A quick look at the current state of NFT lending protocols: What innovations are there and what problems need to be solved?

原文标题：How does NFT lending work today? and why you should pay attention?
Original author: mitchelljhammer
Compiled by Huo Huo, Vernacular Blockchain
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NFT prices may have fallen, but NFT lending has been strong. More than $2.1 billion in loans have been issued on Ethereum (ETH) NFTs this year.
That’s twice the size of Sotheby’s art loan portfolio and about 10% of the total art loan market. How does NFT lending work now, and why should you care?
1. The current status of NFT lending
The NFT lending protocol allows holders to obtain liquidity without having to sell their NFTs. Users lock NFTs in smart contracts as collateral and then withdraw liquidity funds.
There are two main lending models in the market today: peer-to-peer (P2P) and peer-to-pool (P2Pool).
Peer-to-peer (P2P) lending: Peer-to-peer lending protocols include @Arcade_xyz, @NFTfi, @the_x2y2. These protocols match individual lenders with individual borrowers based on preferences. For example, if I want to lend to Beanz holders, I can search @NFTfi for loans that meet my risk/return requirements.
Peer-to-Pool (P2Pool) Lending: Peer-to-Pool lending protocols include @BendDAO, @ParaSpace_NFT, @TheBNNFT, @dropsnft. These protocols allow borrowers to instantly extract liquidity from existing pools of funds, similar to how @AaveAave and @compoundfinance work for fungible tokens.
Both models have pros and cons:
The peer-to-peer (P2P) model is more suitable for non-mainstream/long-tail NFTs. However, loan matching takes time, the loan term is fixed, and the lender has a higher risk.
The peer-to-peer (P2Pool) model is more suitable for mainstream NFTs, with instant liquidity and decentralized risk. However, the interest rate/collateral ratio does not take into account characteristics and relies on oracles.
2. Improvements in the current market
New models are emerging to improve upon the existing peer-to-peer (P2P)/peer-to-pool (P2Pool) paradigm.
Blend (@blur_io) uses an order book to aggregate bids from lenders, improving liquidity and enabling efficient refinancing. @ParaSpace_NFT provides rarity enhancements, reducing collateralization ratios for higher value NFTs.
@AstariaXYZ uses a 3-party system. Liquidity providers pool funds into a vault and delegate to strategists to manage the loan underwriting process.
@metastreetxyz uses tiered borrowing. Borrowers can specify their own borrowing risk preferences. Risk is segmented, but liquidity is shared among borrowers.
3. The Future of NFT Lending
These protocols are all building key NFT lending infrastructure components. But we still need to solve some major problems, including:
Better balance of borrower/lender interests
Manage your positions easily
Improved protocol interoperability.
1) Balancing the interests of borrowers and lenders
Lenders should be appropriately compensated for their risk, and borrowers should receive reasonable loan terms. This is not easy to achieve in the volatile NFT market. Prices can fall rapidly, leading to the liquidation of borrowers and the creation of bad debts.
On top of this, current loan agreements pay interest when due, meaning the risk to the lender increases as the loan term goes on.
Therefore, current NFT loans are characterized by short-term and high-interest rates, which increases friction and costs for both sides of the market.
The implementation of repayment plans like those seen in traditional finance will help reduce the risk to the lender during the loan period.
The reduction in lender risk will be passed on to borrowers in the form of longer-term, lower-interest loans.
2) Manage positions easily
Today, managing your NFT lending or borrowing positions requires a full-time job. You need to keep an eye on prices and act quickly to avoid being liquidated or holding a bag of worthless collateral.
This is a bad user experience for most people.
Telegram and email alerts are a good first step in helping people manage their loan positions.
More advanced features, such as automatic repayment, liquidation insurance, and hedging tools, can further enhance the user experience for both lenders and borrowers.
3) Improved interoperability
To borrow against your NFT, you need to deposit it into a smart contract. Operationally this means that the utility (airdrops, governance) associated with your NFT will also be transferred.
But in traditional finance secured loans, this is not the case. Even if your home is mortgaged, you can still continue to live in it!
Holding your NFT as collateral shouldn’t mean you have to stop using it!
We need to develop standards and build in a way that borrowers can still access the underlying utility of NFTs when they are used for lending or other financial protocols.
4. Why should we care about this issue?
Borrowing markets are critical financial infrastructure for all major markets. They improve market efficiency, promote growth, and expand market access.
Building the right lending mechanisms ensures the protocol can handle trillions of dollars in demand once most assets are encoded as NFTs.