In the previous series of introductions to making money by following Binance NFT, we introduced the "post" NFT era of "NFT staking", and also told you how to pledge the APE series and Sandbox series on Binance's centralized NFT platform. Interested friends can go to the top file of my article section. So this article will talk about the newly launched NFT lending in Binance NFT section! Let's take some time to explain the basic situation of the current NFT lending industry and some knowledge points:
What is NFT lending?
Like traditional art and collectibles, NFTs have also experienced low liquidity and cash flow generation issues, and NFT lending has changed this situation and injected more liquidity into the space. While NFT prices have plummeted along with the entire cryptocurrency market, the utility of NFTs is exploding - from gaming to social. The increase in utility has led to the demand for NFT lending. After all, NFTs are essentially blockchain tokens, and they can be loaned out and used for borrowing. NFT lending, which enables NFT holders to use their NFT collections as collateral to obtain cryptocurrency loans, is a booming trend. Most NFTs lack sufficient liquidity, and various decentralized finance (DeFi) projects have responded to the need to increase NFT liquidity through lending.
Loans are provided by people who seek to earn interest from the act of providing a loan. Typically, people who participate in NFT-based loans generally receive higher returns than standard cryptocurrency and traditional loans. Like cryptocurrency lending, NFT lending utilizes digital currency as collateral. However, in NFT lending, borrowers lock up their NFT assets as collateral to obtain a loan.
Currently, most NFT loans are provided by DeFi applications, which use smart contracts to stipulate terms and interest rates. The threshold for novices and ordinary users is relatively high: creating wallets on different chains, being responsible for the security of their own wallets, various chain-running projects, various hacker phishing and theft incidents, these problems are numbing for novices. It is no exaggeration to say that which pioneer who "travels" on the chain has not been cheated?
How does common decentralized (DeFi) NFT lending work?
Decentralized NFT lending platforms allow NFT investors to borrow cryptocurrencies and set lending terms and interest rates without a third party. As a borrower, you can get a loan of up to 50% of the value of your NFT, with an interest rate between 20-80%, depending on the valuation of the asset. NFT lending protocols are more direct, transparent, and faster than real-world lending platforms. There are no intermediaries to assess your creditworthiness, verify your identity, and take days to weeks to consider whether to approve or reject your application.
DeFi applications utilize smart contracts to give users full control over their assets. Essentially, the collateral is locked in an automated smart contract. The lender chooses a “fair value” by evaluating the NFT’s past transactions and the reserve prices of similar collectibles. After the lender and borrower agree on the terms, the borrower transfers the NFT from their wallet to a third-party escrow system, and the protocol handles the remainder. If the borrower fails to repay the loan and interest within the specified period, this will result in the NFT being confiscated.
Lending protocols like NFTfi.com and Arcade have fixed-term, fixed-rate loans. They have no access to the collateral or funds involved, and will not liquidate collateral if its price drops. However, other protocols like JPEG'd will liquidate collateral if the loan-to-value ratio reaches 33% or higher.
Common NFT lending types
Peer-to-Peer NFT Lending
Peer-to-peer NFT lending works like regular crypto loans - transactions take place directly between parties. For example, a borrower lists an NFT on NFTfi as collateral for a loan. The borrower will receive wrapped ether (WETH) or DAI, and the collateral will be locked in a digital vault under specific terms and conditions. When the borrower repays their loan plus interest within a specified time, they will receive their NFT back, and the lender gets his investment back plus interest. NFTfi is an example of a peer-to-peer NFT lending platform.
advantage
The loan terms can be renegotiated if both parties mutually agree.
There is no automatic liquidation before the loan maturity date, providing a certain stability for the borrower.
shortcoming
Since there is no liquidation if the NFT’s reserve price is lower than the loan amount, the interest rate is usually higher.
A lower loan-to-value ratio can make loan terms less attractive to borrowers.
Perpetual peer-to-peer lending
This is what Blur came up with. The perpetual peer-to-peer NFT model is a lending system that facilitates direct loans between borrowers and lenders without set expiration dates. The model introduced by Blur does not use price oracles to perform liquidations, like the peer-to-pool model. Instead, it gives lenders the option to sell loans in a Dutch auction or trigger liquidations when they feel their principal is at risk. The protocol also maintains the borrower's right to repay the loan and interest at any time.
The idea behind this model maintains the assumption that loan terms for NFTs need to be set individually. However, a key difference from the peer-to-peer model is that lenders make offers based on NFT collections, rather than on an individual case basis.
So far, the system of no expiration dates and no specific collection loan offers has resulted in a more efficient market. But the story of Blur is a long one, so we won’t waste time on it here.
advantage
Since there is no loan expiration date, borrowers and lenders have greater flexibility.
A Dutch auction refinance can help borrowers find new loan terms.
shortcoming
For lenders, the risk is higher because they need to actively monitor the value of the NFT.
This process may be more complicated than traditional peer-to-peer NFT lending.
Peer-to-pool NFT lending
Peer-to-pool NFT lending is a more complex transaction that lacks some of the flexibility that borrowers enjoy in peer-to-peer NFT lending. However, it provides increased liquidity and speed. Through platforms like BendDao, anyone can borrow ETH from a pool of liquidity providers. Borrowers can receive 40% of the floor value of their NFT collateral.
Peer-to-pool lending allows users to borrow directly from a liquidity pool, rather than waiting to find a suitable borrower. This pool consists of liquidity providers who deposit directly into it, and when borrowers list their assets as collateral, they can automatically access funds.
NFT owners list their assets as collateral and deposit them into the system’s smart contract. In return, they receive a loan that is usually a percentage of the NFT’s value, with the interest rate varying with the pool’s usage over the long term.
In this lending agreement, the borrower deposits the collateralized NFT into the smart contract and borrows from the pool, with the interest rate calculated by the smart contract.
Liquidations occur when the value of the NFT used as collateral drops and the loan is now below the minimum collateralization ratio (also known as the liquidation threshold). The higher the MCR value, the more secure your funds are in the event of a liquidation.
advantage
It provides a smoother borrowing experience, with interest rates and loan amounts calculated automatically.
The lack of a repayment period provides flexibility to borrowers.
shortcoming
If the health factor conditions are met, there may be a risk of collateral liquidation.
May not be suitable for NFTs with volatile floor prices as it may lead to premature liquidation.
Three-actor model
The triangular model is a hybrid alternative to peer-to-peer and peer-to-protocol NFT lending that introduces a third party, called a strategist, to facilitate loan transactions between borrowers and lenders. Astaria is the first platform to implement this model, which simplifies the term agreement process.
advantage
Get instant liquidity without back-and-forth negotiations with lenders. Have the option to refinance when better terms become available.
Liquidation will only occur after the loan maturity date if the borrower fails to repay the loan.
Liquidity providers can evaluate the risks and returns of different vaults, providing more options.
shortcoming
The involvement of a strategist adds an extra layer to the lending process.
Success depends on the strategist's expertise and efficiency.
As a new model, it may face challenges in achieving success in widespread use.
Non-Fungible Debt Positions
MakerDAO has been using collateralized debt position lending to provide crypto loans - borrowers lock up ETH collateral to get a DAI loan. In non-fungible debt positions, borrowers lock up their NFT assets to get synthetic stablecoin loans similar to MakerDAO. On the other hand, lenders can provide PUSD liquidity or exchange PUSD for other tokens to generate returns on DeFi protocols. reNFT platform is an NFT lending platform that provides this model.
Current ranking of lending TVL on DiFiLama:
Thoughts on the sustainability of NFT lending
Like any financing mechanism, NFT lending can be used to generate capital and economic activity, or to make speculative investments. At a time when the NFT investment narrative is driven by trader-led perceptions, there are concerns that lower interest rates will spark a lack of speculative sentiment. However, as with all issues wrapped in fear and uncertainty, we need to understand the context:
NFT markets are inherently illiquid and difficult to quantify, so the mechanics of cheap debt differ from their more liquid counterparts. The impact it may have on demand is difficult to predict. Many prominent creators believe that the NFT industry needs to break away from its relationship with price speculation incentives. Instead of constantly optimizing for a project that keeps falling, they need to build projects for new use cases such as media, physical goods and experiences, and games. These innovations will attract the entrants needed to start a new cycle. If so, then the NFT market may not need this type of leveraged investment to reach its market fitness.
Well, we have analyzed some situations of NFT lending. Undoubtedly, it is completely confusing for us, a novice on Binance (Jiu Cai). So let's take a look at how the centralized Binance Square NFT section creates opportunities for us?
Binance NFT has launched NFT lending at 19:00 on May 26, 2023 (Eastern Time Zone 8). NFT holders can use their NFTs as collateral to obtain ETH loans, allowing users to retain the potential long-term value of holding NFTs without having to sell them.
Binance NFT Lending is a centralized peer-to-pool loan
Previously, peer-to-peer pool protocols on the market were all decentralized, so as an NFT holder, when using the lending function, you must face unexpected problems such as being responsible for your wallet security, various chain-running projects, smart contract vulnerabilities, hacker abuse, etc. However, when we use the lending function of Binance NFT, we don’t have to worry about these problems. Anyway, if there is a problem, Binance will compensate.
basic rules:
The loan amount is determined by the value of the NFT and the pledge rate. Based on the value of the NFT, the pledge rate determines the maximum loan amount a user can obtain.
Each loan needs to be overcollateralized. This means that the value of the borrower’s NFT collateral must exceed the value of the cryptocurrency received from Binance NFT lending.
Binance NFT lending is an open-ended loan. As long as the NFT and loan assets are supported by the product and do not exceed the corresponding pledge rate (i.e., liquidation is not triggered), the borrower can hold their loan position indefinitely.
Binance NFT lending benefits:
Starting from May 26, 2023, Binance NFT Lending supports Ethereum (ETH) loans, and supports Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC), Azuki and Doodles collection as collateral options.
I think the biggest attraction is the preferential interest rate. The normal interest rate on Binance is 11.2%, and the interest rate on DeFi is between 20-80%. The current interest rate during the event is 3.36%.
This is basically a blood transfusion for blue-chip NFT players. Imagine that someone spent 1 million yuan to buy a picture of a boring monkey, and the price was cut in half again and again, and no one took it. At this time, you pledge the monkey to Binance and borrow money with an interest rate of only 3.6%! This is a sure way to increase your own liquidity.
Some notes:
What is the collateralization rate? How much can I borrow from Binance NFT Lending?
The collateral ratio stands for loan-to-value ratio. It represents the ratio between the borrowed amount plus accrued interest (if any) and the value of your collateral. The collateral ratio determines how much you can borrow. The collateral ratio will vary for different NFTs.
Pledge ratio: the ratio of the maximum loan amount to the collateral value (NFT floor price). Pledge ratio = loan value / collateral value.
Liquidation Threshold: The critical level that a borrower’s collateral value (expressed as a percentage) must exceed to avoid liquidation of their assets. For example, BAYC collateral value must remain above 80% of the loan amount to prevent asset liquidation.
Borrowable Quantity for a Single NFT Collection: Determines the limit on the total amount of Ether (ETH) that can be borrowed for NFTs in a specific collection.
ETH borrowing limit per NFT: A limit on the maximum amount of Ether (ETH) a user can borrow for a single NFT asset.
ETH loan cap per user: Limits the total amount of Ether (ETH) a user can borrow on Binance NFT Loans for all their NFTs.
How to calculate the floor price?
The NFT floor price is calculated based on the Binance oracle, which comes from 2 data sources (Chainlink and OpenSea).
How is the interest rate calculated?
The interest rate is calculated based on the current total debt (including principal and previously accrued interest) as the principal, ensuring that the interest calculation reflects the interest accumulated over time. The interest rate is set based on Binance's internal algorithm and may also change based on market and risk parameters. Users can refer to the NFT lending page for interest rates.
1. Daily interest rate calculation:
The loan interest rate is calculated daily. The interest charged will be calculated and automatically added to the outstanding debt at 08:00 (GMT+8) each day.
The interest rate for borrowing is calculated on a daily basis. Any changes in the interest rate will apply to the current and future borrowing periods. Past borrowing periods will not be affected and will be charged based on the interest rate then in place.
For example, if you borrow money today (Tuesday) at an interest rate of 10%, the daily interest rate will be calculated as (10% * amount borrowed) / 365 days. If the interest rate changes to 15% tomorrow, the new daily interest rate (starting from Wednesday) will be (15% * amount borrowed) / 365 days.
2. Calculate interest based on the current total debt amount as principal:
Interest is calculated by treating the total current debt amount (including principal and any previously accrued interest) as principal.
Interest: rounded to 4 decimal places. No matter how small the amount is, the minimum interest reflected is 0.0001.
For example, 0.00000003 interest amount -> 0.0001
0.00011 - > 0.0002
For example, if the principal is 4 ETH, today's interest is 0.01 ETH. Tomorrow's principal will be 4.01 ETH (including the interest from today), and the interest will be calculated based on this new principal.
What is the liquidation procedure?
The NFT lending liquidation process follows the steps listed below and is designed to ensure that the lender can recover the funds if the borrower defaults or fails to meet the loan conditions. The following is an introduction to the liquidation process.
1. Loan default: When the health index is lower than 1, a forced liquidation event will be triggered.
2. Initiate forced liquidation: When a forced liquidation event occurs, Binance NFT may initiate a forced liquidation procedure for the NFT used as loan collateral.
3. NFT Valuation: The NFT that is liquidated is valued based on the floor price at the beginning of the Dutch auction, which is critical for selling to recover the outstanding loan amount.
4. Sell NFT: The NFT after forced liquidation is sold at a fair market price through the Dutch auction process. The Dutch auction starts at 125% of the current floor price, and the price decreases linearly by 0.5% every 10 minutes, with a minimum price of 70%. The Dutch auction will last for 24 hours.
5. Recover the borrowed amount: Once the liquidated NFT is sold, the funds raised from the sale will be used to repay the remaining debt.
6. Distribution of Excess Proceeds: If the liquidated NFT sale price exceeds the outstanding loan balance and fees, the net surplus may be returned to the borrower.
7. Resolution: The liquidation process is considered complete after the remaining debt and related fees are fully recovered. If the proceeds from the sale are not enough to repay the loan, the borrower will not receive any return and Binance NFT will bear the bad debt.
8. Collateral takeover: If the liquidated NFT fails to be sold during the 24-hour Dutch auction, Binance NFT will seize the NFT collateral and take over the ownership and control of the NFT assets.
9. Dutch Auction
A Dutch auction is a type of auction where the price starts high (usually above the floor price) and gradually decreases until a bidder is willing to buy at a specific price. In the context of liquidation of NFT loans, a Dutch auction is a process that Binance NFT can use to recover funds when a borrower defaults on an NFT loan.
When a borrower fails to repay his NFT loan and the loan health index falls below 1, Binance NFT will initiate a forced liquidation procedure.
Is there any forced liquidation protection?
To ensure the safety of NFT holders, Binance NFT will set up a 24-hour Dutch auction window. If no other users have bid for the liquidated NFT, the borrower can still repay the outstanding loan.
Total debt = loan amount + accrued interest + liquidation fee (5% of the loan amount plus interest)
However, if you repay before another person bids on your liquidated NFT, your loan secured by NFT will not be liquidated. However, if an interested buyer bids on your liquidated NFT during this window before you repay the loan, the NFT ownership will be transferred to the new owner.
How do I stake my NFT to get a loan?
1. Go to the Binance NFT lending page.
2. Click [Borrow Now].
3. Select an NFT collection under My Assets and click on the NFT you want to use as collateral.
Adjust the percentage on the slider, or enter the amount you want to borrow under [I want to borrow].
Click [Loan].
4. Next you will see a pop-up window for confirmation. Double-check your [Loan Amount] and [Interest Rate] and click [Confirm] to confirm they are correct.
Note: Remember to proactively check the health index of your loan on the NFT lending page to reduce the risk of forced liquidation.
Binance NFT lending summary and subsequent opportunities:
We have seen that the lending function of Binance's NFT section is essentially Binance endorsing its own NFT lending product. For those with Web3 obsession, although it goes against the concept of decentralization, the current on-chain security is indeed not high, and many users still have concerns about large-scale fund operations.
Binance NFT lending section solves the concerns of novices about using their NFTs to increase their asset liquidity. At the same time, it also achieves the immediacy of lending, and of course there is no need to pay high GAS fees on ETH (tens or hundreds of dollars for a contract interaction, which is really painful).
The most important thing is that Binance NFT's lending rate of 11.2% is much lower than the market price, and it was reduced to 3.36% during the event. It's full of sincerity. If you take it out, you can join me in the contract competition! #合约锦标赛
I think if we talk about opportunities in the future, if the pool allows ordinary users like us to put our own ETH into it and lend it to others to earn interest, such a high interest rate is really great!
Let us always pay attention to the opportunities to make money in the Binance NFT section!
