NFT collectors, no longer content with just using their tokens as NFTs as status symbols, are finding a way to leverage their favorite digital art as collateral for loans. One platform that makes this possible is Arcade, a peer-to-peer liquidity protocol for NFTs.

NFT collectors use platforms like Arcade, NFTfi, and Drops to tap into the value of their holdings to unlock short-term liquidity instead of selling it for a one-time payout.

"Put your NFTs to work," Arcade's website urges. "Borrow and lend against valuable NFT assets."

Arcade founder and CEO Gabe Frank told Decrypt how it works in an interview at Consensus in Austin, Texas. "If you own an NFT that's 100 ETH in value, we have a team that will appraise it and value it," Frank said. "Then a lender will decide on a loan-to-value ratio on an APR rate, and a duration."

Frank is a third-generation Texas pawnbroker who turned his attention to NFTs and Web3 in 2016, so he knows a thing or two about valuing an object. NFTs are the blockchain-based tokens that show ownership over digital or physical assets, and valuing them has been largely tricky and contentious.

According to Frank, the loans facilitated by Arcade are non-recourse loans. A non-recourse loan is one where a lender can seize the loan collateral in the case of default.

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If collateralizing NFTs sounds like a bad idea, Arcade is aware of the risk of default by borrowers. "If the borrower defaults, the lender has an on-chain claim to the collateral in the protocol," Frank says. "So the lender can claim the assets, unwrap it, and then sell it if they have to, or keep it on their balance sheets."

Frank says Arcade cannot access the NFTs, and everything happens through smart contracts. "We're just the software," Frank says. "We think the best way to get liquidity out of this asset class is in a peer-to-peer fashion because lenders have different risk profiles, want different assets, and have different risk appetites."

Frank says there is a growing market for collateralizing NFTs, adding that Arcade has $25 million worth of"blue chip" NFTs locked in escrow. He estimates the NFT industry has seen about $200 million worth of loans taken out against NFTs.

And if you follow NFTs even a little bit, you can likely guess which collections are being collateralized: "We've done $25 million in loans against monkey pictures. That's what NFTs look like today. It's Bored Apes, it's CryptoPunks."