The market for borrowing and lending non-fungible tokens (NFTs), known as NFTFi loans, has surpassed $430 million across 43,521 borrowers, according to a report by Paraspace, a non-fungible token money market protocol, and BitKeep, a multichain wallet. The majority of collateral in these loans consists of the most popular NFT collections, including Wrapped CryptoPunks, Bored Ape Yacht Club, and Mutant Ape Yacht Club.
Research conducted by Paraspace and BitKeep reveals that the outstanding loans in the NFTFi market increased by $25 million between January and March. The launch of Blur, a digital collectible lending protocol by NFT marketplace Blur, also contributed to this growth, with over $16 million in loans issued within a day of its launch, led by Taiwanese celebrity Machi Big Brother. However, the introduction of Bitcoin Ordinals played a crucial role in boosting the total transaction volume of the NFT market to $1.5 billion in March, which later decreased to $330 million in May. According to researchers, despite this growth, liquidity concerns remain prevalent in the sector.
Liquidity challenges and successes in the NFT lending space
The lack of liquidity in NFT trading stems from limited user numbers, pricing difficulties, and high NFT prices, as Paraspace and BitKeep researchers highlighted. They observe two extreme scenarios: the top 10 NFTs maintain a certain level of liquidity with minimal fluctuation between projects, while other NFTs are sold at discounted prices. Paraspace has implemented a successful strategy to address these challenges, resulting in only 16 NFT liquidations and no bad debt since the protocol’s inception last year. The key to their success lies in their stringent collateral rules, allowing only the most established and highly liquid, or blue chip, NFTs to be pledged. However, these blue chip NFTs often have high entry thresholds, with average prices ranging from $11,000 to $120,000.
Unlike traditional platforms where users can only borrow against a single NFT, Paraspace allows users to create a basket of NFTs and ERC20 tokens, such as Bored Ape Yacht Club, AZUKI, and Bitcoin, to borrow a collection asset. This innovative approach aggregates liquidity into a single platform, increasing capital efficiency for liquidity providers.
The future of the NFT market and overcoming challenges
While the NFT market has shown remarkable growth, developers at Paraspace and BitKeep caution that the market needs historical data and universally recognized valuation analysis methods, leading to pricing difficulties. Different perceptions of rarity based on subjective views have resulted in significant price variations within the same NFT series. The developers believe that high-quality NFTs with strong community consensus, notable team backgrounds, and distinctive artistic styles will continue to thrive. However, the barriers for ordinary users to participate in blue-chip or popular NFTs are rising. As a result, solutions such as NFT fractionalization, NFT staking, and the emergence of NFT liquidity platforms have emerged to address these challenges and enhance accessibility.
The NFT lending market’s growth and increasing focus on blue chip NFTs signify the evolving nature of the NFT ecosystem. As the market matures, addressing liquidity concerns and fostering inclusivity will be vital for sustained growth and broader adoption.
