Ethereum NFT-Backed Loan Market Heats Up as CryptoPunks Owner Borrows $8.3M

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Ethereum NFT-Backed Loan Market Heats Up as CryptoPunks Owner Borrows $8.3M
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In brief

Loans that use high-value NFTs as collateral are gaining traction.
An owner of 104 CryptoPunks NFTs took out a $8.3 million loan on the lot.

Auction house Sotheby’s was slated to offer up a lot of 104 high-value CryptoPunks NFTs in February, with an estimated haul of $20 million to $30 million for the set. Instead, the owner of the Ethereum NFTs withdrew the lot minutes before the auction’s start—and gloated about “rugging” Sotheby’s on Twitter.

Instead, 0x650d—the pseudonymous owner of those NFTs—has now taken out an $8.3 million dollar loan using the set of CryptoPunks as collateral, the largest such loan reported to date.

The April 1 loan tops one backed by a separate bundle of 101 CryptoPunks from a different holder, who secured $8 million in early March. Both loans were executed through NFTfi, an NFT-backed loan marketplace, with a liquidity-providing DAO (or decentralized autonomous organization) called MetaStreet offering up the funds on both occasions.

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“Thanks to the chads [at MetaStreet] for unlocking 8.32m in liquidity on my CryptoPunks while allowing me to retain upside exposure to my collection,” 0x650d tweeted. Decrypt reached out to 0x650d for additional info on the loan and the earlier decision to cancel the Sotheby’s auction, but didn’t receive a response.

The loan sees 0x650d borrow 8.32 million DAI stablecoin with a 90-day repayment window and a 10% APR, according to details provided by NFTfi. It’s the largest example yet of the growing trend of NFT collectors tapping their valuable holdings to unlock short-term liquidity, rather than sell off the NFT for a one-time payout.

As the NFT market exploded in value over the course of last year, some holders of “blue chip” NFT collections sought ways to benefit in the short term from their increasingly valuable assets. That’s where NFTfi comes in, as a peer-to-peer marketplace that connects NFT owners with liquidity providers who can offer loans in Wrapped Ethereum (WETH) or DAI. Other such NFT-backed lending platforms include Arcade and Drops.

Stephen Young, CEO of NFTfi, told Decrypt that his marketplace has now handled more than $110 million across 6,500-plus loans—$70 million of that in 2022.

An NFT holder can connect a wallet to NFTfi and choose which NFT(s) they’d like to seek a loan on, and specify the desired terms. From there, providers can make offers. If accepted, the on-chain transaction sees funds sent from the liquidity provider to the NFT holder, while the NFT is held in an escrow smart contract for the duration of the loan period.

There’s risk on both ends. If a borrower doesn’t repay the loan in the set timeframe, the loan defaults, and the lender could foreclose and claim the asset. And for providers, with the NFT market famously volatile, there’s always the chance a seized asset could plummet in value.

The default rate for transactions is about 11%, Young said, while the default rate when measured in loan volume is less than 7%. That means the loans against lower-value NFTs are more likely to default, perhaps due to the assets’ declining value. It’s entirely possible NFT holders may benefit more simply by defaulting on loans.

Anyone can borrow, anyone can lend

NFTfi supports more than 150 Ethereum NFT collections, including the Bored Ape Yacht Club, Art Blocks, VeeFriends, and Mutant Ape Yacht Club. The largest single NFT loan to date on the platform was for an Autoglyph, a limited-run project from CryptoPunks creator Larva Labs. That loan yielded the borrower over $1.4 million back in October, again via MetaStreet.

It’s not just companies and organizations that are providing liquidity for NFT-backed loans, however. Anyone with spare cryptocurrency can plug into the platform and provide a loan, Young said, to earn some extra yield on their funds—or to try and secure the collateral NFT through a default.

The space is becoming “way more professionalized,” Young explained, particularly around blue chip assets like CryptoPunks, Autoglyphs, and Bored Apes. More institutional parties are offering liquidity, he said, while some traders are building AI-driven bots that automatically value assets and make offers.

And while some borrowers may take NFT-backed loans to buy even more NFTs, or make crypto trades, others are freeing up funds for real-world uses. Young shared the story of someone who used a Doodles NFT to take a 4 ETH loan to buy a truck to aid Ukraine relief efforts, and he was able to get a 0% APR loan from a lender to help with the cause.

It’s still relatively early days for the NFT market, and even earlier days for the NFT-backed loan market, but Young said he anticipates the market can grow to 10% penetration based on total NFT trading volume. It’s currently estimated at 0.5%.

“As more and more of our lives are digital, as more value accrues in digital space, and as more physical things get represented as NFTs, I don’t really see that floodgate turning around,” Young added. “As more and more value accrues in these assets, people are going to need financial tools.”

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