You Ask We Answer Vol.13-NFTFi

CoinEx
7 min readMar 27, 2023

Regarding the event “You Ask We Answer Vol.13, Ask anything about #NFTFi to win $1000 in $CET!”, here is a response to questions about NFTFi for your reference. Please take a look.

1、What is the process for creating and trading NFT-based loans on the NFTFi platform, and what are the benefits for lenders and borrowers?

NFT lending plays a crucial role in the NFTFi ecosystem. NFTs are known for their indivisibility, meaning that they are less liquid than FTs. In addition, unlike FT holders, NFT holders cannot generate revenue by staking NFTs and have no other option but to sell their NFTs if liquidity is needed. That said, many NFT holders hope to obtain temporary liquidity without selling their assets, which has led to a growing demand for NFT lending. By staking their NFTs as collateral, holders can acquire temporary liquidity (cryptos); at the same time, liquidity providers get to earn interest.

To engage in NFT lending, users typically need to select one or more NFTs as collateral and enter the loan amount, which cannot exceed a certain percentage of the NFT’s floor price (e.g., BendDAO recommends borrowing no more than 95% of the floor price). Then, after granting authorization, users will get the corresponding cryptos.

2、Will there be more NFTFI projects added to the CoinEx trading board? What is your projection for this year?

According to NFTGO, the total market cap of the NFT market stands at nearly 1 million ETH, and the NFT trading volume in the past 7 days has exceeded 200,000 ETH. NFTFi projects, in particular, are an essential component of this thriving market and aim to enable the mass circulation of NFTs, while making them more accessible to users. Though many of the NFTFi projects remain in their infancy, surprising innovations from them may help the NFT market record exponential growth.

NFT is clearly a promising category driven by strong market dynamics. At the moment, CoinEx has listed 10 NFT cryptos, including BLUR, LOOKS, RARE, X2Y2, RARI, JPEG, SOS, BEND, NFTB, and NFTD. Going forward, we will stay attuned to NFT and NFTFi projects and provide more outstanding and innovative NFTFi assets for investors. You can stay updated on the latest market movement through our Market segment.

3、What are the pros and cons or things to be aware of when using different types of NFTFi?

NFTFi projects remain in a nascent stage, and many of them face issues such as inefficient use of capital and high-interest rate spreads. Additionally, as they have not fully resolved the problem of real-time pricing, NFTs are still less liquid than FTs. Despite that, for holders of blue-chip NFTs, acquiring temporary liquidity from lending projects is a good way to improve their capital utilization efficiency.

It should be noted, however, NFTFi projects come with a complex market landscape, and users should be careful with the security of their wallets and contracts to avoid NFT thefts.

4、How does NFTFi’s governance model work, and what role do NFTFi tokens (NFTF) play in the platform’s decision-making process?

NFTFi projects issue tokens to serve two main purposes:

1. Some NFTFi projects advocate DAO-based governance. With such projects, proposal and governance rights are returned to the community after token issuance, allowing token holders to participate in the future decision-making process. In this way, project development is not solely controlled by the founding team, but is jointly driven and managed by the community as well.

2. Tokens provide better user incentives. On an NFTFi platform, users engage in activities like trading and lending, providing liquidity and value for the platform. As such, some NFTFi projects regularly airdrop tokens to users. Such incentives constitute a positive economic model, allowing Web3 users to earn shared returns.

5、What criteria are required for #NFTFi to accept an NFT collection as collateral?

Typically, blue-chip NFT projects are accepted as collateral. These are NFTs that come with high, stable prices. For instance, NFTs like CryptoPunks, Bored Ape Yacht Club, Azuki, Mutant Ape Yacht Club, Moonbirds, Doodles, CloneX, and Otherdeed always rank among the top ten in the NFT market, with extensively recognized market value. Therefore, most NFTFi projects only accept blue-chip NFTs as collateral to avoid the risk of dramatic price declines.

6、What is the value of each NFT based upon?

The value of an NFT depends on its market recognition. As each NFT has its own unique features, it is difficult for us to accurately capture the value of each NFT. Like traditional collectibles, different NFTs come with varying characteristics, and the attribute preferred by collectors makes an NFT more valuable. It is precisely the lack of clear valuation methods that makes NFT trading more challenging than FT trading, thereby blocking the market circulation of NFTs.

Under this circumstance, many NFT oracles are attempting to resolve the issue of price capture. For instance, Abacus oracle uses a peer incentive pricing mechanism and the Abacus Spot liquidity valuation to provide NFT pricing services. Other platforms like Upshot and Banksea are also exploring their own pricing mechanisms.

Decentralized NFT marketplace Sudoswap introduced the AMM mechanism of DEXs into the NFT market, allowing users to benefit from instant pricing as market makers on the platform. However, this method is more suited for NFT projects ranking in the middle or bottom of the market because the AMM mechanism eliminates rarity differences. Meanwhile, AMM is not applicable to blue-chip NFT projects, as they are subject to greater price differences.

Currently, the price of blue-chip NFT projects mainly depends on their floor price, which can be seen in NFT marketplaces such as OpenSea and Blur.

7、What is the main utility of #NFTFi? What types of opportunities #NFTFi provides for investors?

At the moment, the main issue with NFTs lies in their inaccurate pricing, which has led to a lack of market liquidity. Additionally, the high entry barriers of blue-chip NFTs have become a major obstacle to the development of the NFT market. For instance, Bitcoin, the №1 crypto, is sold for a whopping $28,000. Yet, retail investors can buy 0.01 or fewer bitcoins on exchanges. Meanwhile, the floor price of BAYC NFTs stands at 66 ETH (over $100,000), which is even more expensive and completely unaffordable to ordinary investors.

NFTFi has emerged to address the challenges of inaccurate pricing and high entry barriers in the NFT market by providing a range of services that include marketplaces, aggregators, lending, renting, derivatives, fractionalization, and oracles. As they help to earn interest on idle funds for investors and improve capital utilization efficiency for NFT holders, NFTFi projects create new growth opportunities for the NFT market and tokens.

8、When a borrower’s Collateral(NFT) offered after getting a loan surges up in value, more than the loan collected, if the borrower is unable to pay back the loan and the collateral becomes the lender’s, will the % surge be shared or it all belongs to the lender?

Most NFT lending projects with a peer-to-pool model don’t have a maturity date. Instead, liquidation procedures are only initiated when the collateral price falls below the liquidation threshold. When the price of the NFT collateral keeps growing, the platform will not initiate forced liquidation. However, in the case of peer-to-peer NFT lending projects with a maturity date, if the borrower fails to repay the loan and interest upon the due date, the lender can acquire the collateralized NFT and reap profits from NFT appreciation, if any.

9、Are there automatic liquidations in NFTFi? If the base prices fall, will I be liquidated and lose the asset?

Most NFTFi platforms feature automatic liquidation. The platform may initiate automatic liquidation when a collateralized NFT plummet and a certain percentage (e.g., 80%) of its floor price falls below the total loan and interest. That said, the liquidation threshold/ratio and rules vary from project to project. Once automatic liquidation is triggered, your NFT will be auctioned or transferred.

10、I think peer-to-peer lending has a high time cost and borrowers will likely take a long time to find the right lender, but have you created a useful program for matching methods?

In today’s market, NFT lending mainly includes two models: peer-to-peer and peer-to-pool.

NFTfi is a typical provider of peer-to-peer lending services. This lending model allows borrowers and lenders to negotiate all the lending conditions, including the amount, term, interest rate, and liquidation method. As such, peer-to-peer lending features smaller interest rate spreads, and since no external oracles are needed, users are not exposed to oracle risks. That said, peer-to-peer lending is subject to high time costs, and borrowers may need to spend a long time finding suitable lenders.

Many NFT lending platforms have leveraged AAVE’s lending model, employing the peer-to-pool approach, in which the protocol matches the two sides and makes decisions on behalf of lenders. This approach is more efficient and enables quick matching, but with poor capital utilization efficiency, it is subject to significant interest rate spreads. For instance, if there is 1,000 ETH in the pool, but the borrower only wants to borrow 500 ETH, the interest he/she paid will be evenly distributed among all lenders, meaning that the lenders would receive a much smaller interest payment. As a result, most of the funds in the pool are not fully utilized. Moreover, under the peer-to-pool model, there may be a run on the platform. For example, the well-known NFT lending platform BendDAO experienced liquidity crunches due to the liquidation of NFTs during a market downturn.

Some projects are exploring the pool-to-pool approach, which offers lower costs and smaller interest rate spreads but also comes with long matching time and high entry barriers. Additionally, in the future, the market may witness the emergence of the peer-to-order book model, which is similar to the bond market in traditional finance.

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