What is NFTfi?
A p2p marketplace for non-fungible token (NFT) collateralized loans where users can put their own NFTs up as collateral for a loan, or offer loans to other users on their non-fungible tokens.
The marketplace allows borrowers to put up assets for a loan and lenders to make offers to lend in return for interest.
Lending on NFTfi is simply about providing liquidity to other users, or the borrowers. In their contract, a lender exchanges their loan in wrapped ETH (wETH) – which allows users to trade directly with alt tokens – for a claim to their NFT, which is used as collateral in the transaction.
The lender sets the loan value, the interest and the duration of the loan. That means they are in total control of their own risk, for better or worse.
Brief Background History of NFTfi
NFTfi’s founder & CEO Stephen Young has led the build of NFTfi since its launch in February of 2020. The company has recently announced a successful $890k funding round which included investment from top VC firms in the NFT and DeFI space such as Coinfund, 1KX, Collab+Currency, Maven 11 and The LAO. Animoca Brands also participated in the round as a strategic investor. The rest of the round included several leading builders and collectors in the NFT and DeFi space including Roham Gharegozlou (CEO of Dapper Labs, the creators of NBA Top Shot and CryptoKitties), Sebastien Borget (COO of The Sandbox game), Johnathan Gabler (cadCad Edu, Blockscience), Andrew Steinwald (Zima Red, Sfermion), Snowfro (Artbocks) and Roberto Ceresia (ark.gallery, Wrapped Punks) among others.
How to get and repay a loan on NFTfi
If you go to the borrow tab of the site you will see all your own NFT assets listed. To put up an asset for a loan, simply click on one of your assets, and click “list as collateral” to sign for the asset to be listed. Your NFT will now appear to other users on the loan marketplace and can receive offers.
Once one or more users make a loan offer for that asset it will change colour to blue. If the user clicks the asset, they will be able to accept a loan. Accepting an offer causes the NFT to be locked in the contract as collateral and the loan to be paid into the users wallet as wETH. The NFT will now appear in yellow on the users “Borrow” screen, indicating that it is in escrow.
To repay the loan, the user can simply click on the NFT again and click the yellow “repay loan” button. They need to ensure that they have sufficient wETH their wallet to complete the transaction. The user also needs to ensure that they have granted NFTfi permission to manage the wETH otherwise the transaction will fail.
How to make loans to other users
The user needs to ensure they have wETH in their wallet and that they have signed the permission to let NFTfi manage their wETH otherwise their transactions will fail – a bar will appear on the site until permission is granted.
From there, a user can then proceed to the “lend” tab in the top right corner. There they can see all the NFTs listed as collateral for loans. Next, the user needs to find an NFT they’d like to make an offer on. They’d click on that asset and fill out the loan amount (how much they are willing to lend against that asset), the repayment amount (how much they want back in total) and duration (7, 30 or 90 days) of the proposed loan. After this, they can then submit their offer and wait for the borrower to accept the offer.
Once the borrower accepts the loan wETH will be deducted from the user’s wallet and the borrower’s NFT will be locked in escrow in NFTfi’s contract as soon as the loan is paid out. To get the NFT back, the borrower has to repay the full repayment amount. If a loan is not paid back in time by the borrower, the asset becomes available for foreclosure by the lender. As a lender the user doesn’t have to foreclose immediately, but if they decide to do so, the NFT will be transferred to their account and they will waive their claim for the outstanding loan amount. This is called a non-recourse loan in the normal art/collectible world. In short the loan is directly guaranteed by the NFT itself as collateral, and the asset will sit in escrow in NFTfi’s contract until the borrower has completed the repayment. This simple mechanism, enabled by NFTfi’s contract, allows lenders and borrowers to interact in a safe, trustless and decentralized way.
Why does the platform use wETH?
In the NFTfi world, wETH offers numerous advantages. wETH is an ERC20 token standard which unlike standard ETH allows the token holder to grant other Ethereum accounts permission to spend their tokens. By giving the NFTfi smart contract permission to manage the user’s wETH it enables them to make offers using only a signature. It also means the wETH can be moved at the start of the loan and repay loan process. It also means that lenders can make multiple loan offers on different NFTs with the same wETH balance, reducing liquidity needs and improving platform efficiency and usefulness. This is similar to Opensea offers. You can easily convert your ETH to wETH (and back) 1:1 on Opensea.
For a borrower, their assets are safe during the loan period since the NFT is held in escrow in NFTfi’s contract through the entire duration of the loan. The lender does not have access to it. The only way a user can lose their asset is if they don’t repay the loan on time and the lender opts to take advantage of the foreclosure option.
According to NFTfi, the contract is built by a team with expertise from multiple projects involving wrapped NFTs and has been validated by multiple external developers in private audits. They will also submit the contract to a formal audit. Additionally, the contract itself will be insured in case of loss.
Fees on NFTfi
The good news is NFTfi does not charge the borrower anything. Borrowers already pay fees to the lenders. The only fee NFTfi takes is a 5% share of the interest that the lender has earned on a successful loan. Say a user lends someone 1 ETH and gets 1.05 ETH back after a duration of a month, NFTfi would charge 5% of the 0.05 ETH earned. Likewise, no fee is paid if the loan is foreclosed or offers are not successful.cAs usage and volume grows, NFTfi hopes to be able to reduce this fee further.
Why NFTfi was created
Unlike in the equity or other types of asset markets, lack of liquidity is a huge problem in the art and collectibles space. Now you can imagine that problem in the NFT world which is still in its infancy. Matching buyers and sellers can take some time. Even though several projects focusing on this NFT domain are going live, participation remains a niche affair since existing players and collectors typically have a lot of their crypto assets already tied up in existing NFTs.
This challenge means that ecosystem participants may miss out on lucrative opportunities or be forced to sell at low prices when desperate for cash. NFTfi seems there’s an opportunity for other users to get a return on their ETH while helping the NFT ecosystem instead of just parking it in Maker, Compound or other DeFi marketplace.
When using the NFTfi platform, users should be aware of the following risks:
- Lenders shouldn’t lend too much wETH compared to the value of the NFT. The borrower may choose to never pay you back and simply opt for foreclosure. Lenders should choose a loan-to-value ratio they are comfortable with, and not make large loan offers on assets they don’t fully understand or don’t have an accurate valuation of.
- Lenders should consider offering longer term (30–90 day) loans if they believe that the NFT will hold its value through the entire loan period. New projects may appear liquid and valuable, but fade away over extended periods such as 90 days.
- Borrowers should consider the APR they accept to pay on the loan. Not all loans are good loans, and other users may offer users better rates. NFTfi caps the repayment amount at +50% more than the loan amount to avoid predatory offers — but on a 7 day loan that is still a very expensive APR to pay.
Strategies for lending on NFTfi.com
Lending for profit
Lend to other people to make a profit. This is a competitive alternative to providing liquidity on Uniswap for instance. On the one hand users should avoid the risk of significant impermanent loss in smaller pools and on the other hand NFTfi offers a significantly better return on user funds than any of the larger pools.
According to NFTfi, this approach has driven much of the initial usage of the platform and most loans on NFTfi so far have been agreed in the 40–100% APR range, demonstrating that lending to other users potentially offers very lucrative returns to increase a user’s ETH (or DAI) stack over time. There are well managed risks associated with this approach since NFTfi offers lenders a way to get outsized returns compared to other DeFi platforms, while at the same time retaining full control over their own risk. Unlike other loans NFTfi, as an example, doesn’t have to actually trust the borrower.
The best strategy is to make lots of loan offers, but maintain a strict formula for the loans one makes in order to minimize the risk of each loan. Once the user signs for a certain NFT asset type once, making loan offers on those assets are free due to the use of wETH and the wETH isn’t tied up, similar to OpenSea offers. This means that there is no downside to NFTfi making tons of offers with the wETH, across many items.
The Loan to Value (LtV) ratio is how much a user offers as a loan amount, compared to how they and the market value that NFT. This is the most important tool for managing risk, as well as the duration of the loan. If a user sets the loan value too high, they effectively offer the borrower an option to exit their NFT at that price over the course of the loan. And the longer the duration of the loan, the longer the user is providing this option to the borrower, compounding the market risk.
Users ought to ensure that they are comfortable that they could sell that NFT in 24–48 hours at a price that would recoup their loan or even make them a profit from the sale.
Users are advised to not make offers on NFTs if you don’t understand how to value them. Elements such as last sale price are valuable, but can be misleading. It is worth clicking through to OpenSea to explore recent sales and floor price too. Longer loans (30-90 days) can be very profitable, but are best offered on NFTs that have demonstrated stable market value over a period of time. Users are encouraged to make offers in either wETH or DAI (or both) depending on what exposure they want and how it fits in their overall portfolio.
Lending for collection
This could be an effective way for larger NFT DAOs to acquire NFTs cost-effectively over time. The key to making this strategy work is to only make loan offers on NFTs a user would like to acquire, and only make loan offers for an amount that a borrower wouldn’t mind defaulting on. Loans that do pay back pay earn users fees, which will be used to pay for the NFTs they eventually foreclose, making new acquisitions cheaper, free or even profitable over time.
In this approach users have a strategic advantage to pure financial lenders. They are happy to accept a lower return in return for an option to foreclose that asset if the borrower doesn’t pay back. Following this strategy a user may want to offer more competitive interest rates (10-40% APY) in order to get offers accepted on valuable pieces from borrowers and “win” the loan.
It is important to remember that NFTfi is a p2p marketplace, so the borrower can and will most likely accept the most competitive offer made available to them. Generally, a user should want to make offers on any item they’d like to acquire with speed.
Lending to ‘trusted’ parties
NFTfi encourages friendly lending. Due to the nature of the platform, users can make any loan offer they wish to. NFTfi offers users a safe and easy way to lend to friends for free, but with one or several of their NFTs as security in case of anything unexpected.
This approach could also be used by patrons that want to lend a larger amount to an artist or a project but feel more comfortable having security for the loan. Despite NFTfi only offering up to 90 day loans at the moment, users could easily stagger 2-4 overlapping loans in a row, each paying back the previous and extending the loan period.