NFT as collateral. A new way to borrow and lend in crypto

NFTs (non-fungible tokens) have been a buzzword for the past couple of years. But let’s start with the basics. What does NFT actually mean? The “non-fungible” part means that each NFT is unique. You usually cannot trade one NFT directly with another, as they are not identical. For this reason, NFTs are often used in the form of collectibles and art. The token part means that it is executed via a smart contract and is live on a blockchain to represent a property register. NFTs are generally categorized as illiquid assets, and the price varies depending on the buyer’s willingness to pay for that art or collectible. However, in this article prospective use cases of NFTs in the Challenge world will be explored and discussed. But before that, let’s talk about some out-of-the-box use cases of NFTs.

Using NFTs as a collectible is a popular approach on almost every blockchain networks. However, this is only the starting point. It’s simple to understand and uncomplicated. Users can still use these collectibles as avatars (eg, Twitter) if the website supports it. There may be many more use cases in the future.

Another way to use NFTs is in the music industry. It is a known fact that the intermediary between the composer and the listener generally earns more than the artist himself. NFTs can open a new world for composers to interact directly with their audience through dedicated platforms. Still, platforms can earn revenue through royalties (eg, 5% or 10%), but most revenue will go to composers. In addition, to appreciate long-time fans, a special discount for concerts or exclusive events can be applied to NFT holders. In March 2021, Kings of Leon released an album titled “When you see yourself”, with sales of several hundred Ethereum. Six “Golden Ticket” auctions, guaranteeing the owner four front-row seats to one show from each landmark Kings Of Leon tour for life, also brought in a significant portion of the revenue.

NFTs have already been used in metaverses, and it is estimated that metaverses will grow exponentially. Goldman Sachs sees the Metaverse as $8 trillion opportunity in the future. The use of NFTs is also expected to increase. NFTs such as skins, clothes, goods, etc. can be sold on the market and can be assigned to the user’s wallet to be transferred from one metaverse to another. Interoperability between metaverses will allow users to experience a wide range of metaverses and take their digital assets with them.

Integration of NFTs with the Challenge world has already begun. We have seen that some decentralized exchanges (DEXs) use NFTs to increase farm pool returns or reduce trading fees. Also on Pancake Swap (a decentralized exchange running on the Binance smart chain), we saw that the DEX also opened its own NFT market. Additionally, users can also be rewarded with NFTs as we saw in the example of genius yield Initial Pool Offering (ISPO). If one has delegated a minimum of 500 ADA for more than 28 eras, then the delegator has qualified for the Diamond Hands NFT. ISPO NFTs will have the unique utility to unlock the GENS staking rewards program for acquired GENS.

In lending and borrowing protocols, we have seen protocols that use cryptocurrencies as collateral. One of the best-known examples of such platforms is AAVE. AAVE works on different blockchains and allows to provide assets and earn interest on them. For example, at the time of writing, the annual percentage Yield (APY) of ETH is 0.73%. APY is the actual rate of return earned on an investment, taking into account the effect of compound interest. Moreover, one can also borrow assets and pay interest on the principal amount.

While we’ve recently seen centralized borrowing and lending protocols, namely Celsius, go through bankruptcy proceedings, decentralized ones, for example, AAVE have performed very well in turbulent markets and have proven that decentralized market players are here to stay. We are now starting to see protocols launch that use NFTs as collateral, however, this method has not yet been widely used. One of the main reasons is that NFTs are generally illiquid assets. Using them as collateral can be difficult, because if there is no buyer for that NFT, the value of that collateral cannot be estimated.

One of the original ideas came recently from Fluid tokens. In peer-to-pool NFT lending platforms, borrowers place their NFTs in a smart contract and receive the required loan amount from the pool of liquidity comprising the assets deposited by the lenders. Moreover, since the lender and the borrower can decide when the loan must be repaid in full, the borrower can, at any time, repay the loan before its due date. Yet, the loan can be repaid even after expiration, provided the lender has not claimed the NFT collateral.


These ideas from Fluid Tokens are groundbreaking and could have a significant impact on lending and borrowing protocols.

NFTs have come a long way from the beginning as basic collectibles, and are now expanding in form and function with many possibilities for future uses. Integration of NFTs with the Challenge world and the potential use of NFTs as collateral is a new and exciting concept, and one that many NFT fans and owners will be interested in keeping an eye on. While using NFTs as collateral poses some challenges, we are now beginning to see how builders, like the developers of Fluid Tokens, can address issues and provide viable solutions that continue to move the space forward.

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