NFT Lending Platforms Are Booming, but New Traders Beware of 'Predatory' Behavior

While non-fungible token (NFT) trading volumes slumped in May, the adjacent NFT lending space is blooming. And so far, reviews are mixed.

Non-fungible token (NFT) trading volumes may have slumped in May, but the adjacent NFT lending space is blooming – and so far, reviews are mixed.

NFTfi – an evolving term for technology that sits at the intersection of NFTs and decentralized finance (DeFi) – is on the rise. NFTfi encompasses a range of tools that aim to offer broader utility and liquidity for NFTs, including NFT collateralized loans, fractionalized tokens and renting or lending NFTs.

What started as a way to capitalize on the bull run of NFTs in 2021 has recently exploded in popularity as major Web3 players entered the market. In May, leading NFT marketplace Blur launched Blend (short for Blur Lending) – a peer-to-peer lending platform that allows users to borrow against their NFTs as collateral. The platform, which capitalizes on the popularity of Blur, quickly seized 82% of the entire NFT lending market share within its first three weeks.

Shortly after, other NFT lending platforms began to spring up. Binance launched its feature called Binance NFT Loan, which allows holders to secure ETH loans by using their NFTs as collateral. And Joseph Delong, the former CTO of DeFi protocol SushiSwap, launched Astaria, which utilizes a third party to facilitate its lending market.

Scores of traders have flocked to these platforms to begin “pawning” their tokens to earn yield. Additionally, traders who may not have been able to afford an expensive blue-chip NFT from collections such as Bored Ape Yacht Club (BAYC) or Azuki can now lease these tokens for a fraction of the cost.

No doubt there are pros to participating in NFT lending, though the activity also comes with risks. Some Blur traders and NFTfi-native users called Blend’s lending mechanics into question and urged newer traders to educate themselves on how to borrow NFTs safely before diving in.

And while traders may support the idea of earning extra cash by lending out their dormant tokens, the risk of liquidation and concern over platform-specific lending mechanisms and decentralization among these platforms remains.

NFT lending benefits ‘lazy’ traders with big bounties

This rise of NFT lending platforms makes sense when you consider the current market conditions. Many NFT holders who purchased their tokens during the bull run are looking to earn some extra ETH in down markets. They can pawn their NFTs by leasing them to a trader who will pay to hold them over a specified period, earning the original owner some ETH. In turn, the borrower gets to join an NFT ecosystem or access certain perks they may not have been able to access otherwise.

For people like Polygon director of growth Hamzah Khan, who playfully describes his approach to NFT trading as “lazy,” lending can be lucrative.

“I just keep stuff long-term,” Khan told CoinDesk. “I don't use them daily … fundamentally, I like [NFT lending] because it gives me more capital.”

When asked about the potential dangers of NFT lending, Khan noted the risk of liquidation if the asset price drops, which can happen if the token price falls below 30-40%. However, he emphasized that he’s bullish on the growing industry and sees value in lending assets beyond the highly sought-after blue-chip NFTs.

“I have so many PFPs and I want to use them somewhere, but this vertical can become much bigger because homes can also be NFTs and mortgages can be can be denominated as ERC-721s,” said Khan. “I think people are people are severely underestimating how much we can do with NFTs.”

While NFT lending markets have primarily courted JPEG traders hoping to earn additional yield on their tokens, they operate similarly to lending markets outside the crypto space, like the housing market, that have the potential to onboard thousands more traders and companies to the Web3 landscape.

New traders are most at risk of ‘predatory’ behavior

Not all NFT lending platforms operate in the same way. Mason Cagnoni, chief operating officer of NFT lending platform Wasabi Protocol, and Karan Karia, vice president of business development at Wasabi, told CoinDesk that while the primary risk of NFT lending is early liquidation if a token’s price falls, Blend’s “down payment” feature allows a trader to make multiple payments on an NFT purchase over time, which can be tricky for traders new to trading NFTs.

“It's pitched as a ‘buy now, pay later’ that uses a perpetual lending on the back end, which is super predatory to the borrower,” said Karia. “Have you ever heard of a loan where you can get called instantly and you have 24 hours to repay? Like, the only person that does that is the mob.”

Cagnoni noted that new traders are more susceptible to engaging in risky behavior without fully understanding the consequences.

“Lending platforms were already in existence – if you go look at a Dune dashboard with the overlap of users, the Blend users are all new,” said Cagnoni. “Like, they'