Explaining NFT Borrowing
NFT borrowing allows NFT holders to secure loans using their assets. It has gained popularity as a method for investors to release liquidity and secure funds.
Nonfungible tokens (NFTs) can be purchased, sold, owned, or traded, and they have now become integrated within other decentralized finance (DeFi) systems, including NFT borrowing. The demand for NFT borrowing has increased partly because the nonfungible or distinct nature of NFTs makes them challenging to utilize in alternate DeFi sectors. For example, it is not feasible to leverage or yield farm NFTs in the same way investors can with interchangeable cryptocurrencies.
The NFT market has lower liquidity compared to cryptocurrencies such as Bitcoin (BTC). This scarcity is due to the fact that NFTs can be entirely unique, and it may take a significant amount of time for an owner to locate a potential buyer for an NFT.
NFT loans provide NFT holders with access to liquidity, the ability to secure loans, and the opportunity to diversify their portfolios. Nevertheless, NFT loans also carry risks due to price fluctuations, regulatory ambiguities, and other variables.
Various kinds of NFT borrowing exist:
Individual-to-individual NFT borrowing
In individual-to-individual NFT borrowing, NFT holders utilize a platform to list an NFT as collateral in order to receive loan proposals from other users.
Individual-to-protocol NFT borrowing
This type of NFT borrowing occurs directly from a DeFi protocol or platform. Borrowers pledge NFTs by locking them into a protocol’s smart contracts.
Distinct debt position
In this approach, a unique asset is generated on the blockchain by a platform or service provider to represent a distinct debt position (DDP) as a transparent statement of a loan arrangement. A DDP can also be traded, similar to how MakerDAO’s collateralized debt position (CDP) enables users to secure Ether (ETH) for the stablecoin Dai (DAI).
NFT renting
NFT assets are passed from one user’s wallet to another via an NFT renting service for the duration of a “lease” to enjoy the benefits or advantages granted by the NFT.
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