Over the past few months, non-fungible tokens (NFTs) have become known as the new wave of cryptocurrency. It is much more than the new wave of cryptocurrency, it is another use case that is present due to the blockchain. Now, this is an important matter because it is necessary to see how the blockchain can genuinely open up its trillion dollar potential as some experts note.
The blockchain is supposed to change the world over the course of the next decade or two when combined with other technologies that range from IoT to artificial intelligence and more.
The value is derived from its nature of recording information, being tamper proof, and helping to disintermediate various industries.
If it is successful, it will help to create more transparency, tracking, and more decentralization.
NFTs can present a viable part of what the blockchain can offer to the world.
Whether you are an avid investor in digital assets or only an audience to the developments of this segment, you may have heard of NFTs and their popularity in one way or another.
After taking over the world of digital art, NFTs have also carved their niche in the world of financial transactions. This has become most apparent in the form of collateralized NFTs or NFT loans. As a result, this development has encouraged a lot of people to ask what are collateralized NFTs and NFT loans.
It is certainly important to ask these questions. For one, if you ask these questions early on, you will notice that you can quite likely create opportunities for yourself. You may have the ability to get involved in a project or start your own project.
It is quite essential because large firms and institutional investors are getting involved in blockchain projects by allocating capital into early stage ventures. As such, it is an exciting field and will likely behoove you in more ways than one to be aware of this new concept.
To help you get detailed answers to all of these important questions, here’s an overview of what is a collateralized NFT, what is an NFT loan, and how to get an NFT loan in the first place.
What Are Collateralized NFTs?
The collateralized NFT model uses non-fungible tokens as collateral or security in exchange for a loan. This loan is typically offered in stablecoins, which are blockchain tokens that are tied to the value of cryptocurrency or business writing.
Since NFTs are totally unique in their form and remain irreplaceable by another cryptocurrency in their class, these non-fungible assets act as a token of ownership for specific property such as digital art. The person who holds the token in their digital wallet can show proof of ownership for the asset that is tied to the NFT.
In terms of value, you can think of these NFTs as being similar to physical property such as real estate. Due to this reason, an NFT can be used by a borrower as a guarantee that they will repay their respective loan to the lender in time. Otherwise, the borrower gives the lender the right to confiscate the NFT as well as its associated property in case they are unable to make the repayments as agreed beforehand.
However, since NFTs are digital tokens that exist on the blockchain, the transfer of physical assets is not involved during the agreement. Instead, the NFT that is tied to a digital or real-world asset is handled through the blockchain network itself.
With this in mind, you can say that collateralized NFTs are usually NFTs that are being used as a lending instrument. Besides offering borrowers a way to obtain the funds that they require, this also gives lenders the peace of mind that their investment may remain safe.
How Do Collateralized NFTs Work?
While learning what is an NFT loan and how to get an NFT loan, you need to understand how NFTs get their value in the first place. Since NFTs are irreplaceable tokens that are one of a kind, their value is highly speculative. Even more so, this value is subject to the asset that they are tied to in or out of the blockchain.
These assets usually include tweets, digital artwork, and digital media. When an NFT is tied to such a property, its value is decided by both its creator as well as the market demand for the respective asset. In some cases, this demand stays around hundreds of dollars. In other instances, it breaks past the barrier of expectations to go above and beyond thousands or hundreds of thousands of dollars.
Once a newly-created NFT and its associated asset is bought by someone, the NFT’s immediate value becomes the price that was paid by the buyer. From there, it can increase or decrease in its value, depending on market demand and conditions. This means that once a buyer holds an NFT in their wallet, they can expect to hold around the same value in cryptocurrency that they invested in the purchase. While the value can change due to certain circumstances, that is not always the case.
If the buyer ever wants to liquidate the investment, they can look into selling the NFT. But given that NFTs are often procured with a certain passion for the associated asset, this does not seem like a suitable approach to many. This is especially true for those who do not want to part ways with their precious NFT or its associated asset.
That is where you can learn what are collateralized NFTs and how to turn them to your advantage.
By treating these assets as tradable property, NFT holders can utilize them as collateral to get secured loans. The loans are provided in fiat or cryptocurrency, but their agreement is tied to the NFT and its associated asset. As a result, if the loan is not paid in time or the agreement’s larger conditions are not met, the lender reserves the right to fully acquire the NFT in order to sell it to someone else and recover their losses.
Where to Find NFT Collateralized Loans?
After learning what is an NFT loan, the next question that may come to your mind might be about how to get an NFT loan. Fortunately, the answer is easy to find.
You can move forward with finding different avenues where you can take out such a loan all by yourself. These platforms can be found across the cryptocurrency field in the form of specialized lending solutions.
Some of these solutions act as direct lenders, where they accept NFTs in return for handing out a certain loan amount. Others continue their operations as NFT loan marketplaces, where they connect lenders to borrowers to execute NFT loans.
Direct Lending Platforms
These platforms could be run by financial institutions in the cryptocurrency segment and offer flat interest rates against the loans. Through these networks, you can file a request for an NFT loan directly to the company itself. From there, your application gets processed according to company policy.
Now we come to the what are collateralized NFTs question.
If the terms of the loans are agreed by you, you can hand over your NFT as collateral and receive the amount in your wallet. It is important to note that the NFT is not transferred to the original seller or creator. Instead, a fraction of its value is used in everyday transactions.
Afterwards, you need to pay back the loan according to its outlined duration as well as the monthly payments that you have decided for your loan agreement. In case you are unable to pay back the loan, your NFT collateral is kept by the platform.
Many platforms may also restrict you from using their services in the future. This creates a highly sensitive situation for you and calls for the utmost care and knowledge regarding what is an NFT loan and how to get an NFT loan.
Lending marketplaces might sound curious. But they are full of real-world functionality where people with excess funds and those with a need for financing can come together.
This is not a new concept in the cryptocurrency sector, where peer-to-peer financing is not an out of the ordinary mechanism. With that being said, the spin that NFT collateralized lending puts on this is quite fresh and interesting.
With that being said, the overall approach still works the same way. Anyone who wants to make profit through their own funds can show an interest in lending them to others. According to different loan agreements, they can choose whether to get monthly payments over a few months or be paid in full within a shorter duration.
In case the borrower does not hold up to the terms or does not make the expected payments, the lender can keep the funds. But if the borrower ensures to meet the requirements, the NFT collateral is returned to them at the end of the loan tenure. This makes it important to learn what are collateralized NFTs and the consequences it can have on your funds in case of going default on their loan.
How Can You Get an NFT Collateralized Loan?
It is crucial to understand that collateralized NFT loans do not depend on human interactions or agreements while executing their transactions. Instead, they use their cryptocurrency platform to draft, execute, and maintain their end of the bargain and hash out what is an NFT loan going to be all about in a specific case.
This gives full control to the technology in order to make sure that payment terms or relaxation is not biased past a certain degree. Once you get this concept out of the way, you can start learning how to get an NFT loan as well.
The primary process for handing over NFT loans was started by specialized cryptocurrency networks such as those that work with decentralized finance (DeFi). Through these approaches, the collateralized NFTs can be placed in a special account that is locked through a smart contract. While debt payments can still be made, the account cannot be closed or its terms cannot be modified. This creates transparency in the process.
If the agreement continues without any problems into the future, the lender keeps receiving their amount in their respective account. In case there are any problems, the borrower has to repay the full amount. However, if this doesn’t happen, the NFT is confiscated along with any property rights that you may have put on the table during your loan agreement.
What Points Should You Remember While Getting Collateralized NFT Loans?
It is crucial to keep a few points in mind while dealing with collateralized loans. This includes the following aspects.
The platforms are still evolving. You may run into some hiccups even when their business processes are completely defined on the surface.
The stablecoin exchange has a fee. If you want to liquidate your loan amount and use it outside of the blockchain, you will have to sell or convert it. This could cause conversion and transaction fees to incur on top of your loan amount.
The mechanism demands constant vigilance. Opting for this collateralized mechanism doesn’t strip you of your freedom. But it still asks for you to keep an eye on the calendar to avoid late payments.
By keeping these points in mind, you can easily know how to use collateralized loans and maintain your finances in a smart manner. As long as you steer clear of any significant risks, you can also ensure to keep your show running as soon as possible.
Collateralized NFTs: The Next Thing?
There are a variety of aspects to look forward to when it comes to collateralized NFTs. At the same time, as noted above, it is necessary to note that there are various issues to resolve.
What makes regular collateralized loans more stable is that the asset that is serving as collateral will likely preserve its value. For instance, individuals purchase real estate because it has been known to serve as a decent store of value.
You do not see real estate prices fluctuating toward the downside and the upward quickly. It remains relatively stable and typically appreciates over time. As such, taking out a loan against a house is viable because you know that the house will retain its value.
If the house price were to be volatile, that would create a great deal of stress.
It may turn out that we can use a certain class of NFTs that are tied to certain more real world aspects to conduct collateralization. For instance, NFTs tied to real estate, paintings, and other items that can hold its value over time.
NFTs that are tied to significant investments, lending contracts with traditional financial firms, insurance agreements, and even emerging market bonds may be much more viable.
It will be interesting to see how it evolves and how it is adopted by governments, financial institutions, and people over time.