Mar 19, 2023
Intro
Non-Fungible Tokens (NFTs) are unique digital assets and can represent ownership of a wide range of items, such as digital art, collectibles, or even real-world assets. As NFTs become ever more popular, so too do the lending opportunities that come with them. In this blog post, we’ll explore the different approaches to NFT lending and the differences between Peer-to-Peer (P2P) and Peer-to-Pool (P2Pool) lending.
Peer-to-Peer (P2P) Lending
Peer-to-Peer (P2P) lending is a type of NFT lending in which a borrower directly requests a loan from a single lender. The borrower will list their NFT as collateral on an NFT lending platform, and lenders can then create offers for them to consider. Once the borrower has accepted an offer, the money will be sent to them, and the NFT will be locked in a smart contract until the loan is repaid. If the loan is not repaid in the time agreed upon, the NFT will be sent to the lender, and the borrower will get to keep the money — a process known as a ‘default’.
Common examples of P2P Lending protocols are NFTfi, Arcade.xyz, and X2Y2.
Pros and Cons of P2P Lending
Advantages
Flexible terms, as both parties can negotiate any terms they want
Any collection can be used for borrowing against
No liquidation threshold needed
Disadvantages
Usually more expensive than P2Pool
Negotiating a loan can take more time
More risks for the lender
No protection mechanism for borrowers to get back their NFT after a default
Peer-to-Pool (P2Pool) NFT Lending
Peer-to-Pool (P2Pool) lending is an alternative type of NFT lending in which borrowers receive money from a pool of funds provided by lenders. When borrowers request a loan against their NFT through an NFT lending platform, they can receive the requested amount of money instantly. The loan size is usually dictated by the floor price of the NFT’s collection on a marketplace. Max. loan amount, interest rate, and max. loan duration are determined by the lending protocol.
Once the loan is requested, the NFT will be locked in a smart contract, and the borrower will receive the requested money. The NFT will remain locked until the loan is repaid. There are typically two liquidation scenarios in the P2Pool model:
The loan is not repaid — In this case, the NFT will go to auction, and anyone can bid on it. The auction usually starts at the debt amount to cover the outstanding money. The borrower gets to keep the borrowed money.
The liquidation threshold is reached — P2Pool models usually have a price oracle, which monitors the floor price of the NFT’s Collection. If the floor price drops to a critical level, the NFT will go to auction immediately.
A protection system is sometimes implemented, where the borrower has a given time to repay the loan after a liquidation. They will also usually get a notification when the floor price reaches critical levels, allowing them to either partially or fully repay the loan.
A common example of a P2Pool Lending protocol is BendDAO.
Pros and Cons of P2Pool Lending
Advantages
Instantly accessible money for borrowers
No need to negotiate with different lenders to get a loan
Transparent terms that apply to everyone equally
Protection mechanisms for borrowers to get back their NFT even after a liquidation
Usually cheaper than P2P
Disadvantages
Less flexibility due to predefined terms and conditions
Not all NFTs are eligible for a loan
The borrower must be aware of the liquidation threshold and monitor it closely to prevent liquidation.
Conclusion
NFTs are becoming increasingly popular, and NFT lending platforms provide an opportunity to benefit from this growing trend. There are two main approaches to NFT Collateral lending — Peer-to-Peer (P2P) and Peer-to-Pool (P2Pool) NFT lending markets. P2P lending is best for those who are looking for a more personal, customized loan, while P2Pool lending is better for those who want a faster, easier loan. No matter which approach you choose, NFT lending can be a great way to benefit from the growing popularity of NFTs.
Liquidium’s Take
Liquidium is the biggest NFT lending protocol on the Stacks blockchain. It supports Stacks NFT Collections like Megapont Ape Club, Satoshibles, and The Guests. Support for more Collections on Stacks is coming soon.
At Liquidium, we chose to use P2Pool initially as it is the more convenient and faster method for borrowers. We plan to add P2P loans to our Roadmap for 2023 so that the borrower can choose. We believe that both mechanisms have scenarios where they are superior to the other, so we like the idea of having both options available for the borrower’s specific use case.
Go to Liquidium to borrow STX against your Stacks NFTs.
