz recently held an emergency vote to change liquidation thresholds to make them more enticing for buyers, a BendDao representative tells Axios, in the wake of a rash of defaulted loans and no bidders that drained reserves.
Big picture: NFTs are less liquid than coins. Consider, for example, the oft-quoted reference metric "floor price" only represents the lowest price someone is willing to sell the NFT for, but not the lowest price at which someone would buy.
How it works: NFT lending protocols generally follow three models, with peer-to-peer the most common.
- Protocol-to-peer: JPEG'd allows a borrower to post NFTs as collateral in exchange for its synthetic stablecoin. If they default, the underlying NFT is auctioned. (This is how MakerDAO, the biggest protocol in DeFi, works, except it uses crypto as collateral.)
- Peer-to-peer: NFTfi and Arcade allow borrowers to propose terms for a loan against their valuable NFTs. If someone accepts their offer (duration, denomination, etc), they lend the borrower what they asked for. If the borrower defaults, the lender can take the NFT.
- Pool-to-peer: BendDao and Drops pools loans and an algorithm sets terms. If the borrower defaults, NFTs are posted for auction. (Also see: Astaria)
What they're saying: "Pricing protocols are getting better at pricing assets, but we’re not there yet. There’s not enough liquidity to base a lending decision on a specific trade," Gabe Frank, chief of NFT lending protocol Arcade, tells Axios.
- "It's super niche right now with just 5,000 active users, but with gaming and NFTs representing claims to real-life items, it could be mainstream in the next two to three years," he added (Arcade recently saw a loan on a tokenized NFT).
- "Unlike in fungible markets, one of the most difficult things to establish for NFTs are their real time valuations," according to Cherry Ventures, an early-stage VC shop.
Yes, but: Better mechanisms for price discovery are in development, whether they're appraisal games or price oracles.
Bottom line: NFTs are finding a new life, but in a different market.