Why Are Nfts And Nft Loans Becoming So Popular?
Mason Nystron: "NFT loans don't lend of NFTs, they're loans that are based on NFTs' value" -- Mason Nystron. NFTs are not just cute JPEGs for your Twitter avatar. They're big business. NFT lending is the latest example. This allows people to use their NFTs to borrow crypto as nft collateral. NFTs are becoming more popular for everything, from fantasy sports to social club activities. This has made NFT lending lucrative and popular. This is also a great example of how crypto can transform almost any item into a complicated financial instrument. This is a major risk factor for Web3's future. Many people think of NFTs as unique artworks. Non-fungible tokens can still be traded on blockchains, and used in smart contract. This is how crypto transforms them into financial assets that are loanable and can be borrowed against.
NFT trades are being tied to larger financial institutions by larger financial institutions. Two institutions lending against NFTs are Genesis Trading, a prime crypto brokerage, and Nexo, a crypto exchange. These structures are also more risky. NFT prices have fallen sharply, with top-tier NFTs seeing a drop of 50% in the last month. This shows how quickly things can change in this market. Some investors believe that the greater the risk of NFTs being traded, collateralized and held by larger institutions the greater the market's exposure to them. Why would NFT holders want loans against them? Numerous individuals and funds have large NFT gains. Many of these individuals or funds don't want their NFTs to be sold because they are confident in their long-term value and don't want taxation. Stephen Young, CEO at NFTfi, stated that some borrowers are looking to buy as many NFTs as possible, while others desire the cash to buy new investments. Some borrowers want to earn returns by playing-to-earn or yield farming. NFTfi recently reported that one person took out a loan to purchase a truck for Ukraine.
Hedging is another strategy. Young stated that hedging is another strategy. If the NFT price drops below the amount borrowed, the borrower can default on the loan and take out more cash. Adam Jackson, CEO of Freelance Lab, and angel investor, said that this is the height of overcollateralizing or overleveraging. Young stated that while this is riskier than NFT trading, the loans are self-contained, and lenders cannot go after other assets. Because the loans are all on blockchain, those are the only assets that lenders have access to. However, there is still risk.
He said, "Obviously, if your assets are all super-leveraged, there are still ways for people get into trouble." In presentations, his company stated that leverage can increase your upside but also increase your downside. You need to be aware of what you are doing and limit the risk to assets that you are willing to take on. With that in mind, consider carefully all the information available.