You Can Take a Loan with NFTs!
That’s right. A loan using NFTs as collateral.
Why is it so hard to imagine a scenario like this? This was waiting to happen and the first precedents have been set. We are talking about how an NFT enthusiast used his NFTs as a form of collateral to take out a loan. Before going further, we need to first understand how we got here in the first place.
The first step is to understand that scarcity of something produces its monetary value. And monetary value ties to what communities and individuals consider social and acceptable. Hence, a means of value exchange. We can use the blockchain to register and coordinate our economic activities. With different participants. And with the same system used as a decentralized database and a means of payment. This is a way of organizing the world’s disparate socio-economic systems. To interact with each other. Hence, this is all tracked by interoperable blockchains
What is Value?
There are many different types of value. As a result, value is anything that is meaningful for an individual. Hence by association, to his or her community. Hence, it is something intrinsic and social.
In a global interconnected economy, we need a growth stimulus. Only growth can improve living outcomes for more individuals to find economic opportunities. Blockchain technology automates trust and is a decentralized way of information sharing. Among people, it will spread more economic power to more places all over the world. This is the natural course of the world.
Value can come in all shades and doesn’t necessarily need to be about money. For instance, many intangible things like emotions, thoughts, and feelings cannot quantify. Hence, a ‘goodwill’ score gets calculated by brands from time to time to account for things like that.
What are NFT Loans?
Non-fungible tokens or NFTs are digital objects that live on the blockchain forever. Hence, it’s akin to a real object which is being constantly timed in its life span, as it moves from one place to another. The blockchain is a decentralized database. It records and updates the state of the network. Likewise, one of them is the verifications of economic transactions.
Hence, NFTs are scarce, limited objects that live on a decentralized databases. As a result, we can consider them real enough for certain communities. We’ve begun to ascribe value to it by trading it amongst each other. The question now becomes, what should the NFT have to make it worthwhile to buy and sell? It’s about how you can tell your story and spin up an NFT. This is an audience of people who are global in character and purpose.
Likewise, a loan is simply some value lent by someone to someone else. An NFT Loan occurs when people use their NFTs as a form of collateral to borrow a sum of money. So why are NFT loans great? Imagine the implications of NFT loans. A global, 24/7 NFT loan market run by smart contracts instead of banks. How many banks will want to embrace smart contracts to process NFT loans? Such questions are coming to the surface.
A Loan with NFTs
The trajectory seems clear. We are moving towards a new world where value systems are integrating with each other. Humanity, on the whole, has very clear patterns when it comes to our day-to-day lifestyle. For instance, we need food, shelter, and a lifestyle that provides physical and mental satisfaction. The assumption is that everyone wants to grow. Or rather will dedicate time and effort to create new forms of wealth in whatever way possible. The power to mint currency, tell stories and reach others was something never accessible to so many people at the same time.
A new precedent has been set.
Ciobanica, a digital art collector going by Silver Surfer has a collection of 10 NFTs made by artists Pak and Fewocious. He is valued at around $5 million. Hence, depositing his NFTs as a form of collateral, he decided to take a loan and expand his footprint in the cryptocurrency ecosystem. Genesis, a financial services company, offered him a six-month loan of $1.25 million on a 7.5% interest rate. It is equal to a 15% interest rate.
A bank’s place takes by a smart contract that lives on the blockchain. Smart contracts can store funds and release them based on certain parameters that we can set. In this case, the lending and borrowing smart contract keeps track of funds received and sent. This is from lending and borrowing parties, based on agreed conditions. Likewise, think millions of lenders and borrowers based on smart contracts on the blockchain. This is the dawn of a truly global financial services system.
He used Arcade, a service that connects owners of digital art and collectibles. Other Major players include NFTfi, PawnFi, and TrustNFT. We’ll highlight a separate blog post about platforms where you can use NFTs as a form of collateral.
NFTs and DeFi: The Economic Couple
With scarce digital objects comes internet native value and money. That’s NFTs. And a system to exchange digital ownership and track them? That’s Decentralized Finance (DeFi). All blockchain enthusiasts can think of is to ‘tokenize everything’. This includes the entire asset repository of the real world. And not to forget virtual assets.
Hence, we need to build decentralized applications to process all manner of economic transactions. Readers can build whatever helps further this vision. The difference is that decentralized databases are impartial to all. Hence, it will become the key economic record of the world.
