NFTs have become a pivotal element in today’s digital ecosystem. This is justified by the NFT market cap’s acceleration past 2.62 billion dollars, reviving confidence in blockchain and crypto technology in spite of ever-existing volatility. But NFTs’ existence is often marred by an essential problem – Liquidity. Due to their unique properties, there has historically been a single way to cash out NFT assets – By selling them. NFT loan marketplace development comes as a relief to increase liquidity for NFTs. Our blog will delve into the business model in detail and let you know how entrepreneurs like you can launch NFT loan marketplace platforms.
NFT Loan Marketplace: A Wondrous Innovation
An NFT loan marketplace is a platform where people can borrow loans by submitting NFTs as collateral. The innovative solution serves as a pathway linking the NFT and DeFi (decentralized finance) markets. It offers a bypassing way for people wishing to multiply their NFT portfolio without selling the NFT assets they hold.
The platform can have two pathways – either an NFT marketplace offering loaning facilities or a DeFi application offering loans for NFT collateral. Either way, the platform is a blessing for people and the NFT market as a whole, as concerns about hard liquidity have existed in the NFT space for a long time.
The quote below indirectly sheds light on how DeFi is flexible in terms of including more people in the financial sphere. NFT loaning is a use case that further expands the power of decentralized finance.
“With DeFi, we can build a more inclusive financial system that works for everyone.” – Harriet Taylor, Executive Director of the UN World Food Programme.
How Does an NFT Loan Work?
- A user requests a loan on the NFT loan app by placing their NFT asset as collateral.
- An admin, or a smart contract, or a community board appraises the value of the NFT asset based on its history and background.
- After a set value is found, a lender is assigned to offer the loan to the borrower by keeping the NFT as collateral.
- The loan’s terms and conditions are agreed upon by both parties, after which the loan value is transferred to the borrower, and a smart contract escrow locks the NFT for the lender.
- Usually, the loaning value will be lesser than the collateral’s value to prevent under-collateralization. The borrowed amount will range from 50% to 75% of the collateral value.
- As the borrower repays the loan with debts in full, the NFT will be transferred back to them.
- If the borrower defaults from paying the loan in full, the NFT will be sent to the lender.
Elements Involved in an NFT Loan
- Interest Rate: The interest rate for the NFT loan depends on how much one has borrowed and how long the repayment will take. One should also understand APR (Annual Percentage Rate) and APY (Annual Percentage Yield). While APR calculates interest annually based on simple calculations, APY calculates the same quarterly, monthly, weekly, and daily.
- Loan-To-Value (LTV) Ratio: The loan-to-value ratio for an NFT loan is the ratio between the loan amount and the collateral value. It usually ranges from 50% to 75% more than the loan, as we had mentioned earlier, to prevent collateral value from falling under the loan value.
- Liquidation Ratio: The liquidation ratio is the value at which the NFT collateral can be liquidated (or sold) to gain monetary benefits. This is required in case the borrower fails to repay the loan or the LTV ratio gets to the maximum limits.
- Floor Price: The floor price of NFT assets is an essential factor in determining the amount an NFT loan marketplace can offer to a borrower. This price denotes the lowest price of the NFT collection the NFT is associated with. The higher the floor price, the higher its recognition in the market, hence higher influence on the loan value, LTV, and liquidation ratio.
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NFT Loan Marketplace Development’s Benefits
- An NFT loan marketplace can help unlock liquidity in the NFT market without necessarily selling NFT assets. Putting high-value NFTs for sale is usually a challenging endeavor (even fractionalization could not help fully). Borrowing loans with NFTs as collateral can be a quick way to cash out NFTs while retaining possible ownership of the assets.
- NFT loan marketplace development as a business model takes decentralized finance into the digital asset market, especially those involving high-profile collectibles such as artworks and profile pictures. Such an intersection of NFTs and DeFi powers the Web3 space to new heights as general crypto liquidity tends to become higher.
- Most NFT loaning applications do not require extensive credit checks or Know-Your-Customer (KYC) verification due to their decentralized nature. Such provisions aid most people to leverage their NFTs to good use through borrowing cryptos.
The Process to Launch NFT Loan Marketplace Applications
- Conceptualize: To launch NFT loan marketplace platforms, one should begin by deciding everything related to them. Some elements include business feasibility, technology stacks, target market, and unique value proposition, among others.
- Design: Design the platform’s user interface with friendly experiences – Allowing users to use the app easily is a way to appeal to the target market as a propagator of Web3 adoption.
- Develop: Develop the marketplace’s backend and smart contracts that decide how loans should be processed and collateralization should occur. It is essential to build the platform with high-end security measures at all access points to ensure funds exist safely.
- Test: Test the NFT loaning application using various use cases repetitively to find and troubleshoot possible errors. Beta testing can be utilized to show a glimpse of the project to the market and generate buzz before launching officially.
- Launch: After successfully testing and preparing the application devoid of defects, it is time to launch the NFT loan marketplace app. The launch should be preceded by community-building and outreach efforts in order to establish a brand image for the application.
- Maintain and Update: As a continued measure, it is important to maintain and update the marketplace regularly to ensure the platform is operational at all times without lags. Releasing updates based on user feedback and market trends can be a way to keep up with the latest changes in the NFT and DeFi spaces.
Conclusion
Thereby, we have shown you everything you need to know about NFT loan marketplace development, including the platform’s functionality and the building process. While NFT loaning might not be very prominent today, the scene is slowly changing, and signs of optimism have risen. Business enthusiasts like you planning to launch NFT loan marketplaces can work with our experienced developers at Blockchain App Factory in order to get the best deal possible. As an end-to-end Web3 development company in the space for a long time, we have access to the most advanced technological stacks and experts while emphasizing fulfilling customer needs without compromising. If you are interested in knowing more about building such an NFT loaning application, contact us today by filling out the form shown below.
