That’s right. Now people are using valuable NFT art collections as collateral for loans.
A few weeks ago, one NFT collector put up two rare Zombie CryptoPunks as collateral for a US$3 million loan facilitated by peer-to-peer lender Arcade.
Arcade’s P2P marketplace, which supports Ethereum-based NFTs, matches blockchain art owners with lenders, and already boasts more than $20 million of NFTs in escrow. Its lending terms mirror those of fine art loans, which are commonplace in the art world.
With fine art lending, hedge funds and other financial services institutions are willing to underwrite loans to high net worth individuals, so long as they put down their art as collateral. Bank of America, for instance, has more than $10 billion of such loans. Art collectors must have a minimum of $10 million in art, and take out a minimum of $5 million in loans.
NFT Lending Marketplaces Provide Liquidity to an Illiquid Asset Class
Such lending can be lucrative, and now they’re being introduced to the NFT world. Arcade’s loans last three months and charge 20% in annual interest rates annually, with the fees varying depending on the underlying NFTs’ liquidity. The more illiquid an NFT is, the higher the fees are. But while these loans may sound pricey, they grant valuable liquidity to an otherwise illiquid asset class.
NFT holders who suddenly face a cash crunch cannot just sell their collections at a moment’s notice because there are less buyers available – this becomes even more of a problem as NFTs get bidded up in value.
NFT collections such as Bored Ape Yacht Club and CryptoPunks are now valued at billions of dollars. Over the past year or so, Arcade and a slew of other lending marketplaces such as NFTfi, PawnFi, and TrustNFT have emerged to provide liquidity for this emerging market.
Arcade’s CEO Gabe Frank claims that while the value of most NFTs may be questionable, the top percentile of NFTs is valuable, comprising most of the global NFT market. This is not unlike that of Bitcoin, which comprises roughly 42% of the total market cap of all cryptocurrencies, according to Coinmarketcap.com.
How Pricing Solutions Could Introduce More Liquidity to the NFT Market
Illiquidity is one of the core key problems of the NFT industry, and is what’s keeping the market from going truly mainstream. What the market needs now is a NFT pricing infrastructure that can provide consensus-driven pricing. This can establish broader market confidence in NFTs across the board.
In September 2021, NFT pricing platform PawnHouse raised an undisclosed amount from top investment firms such as Huobi Ventures, A&T Capital, Spark Digital Capital, and CryptoTimes to solve this problem.
In short, the platform acts as an “oracle”, taking large datasets of bidding information for NFTs and using it to figure out what people are willing to pay for them, arriving at a highest deal price (consensus value) and an effective price range (price consensus). Both help solidify a more accurate valuation of a NFT’s price by identifying data in the present, and forecasting prices for the future.
While the solutions are still in early stages of development, a mature version of them could introduce greater liquidity and confidence in the global NFT market.