Once considered a fad (for some it still is), NFTs, digital assets that represent real-world objects, are becoming more and more popular inside and outside the crypto world.
But with large amounts of capital locked in illiquid NFTs, more and more people are looking for ways to unlock cash without selling their NFTs..
This market is one of the targets of the South African company NFTfi and has raised a funding round of 5 million dollars to continue to be the pioneer of the financialization of NFT. Early stage crypto fund 1kx led the round, with Ashton Kutcher’s Sound Ventures, Maven 11, Scalar Capital, Kleiner Perkins and others participating..
Founded by Stephen Young in February 2020, NFTfi acts as a marketplace where users can get a cryptocurrency loan on their NFTs and offer loans to borrowers against their NFTs.. In other words, users can use their NFTs as collateral to obtain loans from other users on the decentralized and peer-to-peer system.
For example, if a user comes to the platform to borrow $ 10,000, different lenders would provide the borrower with offers with varying interest rates and payment terms, which the borrower could then select from..
During this time, the borrower will be required to submit an NFT as part of the transaction. When the operation is made, the NFT is transferred into the NFTfi smart contract (no one, including the NFTfi team, will have access to it) while the borrower receives the money.
Once the loan is paid with interest to the lender, the NFT returns to the borrower’s wallet. If the loan is not repaid within the allotted time, the lender collects the TVN.
NFTfi users follow a common practice in the traditional art world where banks, large galleries or auction houses offer loans to artists to determine whether an NFT is worth a loan or not..
Typically, in the traditional market, loans represent about 50% of the value of the work. On NFTfi’s platform, lenders perform appraisals and give borrowers up to 50% of their NFT value as the principal of the loan.
So, if an NFT is worth $ 20,000 when a borrower needs money, lenders are unlikely to offer more than $ 10,000 in loan. Interest rates, Nevertheless, vary by lender and asset. NTFfi takes a 5% reduction in the interest earned on each loan by lenders, but it does nothing in the event of default.
The risk exists on both sides, however. Borrowers have a set time frame to repay their loans before lenders take their NFTs, and because NFTs are volatile due to demand and public perception, lenders may ultimately take TVN at a lower price.
âThat’s why lenders want to have a certain margin between the price of the asset and the amount they lend,â Young said of the pricing dynamics between lenders and borrowers on NTFfi.. “This is because in the event that someone fails, they must be able to sell it for less than market value, and the price may have gone down. Between. This is why they need such a big buffer between the value of the loan and the value of the real asset.
Currently, around 20% of the loans on the platform are in default, but according to Young, most are low-value loans. The reason behind this is that high value NFTs are quite exclusive and hard to find, so users fund loans they hope to default as a means of to acquire the NFTs.
âA lot of lenders don’t mind default because they often only lend on assets that they would like to add to their collection anyway. So when they get a default, they keep the assets or put them up for sale in the market for 75% of the total value and could in fact make more profit on defaults than on the actual loan. “
Although it appears that NFTfi is an advantage for lenders, Young says it is not. However, the platform is working to respond to this speculation by including features that allow term negotiations and extensions for borrowers..
The best NFT loans on NFTfi span popular digital collectibles on the Ethereum blockchain – Art Blocks, Bored Ape Yacht Club, Cryptopunks, Autoglyphs, Meebits and VeeFriends. NFTfi made its first loan in May 2020, and since then, more than 1,500 have taken place on the platform.
Young says business grew 805 month-over-month in terms of loan volume and the company totaled more than $ 15 million in value. The company claims that the lenders have earned more than $ 500,000 in interest.
Prior to launching NFTfi during the early stages of the COVID-19 pandemic as digital assets grew more important, Young was the co-founder and product manager at Coindirect, a cryptocurrency exchange and OTC office..
Last year, he raised $ 890,000 as seed capital for NTFfi, assembling a team in South Africa to build and launch the product. Most of the group’s members still reside in the African country; Nevertheless, company is now incorporated in the British Virgin Islands for compliance and regulatory reasons, according to Young.
With the new cash injection, NFTfi plans to expand its team, launch new product features, deploy the platform on other blockchains, invest in its community. and finance its decentralization.
What started with a group of friends using their NFTs as collateralized loans between themselves – with blind trust and a spreadsheet – has taken off to become a fully decentralized platform, a young person hopes to have a bigger impact in the NFT world.
âOur main goal is that we want to do for NFTs what DeFi has done for cryptocurrencies. As soon as you introduced DeFi into cryptocurrencies, you also had this explosion of activity and liquidity in the market. And really, we want to act as a catalyst for the NFT market, unlocking some of the value of these NFTs so that they can then to be plowed in the community and the NFT market to help further develop the space. “