NFT Staking, Lending and Borrowing
TLDR: A fundamental problem affecting the NFT Sector is idle assets. NFTs sitting in wallets and doing absolutely nothing. What if there was a way to reduce the opportunity cost of holding NFTs? What if there was a way to Stake NFTs, or to Lend them – to unlock the latent Capital contained within and create streams of passive income using these idle assets? Staking and Lending are desirable and technically feasible. In this article we will look at the challenges associated with these practices as well as examine how staking and lending are currently being implemented in the NFT space.
The NFT sector is growing at a breakneck pace – growing so quickly in fact that even insiders have a hard time keeping up. The sales volume for non-fungible tokens has hit an eyebrow-raising 2.5 Billion US dollars in the first six months of this year, up from a total of 13.7 million US dollars for the entirety of 2020. NFT marketplaces are attracting users and experiencing growth that is making other sectors of the blockchain industry red with envy.
However, while these figures are truly excellent and are a testament to the health of this Sector, for the NFT sector to really take off, one fundamental problem must be tackled head-on: the issue of idle, illiquid NFT assets, that remain in wallets, without bids, untouched, for months.
Anyone familiar with the NFT market will have experienced this: after purchasing an NFT, the utter impossibility to sell it. When Rarible, the NFT Platform, airdropped governance tokens to the community (I was one of the lucky recipients), I thought I would reinvest some of the proceeds of the sale of those tokens into NFTs, thinking it would be a great investment. It appears I was wrong. The NFTs I purchased have sadly been sitting in my wallet, without bids, for months.
The utter impossibility to sell NFTs has coincidentally given rise to a class of NFT holders who absolutely refuse to sell at a loss.
There are two possible solutions to the problem of idle assets that sit in wallets without generating any kind of revenue.
The first solution would be to just sell the NFT, possibly at a loss – but that would mean relinquishing ownership of these NFTs, which were purchased for a specific reason. Going forward with that solution is obviously not desirable.
The second solution would be to find a way to monetize these collections of latent Capital while retaining ownership. What if there was a way to reduce the opportunity cost of holding NFTs? What if there was a way to Stake NFTs, or to Lend them – to create passive income using idle assets. Clearly, for a collector, this would be the preferred solution. Solving NFT Staking and Lending is the catalyst that will open the investment floodgates.
But are there any platforms that would allow one to do this? To stake NFTs or to lend them, in a non-custodial way?
Lending and Borrowing
The NFT loan process is somewhat problematic, for the simple reason that the way we assess the value of NFTs is eminently subjective. NFTs are valued at a personal rather than market level because of the uniqueness of each asset.
There is no objective way to assess the value of NFTs at the moment. This means that the lending process cannot be fully automated and decentralized – that is until price Oracles or new price discovery mechanisms make this possible. Until this happens, there will be a central authority that will decide whether a specific NFT is accepted as collateral and how much it is worth.
As stated above, there are no objective ways to assess the value of NFTs, however two fantastic tools can assist individuals in their quest to assess the value of specific items. These two tools can also help individuals to mitigate the risk of other users artificially inflating asset prices in order to obtain bigger loans.
The first of these tools is Stater Finance’s Fair Value Oracle. The sole purpose of this tool is to analyze assets in order to create an acceptable asset value that can be used not only within an application, but across applications. The Fair Value Oracle considers the following parameters when assessing an NFT: past transaction history, properties compared to other assets, number of past transactions, minted date.
The second tool is NFTEXP’s AR/TR indicators. NFTEXP has created two indicators that can be used to rate NFT’s and assess their scarcity: Asset Rating (AR) and Trait Rating (TR). AR and TR are metrics that indicate the real rarity of an asset, with a score of 100 being rarest and 0 being the least rare.
These metrics show rarity across collections. They are helpful tools for lenders who wish to make an educated judgment about NFT assets, in order to determine how much they are worth.
Waifusion #2143, for example, has an Asset Rating of 82 – this NFT, being in the top 18% across all collections, is an excellent investment especially if it can be obtained at a discount on a secondary market such as OpenSea or Rarible.
NFT Pool Lending
NFT Pool Lending is a feature that is starting to make appearances in Decentralized Finance Protocols. It is designed to enable “Fast Lending”, that is, lending via a Liquidity Pool. This means, in concrete terms, that in order to obtain a loan, one does not necessarily need a counterparty – NFT owners can get Instant Loans with their NFT collaterals without waiting for loan offers.
NFTA for instance allows holders to submit their NFT assets and expected loan durations to the platform. The NFTA pool lending engine calculates loan amounts and interest rates automatically. Once the borrower accepts the terms, they can decide to take out a loan, and the borrowed amount is sent to their wallets immediately.
Perhaps the most fascinating aspect of Staking and Lending as liquidity unlocking mechanisms is the fact that the Object of this mechanism, the NFT, doesn’t need to represent Art. Real Estate NFTs can be staked, and this will help unlock the Capital latent in idle physical properties. NFTs linked to domain names is another great example of an asset that can be staked or lended, to create passive income for owners – something that was technically and conceptually very difficult to do before the advent of NFTs.
We are still in the very early days of NFT Staking. While certain platforms, such as Uniswap and Aave, have announced plans to implement NFT staking, the only platform with a working NFT staking product so far is Cargo.
Cargo’s staking mechanism is designed to maximize the interests of Cargo Stakeholders and the NFT holders.
By using the Cargo portal, users can stake “Gargo Gems” within NFTs, making those NFTs instantly liquid. Gems staked within NFTs can be withdrawn at any time. All NFTs, and not just those tied to Crypto Twitter celebrities, can be staked and generate rewards for their owners. Those NFTs can be transferred peer to peer to other users and when they are transferred, access to the gems locked inside is transferred as well – including any rewards generated.