Once regarded as a fad (for some, it still is), NFTs, digital assets that depict real-world objects, are becoming increasingly popular within and outside the crypto world.
But with large amounts of capital locked into illiquid NFTs, more people are looking for ways to unlock liquidity without selling their NFTs.
This market is one South African company NFTfi targets and has raised a seed round of $5 million to continue pioneering the financialization of NFTs. Early-stage crypto fund 1kx led the round, with Ashton Kutcher’s Sound Ventures, Maven 11, Scalar Capital, Kleiner Perkins and others participating.
Founded by Stephen Young in February 2020, NFTfi acts as a marketplace where users can get a cryptocurrency loan on their NFTs and offer loans to borrowers against their NFTs. In other words, users can use their NFTs as collateral to get loans from other users on the decentralized and peer-to-peer system.
For example, if a user comes to the platform to borrow $10,000, different lenders would propose to the borrower offers with varying interest rates and payments terms, from which the borrower could then select.
Meanwhile, the borrower will need to submit an NFT as part of the transaction. When the transaction is made, the NFT gets transferred into NFTfi’s smart contract (no one, including the NFTfi team, will have access to it) while the borrower receives the money.
Once the loan gets paid with interest to the lender, the NFT returns to the borrower’s wallet. If the loan is not repaid during the allocated time, the lender receives the NFT.
NFTfi users apply a common practice in the traditional art world where banks, big galleries or auction houses offer loans to artists to determine if an NFT is worth a loan or not.
Typically, in the traditional market, loans are roughly 50% of the artwork’s value. On NFTfi’s platform, lenders make evaluations and give borrowers up to 50% of their NFT value as the loan principal.
So, if an NFT is worth $20,000 at the point a borrower needs money, lenders are likely to offer not more than $10,000 as a loan. The interest rates, however, vary depending on the lender and assets. NTFfi takes a 5% cut of the interest earned on every loan by lenders, but it doesn’t make anything on a default.
Risk exists on both sides, though. Borrowers have a set time to repay their loans before lenders take their NFTs, and since NFTs are volatile due to public demand and perception, lenders can eventually take lesser-priced NFTs.
“That’s why lenders want to have some room between the price of the asset and how much they lend,” Young said on the dynamics in pricing between lenders and borrowers on NTFfi. “This is because in the case where somebody defaults, they need to be able to sell it for less than market value, and the price might have dropped in between. So that’s why they need such a big buffer between the loan value and the value of the actual asset.”
Currently, roughly 20% of loans on the platform get defaulted on, but according to Young, most are lower-value loans. The reason behind this is that high-value NFTs are pretty exclusive and hard to come by, so users fund loans that they hope will default as a way to acquire the NFTs.
“A lot of lenders actually don’t mind a default because often they’ll only lend on assets that they would like to add to their collection anyway. So when they get a default, they’ll keep the assets or list them on the market for 75% of the total value and might actually end up making more profits on defaults than on the actual loan.”
While it appears that NFTfi serves as an advantage to lenders, Young says that’s not the case. However, the platform is working to address that speculation by including features that allow term negotiations and extensions for borrowers.
The top NFT loans on NFTfi span across popular digital collectibles on the Ethereum blockchain — Art Blocks, Bored Ape Yacht Club, Cryptopunks, Autoglyphs, Meebits and VeeFriends. NFTfi transacted its first loan in May 2020, and since then, more than 1,500 have taken place on the platform.
Young claims NFTfi has been growing at 80% month-on-month in terms of loan volume and the company has totalled more than $26.5 million in value. The company says lenders have earned over $500,000 in interest.
Before launching NFTfi during the early stages of the COVID-19 pandemic as digital assets became more prominent, Young was the co-founder and chief product officer at Coindirect, a cryptocurrency exchange and OTC desk.
He raised $890,000 as seed money for NTFfi last year, assembling a team in South Africa to build and launch the product. Most of the group still reside in the African country; however, the company is now incorporated in the British Virgin Islands for compliance and regulatory reasons, according to Young.
With the new cash infusion, NFTfi plans to grow its team, launch new product features, roll out the platform on other blockchains, invest in its community and fund its decentralization.
What started from a bunch of friends using their NFTs as collateralized loans between themselves — with blind trust and some spreadsheet document — has taken flight to become a fully decentralized platform, one Young hopes will have a more significant impact in the NFT world.
“Our main focus is that we want to do for NFTs what DeFi did for cryptocurrencies. As soon as you brought DeFi into cryptocurrencies, you also had this explosion of activity and liquidity in the market. And really, we want to act as that catalyst for the NFT market, unlocking some of the value in these NF T’s so they can then be ploughed back into the NFT community and market to help develop the space further.”