The borrowing against valuable NFTs as collateral has seen steady growth this year. The recent development involves Fragment, a Mutant Ape Yacht Club NFT holder who borrowed about 1,000 ETH valued at over $1.3M using a pair of the said NFTs as collateral.
Gabe Frank, CEO of Arcade, the lending DeFi that facilitated the loan, says he is pleased to see such big loans funded despite the current bear market. He adds the reason could be that the prices have stabilized and volatility has also dropped. Therefore, lenders are willing to take the risk of underwriting bigger loans.
The Fragment’s loan is a non-recourse loan. Hence in case of default, the lender has the right to seize the loan collateral. Other lenders involved in this loan include Meta4 and Nexo NFT lending. The loan attracts 44 ETH as interest, and its repayment period is within 90 days, as per Arcade.
What Could Happen When a Borrower Defaults?
Frank says that the lender has an ‘on-chain claim’ to the collateral in the protocol if the borrower defaults. So, the lender can claim the digital assets, then sell them if they have to or choose to keep them on their balance sheet. If it happens, the borrower loses the ownership and intellectual rights attached to the NFTs.
PTM, the founder of Fragment, says the reason behind borrowing is that the company is looking to build IPs around Mega Mutants to have more Megas participating in its universe. Therefore, Fragment chose borrowing to get the funds required to realize its objectives. PTM is optimistic about clearing the loan within 90 days.
NFT Borrowing Increases This Year
There have been several other cases of borrowing this year. In March, a CryptoPunks holder obtained a loan valued at over $8 million using 101 NFTs as collateral. Another borrowing happened in April as CryptoPunks holder used 104 NFTs to borrow $8.3 million in DAI. The two borrowers used an NFT-backed loan marketplace NFTfi, to facilitate the loans.
Arcade reports an increase in NFT borrowing beginning June 2022. Even though the main activity is still buying and selling NFTs, several blue-chip NFTs holders believe borrowing against their collectibles is a better option than selling them as it lets them retain ownership.