Huobi Ventures Weekly Report #36

Huobi Ventures Weekly Insights

Insight provided by Juliet Tang of Huobi Ventures

What is NFT Lending?

NFT Lending is the way to use your NFTs as collaterals to borrow capital.

Comparing with fungible tokens, NFTs lack liquidity and have wide ranges of prices, so it’s difficult for an NFT owner to get liquidity once he bought it. Those problems trigger the demands of Financial NFT products and thus makes NFT Lending projects possible.

In short, NFT Lending will offer liquidity to NFT owners without them having to sell their NFTs.

Classification of NFTs

Depending on different counterparties, there could be 2 kinds of different NFT Lending projects, one is P2P lending protocols like NFTfi, and the other is P2Pool lending protocols like BendDAO.

Some protocols on NFT Lending, source: https://medium.com/1kxnetwork/show-me-the-liquidity-evaluating-nft-financialization-methods-f3c30bf8f08c

P2P

Lending happens between the NFT owner and lender, and it needs to meet the demands of both parties to close the deal. Its strength lies in the tolerance to different kinds of NFTs and its weakness lies in the poor pricing system and high slippage.

P2Pool

Lending happens between one person and a liquidity pool. On the one side, it could be the NFT owner to mortgage his/her NFTs thus to get liquidity from the pool, and on the other side, one can also put his/her liquidity into the pool and get interests and incentives as rewards. Its strength lies in the high trading efficiency, but meanwhile the Oracle could easily get disturbed by price manipulation of floor prices on markets.

Key Elements of NFT Lending

Similar to traditional lending models, there could be 3 parties here:

· Borrower: who mortgages his/her NFTs, gets liquidity and pays for interests

· Lender: who lends liquidity and gets interests

· Platform: who offers a platform to parties above and charges service fees

Other key elements include:

APR (here equals borrow interest rate), Service Fee, Duration, Collateral, Collateral Ratio and Liquidation Threshold.

Case Analysis

Here, I would like to bring in NFTfi and BendDAO, which are the leading projects in P2P and P2Pool NFT lending protocols, to be the cases through which we can better understand this field.

Lending page of NFTfi, source: https://app.nftfi.com/lend/assets

NFTfi is a P2P Lending protocol which use Upshot and NFTbank to estimate NFTs’ price. Borrowers deposit their NFTs, and lenders choose NFTs to give an offer that including the lending details. The duration is so flexible that the users can custom duration or choose the recommended duration range from 7 to 90 days. NFTfi started from 2020 with the cumulated loan of $225m and current loan of $23m.

Some data of NFTfi, source: https://dune.com/rchen8/NFTfi

Images above present some data of NFTfi, we can easily find that the average loan size is around $10k, the average loan APR is 52%, the average fee accounts for 4.65% of the loan volume and the average duration is 33 days. The loan default ratio by volume is 9.13% while the loan default ratio by count is 11.68%, which indicates that bad debts always happen on small loans.

Homepage of BendDAO, source: https://www.benddao.xyz/

BendDAO is a P2Pool protocol that launched its official version at the end of this Q1. The community vote to decide whether an NFT project would be on their whitelist and now blue chip projects like Bored Ape and CryptoPunks are on their whitelist. BendDAO uses its own Oracle to estimate the price, usually they will get the initial price from Opensea and LooksRare and do some calculations and verification of the price. Also, they have a kind of mechanism which stands a 48-hour tolerance for the borrower to buy back their NFTs to protect the borrowers from being liquidated.

Now the TVL of BendDAO is about 73k eth which values $110m and the current loan is about 17k eth which values $25.5m. The deposit APR is about 5% and the borrow APR is about 15.6%, meanwhile, both borrowers and lenders will receive governance tokens as incentives.

Comparison of monthly loan value between NFTfi and BendDAO, source: https://dune.com/chuck/NFT-lending

Without considering the total amount of the loans, we can find that BendDAO grows rapidly even in a bearish Market on the image above.

· APR

APR stands for annual percentage rate.

Monthly average APR of NFTfi from May 2020 to Jun 2022, source: https://dune.com/gideontay/Dashboard

The total average APR of NFTfi is 52% and we can see above that the APR always stays at a high ratio. This is because of the lack of a price mechanism or maybe some cheap NFTs which have to endure a high borrowing rate to take out a loan.

Average APR of each duration of NFTfi, source: https://dune.com/gideontay/Dashboard

We can also find from the image above that the shorter the duration, the higher the APR.

Borrowing rate of BendDAO, source: https://docs.benddao.xyz/portal/protocol-overview/interest-model

From the curve above, we can find that the borrowing rate of BendDAO depends on the utilisation rate of the deposits. According to its calculation shown below, the APRs for both parties are listed.

APR for both parties, source: https://docs.benddao.xyz/portal/protocol-overview/interest-model

· Service Fee

NFTfi charges 5% from the interests and BendDAO charges 30%.

Note: the borrowing APR is different on 2 protocols and so as the interests.

· Collateral

Collaterals on NFTfi, source: https://dune.com/rchen8/NFTfi
Collaterals on BendDAO, source: https://dune.com/0xpai/BendDAO-analytics

Most of the NFT Lending protocols adapt whitelist to NFT items. We can find from the 2 charts above that most of the collaterals are blue chip NFTs.

· Collateral Ratio

Collateral ratio on BendDAO, source: https://docs.benddao.xyz/portal/highlights/instant-lending-and-repayments

The collateral ratios vary on different NFT projects on BendDAO. Top bule chip NFTs like CryptoPunks enjoy the highest collateral ratio of 40% on BendDAO. While on NFTfi, the ratio is decided by lenders and borrowers.

Summary:

· With the development of NFT, the demand for NFTfi will become stronger, indicating a promising market.

· Some innovations emerged, but the scale of NFTfi requires a more mature Oracle to provide a pricing mechanism.

· Comparing with the fungible lending market, NFT lending market is still very young and small. Opportunities stay more likely at infras at this stage and will attract more developers to join.

About Huobi Ventures

Huobi Ventures is focused on growing its venture investment portfolio and supporting blockchain projects through long-term investment strategies.Huobi Ventures aims to identify strategic opportunities across different blockchain verticals to complement and expand Huobi’s product offerings. Acquisitions will be integrated into Huobi’s growing suite of blockchain-enabled applications and services to expand the business into new markets.

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Huobi Ventures

Huobi Ventures

Focus on Huobi’s venture investment portfolio and supporting innovative blockchain projects through long-term strategies. Twitter:@HuobiVentures