DeFi lending was already big business, but a quickly growing niche is borrowing against valuable NFTs and using them as collateral for loans. Fragment, the holder of a pair of Mutant Ape Yacht Club NFTs, borrowed 1,000 ETH—around $1.3 million—using the star-studded JPEGs as collateral today.
1000 ETH was borrowed against two mega mutants today on @arcade_xyz! The payback is set to be 1,044 ETH in 90 days (18% APY). Additionally the borrower (@fragmentxyz) has bought a third mega mutant from @machibigbrother pic.twitter.com/0dkWIVOGYo
— 0xTIGΞR (@PltTiger) September 27, 2022
“It’s awesome to see these loans getting funded in this market climate, and more so that it’s happening all on-chain via DeFi,” Gabe Frank, CEO of NFT lending company Arcade, told Decrypt. Arcade facilitated the latest eye-popping loan.
“Prices have stabilized some, and volatility has dropped, so lenders seem more willing to underwrite larger loans,” Frank explained. “At the same time, the mega mutants are incredibly rare assets.”
This particular loan is a non-recourse loan, meaning the lender can seize the loan collateral in the case of default. The lenders on the other end of Fragment's Mutant Ape loan are Nexo and Meta4 NFT Lending. According to Arcade, the loan repayment terms are 1,044 ETH in 90 days at an 18% APY.
"If the borrower defaults, the lender has an on-chain claim to the collateral in the protocol," Frank previously told Decrypt. "So the lender can claim the assets, unwrap it, and then sell it if they have to, or keep it on their balance sheets."
Non-fungible tokens, also known as NFTs, are cryptographically unique tokens linked to digital and physical content, memberships, or proof of ownership.
“We're building IPs around [Mega Mutants], starting with @AppliedPrimate, so we're looking to have more Megas to participate in our universe,” Fragment founder PTM told Decrypt.
“The idea here was how do we get some cash fast to take advantage of an opportunity. Lending was the right call for what we needed,” PTM explained. “We will likely unwind the loan in the next 90 days or so.”
In March, a CryptoPunks holder used their collection of 101 NFTs to borrow $8 million. In April, another CryptoPunks holder opted against an auction at Sotheby's and instead borrowed $8.3 million in DAI using the bundle of 104 NFTs as collateral. Those borrowers facilitated the loans through NFTfi, an NFT-backed loan marketplace.
According to Arcade, there has been a steady increase in NFT borrowing since June 2022, with a high of $2.5 million in September, although most activity remains in buying and selling NFTs, with $11.1 million in September, Arcade says.
Holders of "blue chip" NFTs are seeing borrowing against their collections as a lucrative option that, unlike selling their NFTs, would allow them to retain ownership.
As long as they don’t default on the loan, in which case it’s bye-bye JPEG.