NFTs (non-fungible tokens) are one of the most fascinating aspects of the blockchain industry. In the last 2-3 years, people have been recognising their value, with some even elsling for around $70 million. The NFT market is now its own distinct thing, with more than $2 billion being traded. Considering the value that these tokens are worth, some have been left asking whether they can be used as collateral for a loan? And the answer to this is a resounding yes, although there are some factors to keep in mind.
Finding a Suitable Lender
Just like when using physical artifacts such as paintings for collateral, you will need to find somebody that will accept your NFT in exchange for money. There are two options for doing this. You could either find a DeFi lending service or a CeFi service. However, it is probably best to find a CeFi service, as NFTs are unique and distinct, and it can help to get another human to evaluate them, rather than using an automated service that might not understand its value. Even if an NFT is generated via an automated program, such as how Cryptokitties are made, this does not mean that a separate program will know how to properly assess its value. A fantastic example of this is the Hasmasks NFT project; each NFT is generated via code, but some NFTs have unique features that the program could not have predicted. In these circumstances, a program would have no idea of its value or worth because those unique elements are designed to be appreciated exclusively by the human eye.
Finding a CeFi,human-based, lending service or platform would be the best option for NFTs. Beauty is subjective, and when it comes to art, so is value. These are unlike cryptocurrencies in that their worth cannot be deterministic.
Helio Lending now offers the ability to use NFT as collateral for a loan. Head to https://heliolending.com/real-estate-nft/ to find out more.
Calculating the worth of an NFT
This is complex, as each NFT will have a different price than the next, and different people will be willing to pay different amounts for the same piece. A dialogue would need to be opened between the lender and the borrower, where they both negotiate a reasonable price. This could take some time, and it may take some trial and error when trying to find the right lender who truly understands the value of the piece. For this reason, be sure to contact more than one place or person.
One thing to consider is that NFTs can increase in value. The industry is fresh and rapidly moving, and sometimes an NFT from an early adopter can skyrocket in price as the market expands and matures. Make sure that you discuss with the lender what would happen if the value rises during the loan period, as some lenders may ask you to pay more to get the NFT back. Sketching out the terms for this is especially important if the price of the NFTs you own is calculated by an algorithm, such as how Berry Cards work on the NEAR protocol.
No Different than Using Physical Art as Collateral
Physical paintings, sculptures, books, and other mediums of art have been used as collateral for as long as humans have been making art. And using NFTs as collateral is no different. It fits a model closer to how pawn brokers operate, although via more technological means.
As the NFT market grows, and their value continues to develop, expect more lenders to accept them as collateral. If you work with a CeFi crypto lending service aadlrey, it may be worth reaching out and asking if they would consider using an NFT to collateralize a loan.
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