The Ethereum NFT-Backed Loan Market Heats Up with the Borrowing of $8.3 Million by the Owner of CryptoPunks

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The Ethereum NFT-Backed Loan Market Heats Up with the Borrowing of $8.3 Million by the Owner of CryptoPunks

The Ethereum NFT-Backed Loan Market Heats Up with the Borrowing of $8.3 Million by the Owner of CryptoPunks
Source: Decrypt
1649518485 09 Apr / 15:34

Sotheby's was scheduled to auction a lot of 104 high-value CryptoPunks NFTs in February, with the set expected to fetch between $20 million and $30 million. Rather than that, the owner of the Ethereum NFTs withdrew the lot minutes before the auction began—and then gloated on Twitter about "rugging" Sotheby's.

Rather than that, 0x650d—the pseudonymous owner of those NFTs—has now secured a $8.3 million loan against the set of CryptoPunks, the largest such loan to yet.

The April 1 loan surpasses one secured in early March by a second bundle of 101 CryptoPunks from a different bearer. Both loans were made through NFTfi, an NFT-backed lending marketplace, with cash provided on both instances by MetaStreet, a liquidity-providing DAO (or decentralized autonomous organization).

“Thanks to the chads [at MetaStreet] for unlocking 8.32m in liquidity on my CryptoPunks while allowing me to retain upside exposure to my collection,” 0x650d tweeted. Decrypt attempted to contact 0x650d for further information on the financing and the previous decision to cancel the Sotheby’s auction, but received no answer.

According to specifications released by NFTfi, 0x650d would borrow 8.32 million DAI stablecoins with a 90-day payback window and a 10% annual percentage rate. This is the greatest example yet of a rising tendency among NFT collectors to access their valued assets to generate short-term cash, rather than selling the NFT for a one-time payoff.

As the NFT market soared in value last year, several owners of “blue chip” NFT collections sought methods to profit from their highly expensive assets in the near term. That is where NFTfi comes in, as a peer-to-peer marketplace connecting NFT owners to liquidity providers offering loans in Wrapped Ethereum (WETH) or DAI. Arcade and Drops are two further NFT-backed lending services.

According to Stephen Young, CEO of NFTfi, his marketplace has now processed more than $110 million over 6,500-plus loans—$70 million of which will be in 2022.

A holder of an NFT may link their wallet to NFTfi and designate which NFT(s) they wish to request a loan on, as well as the preferred terms. Providers can then make offers. If the on-chain transaction is accepted, monies are sent from the liquidity provider to the holder of the NFT, while the NFT is retained in an escrow smart contract for the duration of the loan period.

On both sides, there is a danger. If a borrower does not return the loan within the specified time period, the loan fails, and the lender may foreclose on the property and claim it. And for providers, given the NFT market’s notorious volatility, there is always the possibility that a seized asset’s value would fall.

According to Young, the default rate for transactions is around 11%, whereas the default rate for loans is less than 7%. This indicates that loans secured by lower-value NFTs are more likely to default, maybe as the value of the assets declines. It is certainly plausible that holders of NFTs would gain more by defaulting on debts.

NFTfi now supports over 150 Ethereum-based NFT collections, including the Bored Ape Yacht Club, Art Blocks, VeeFriends, and Mutant Ape Yacht Club. The largest single NFT loan on the site to far was for an Autoglyph, a limited-edition product from the creators of CryptoPunks. That loan returned nearly $1.4 million to the borrower in October, according to MetaStreet.

However, it is not simply businesses and organizations that provide liquidity for NFT-backed loans. Anyone with spare cryptocurrency, Young explained, can connect to the network and give a loan in order to earn additional interest on their funds—or to attempt to secure the collateral NFT through a default.

Young said that the market is becoming “much more professionalized,” notably around blue-chip assets such as CryptoPunks, Autoglyphs, and Bored Apes. More institutional parties are providing liquidity, he explained, while other traders are developing AI-powered bots that appraise assets and make offers automatically.

And, although some borrowers may utilize NFT-backed loans to acquire additional NFTs or to engage in crypto trading, others are repurchasing money for non-crypto purposes. Young told a tale about someone who utilized a Doodles NFT to take out a 4 ETH loan to purchase a vehicle to participate in Ukraine rescue operations and was able to secure a 0% APR loan from a lender to contribute to the cause.

Although the NFT business is still in its infancy, and the NFT-backed loan market is even younger, Young believes the sector can expand to 10% penetration based on overall NFT trading volume. It is now believed to be 0.5%.

“As more and more of our lives are digital, as more value accrues in digital space, and as more physical things get represented as NFTs, I don’t really see that floodgate turning around,” Young continued. “As more and more value accrues in these assets, people are going to need financial tools.”

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