You Can Now Borrow Against an NFT, but What Could Go Wrong?

In the early days of Non-Fungible Tokens (NFTs), holders could only purchase and sell their digital assets. However, several startups are introducing a whole suite of extras, like using NFTs to grant access to Discord channels.

Now a new use case for NFT has emerged in the DeFi space. It’s called NFTFI. Lending and borrowing protocols, such as BendDAO, JPEG’d, and ParaSpace, allow NFT holders to post their collectibles as collateral and borrow other assets in exchange. This helps NFT enthusiasts strengthen their liquidity position without selling their assets.

The Risk of Using NFTs as Collateral

However, lending an illiquid collectible seems risky, considering the fact the NFT market can be very volatile. So when the price of the NFT drops, the borrower is forced to re-up their collateral in order to avoid liquidation.

The abovementioned risk has not stopped holders from borrowing. According to data from Dune, over $20 million has already been borrowed from five lending protocols, including BendDao, Pine, JPEG’d, X2Y2, and Arcade. The data also indicates that these platforms have recorded an increase in users in recent weeks.

As of this week, the NFT lending and borrowing protocols have been onboarding an average of 250 users per day. But this figure is not close to the number of users pouring into DeFi casino.

Along with lending markets, NFT holders have also expressed interest in trading their digital assets on NFT decentralized exchanges. Several platforms, such as NFTX, Blur, and Swapstations, are all striving to create liquid markets for digital art.

It appears that this niche has grabbed the attention of some DeFi gurus. Last June, Uniswap Labs, the firm behind Uniswap decentralized exchange, purchased an NFT aggregation platform called Genie to help traders see NFT listings on various marketplaces.

Some NFT Fans Oppose the Increased Use Cases of Digital Art

The increased utility of NFTs is not sitting well with some NFT enthusiasts. On Friday, a pseudonymous Twitter user (@ROBNESSOFFICIAL) who shares updates about NFTs wrote that life was better when one acquired an NFT and enjoyed it without expecting anything to come with it.