On July 10, a lender through decentralized lending platform Arcade provided a $35,000 loan to an individual who pledged a Patek Philippe watch as collateral, which was verified and escrowed by 4K Protocol.
On July 10, a lender through decentralized lending platform Arcade provided a $35,000 loan to an individual who pledged a Patek Philippe watch as collateral, which was verified and escrowed by 4K Protocol.
Patek Philippe watches are considered among the most valuable in the world, with some even fetching millions of dollars at auction.
The borrower entrusts an escrow company to safely store the watch, which then issues an NFT (non-fungible token) representing ownership of the watch.
The NFT was listed on the Arcade platform, where interested lenders could submit their loan offers. After reviewing the options listed, the borrower accepted the loan offer for $35,000.
On the one hand, in order to ensure the security of the transaction and the interests of the lender, the NFT representing the ownership of the watch is transferred to a custodial wallet until the loan is repaid.
On the other hand, in the event of a default, the lender will claim the Patek Philippe watch by destroying the relevant NFT. This mechanism ensures that the lender becomes the legal owner of the mortgaged watch.
As the transaction data shows, the involvement of escrow companies, smart contracts, and NFTs simplifies the lending process. Most importantly, the identities of borrowers and lenders remain confidential.
The trustless nature of this transaction means that traders do not have to reveal their identity if they transfer value through a non-custodial wallet such as MetaMask.
Although NFTs increase the liquidity of DeFi (decentralized finance) loans and enable users to enjoy global liquidity available around the clock, caution is still needed during transactions.
For example, while this high-profile transaction highlights the potential of DeFi and how NFTs can be used as loan collateral, it should be noted that NFTs are just as volatile as mainstream currencies in the crypto space, such as BTC and ETH.
Following the “crypto winter” of 2022, which continued into early 2023, the prices of popular NFTs like CryptoApe and CryptoPunks have been falling.
In the NFT industry, a reserve price is the lowest price an NFT in a given set will sell for on a marketplace like OpenSea or Rarible.
OpenSea statistics show that the reserve price of the Bored Ape NFT has been falling, from $600,000 in 2021 to 30 ETH in early July 2023.
At this rate, while Bored Ape and other popular NFTs can be used to obtain loans from lenders willing to lend funds, a plunge in asset prices could affect liquidity.