2 NFTs Used as Collateral for $3M Loan on DeFi Platform
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2 NFTs Used as Collateral for $3M Loan on DeFi Platform

Arcade, a new NFT lending platform, has facilitated over $9 million in total loan transactions in the first 15 days of its launch.
Neither the author, Ruholamin Haqshanas, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

After an unprecedented boom market in 2021, a new use-case is quickly emerging for owners of the most popular non-fungible tokens (NFTs)—using them as collateral against crypto loans. Most recently, an NFT collector put up two rare Zombie CryptoPunks as collateral and secured a loan of $3 million via Arcade (formerly pawn.fi).

Arcade’s P2P Network Facilitates Trustless Lending with NFTs as Collateral

The market for NFT lending is pretty nascent, particularly compared to traditional fine art lending, where high-net-worth individuals have been unlocking the potential liquidity of their artworks for decades. Still, new participants aimed at facilitating NFT lending are emerging every day. 

Arcade is one such platform. It is a peer-to-peer lending platform that specializes in matching blockchain art owners with interested lenders. According to its website, the platform has facilitated over $9 million in total loan transactions to date.

Most recently, someone borrowed $3 million on Arcade by putting two rare Zombie CryptoPunks as collateral. There are plenty of smaller loans transacting on the platform as well. Just last week, Arcade facilitated two loans against BAYC #9024 and BAYC #2129 NFTs for around $150,000 each with a duration of 60 days. 

Gabe Frank, CEO of Arcade, believes financing terms in NFT lending is comparable to fine art lending. He said:

“It looks very similar to that model in that high-net-worth collectors want to use their locked up capital more efficiently. [For them], it comes down to capital efficiency, being able to leverage [their] assets and either buy more NFTs or invest elsewhere to earn a higher rate than an interest rate on a loan.”

Arcade officially launched its lending marketplace on January 31, 2022. It touts itself as a peer-to-peer lending platform enabling NFT owners to unlock the liquidity of their Ethereum-based NFTs. On the other hand, stablecoin or ERC20 token holders can lend their tokens in fixed-rate term loans collateralized by borrowers’ NFTs.

Notably, the launch came after a $15M Series A fundraising round with investment from a number of prominent investors, including Pantera Capital, Castle Island Ventures, Eniac Ventures, and Golden Tree Asset Management, among others. 

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Possible Downsides to the NFT Lending

Platforms like Arcade might be specifically attractive to lenders given their exceptionally high APY rates. However, investors should be aware of their potential downsides. For one, these platforms are peer-to-peer and over-the-counter, meaning trading is done directly between two parties and without the supervision of an exchange.

While the platform is heavily backed, it still provides no guarantee and is prone to hacks and exploitation. Furthermore, Arcade’s loans charge around 20% interest annually, which is not be favorable to borrowers. 

As of now, the marketplace offers loans against blue-chip NFTs, those considered among the highest valued in the market, like Bored Ape Yacht Club and CryptoPunks. However, it plans to expand its range of services and include lower value NFTs. The company’s CEO said:

“Right now, most of the value is locked up in the top 1% of assets, so the platform is curated to certain collections. Once we start integrating layer 2s and other blockchains, we can get into some of the lower value assets. Just because of gas costs, it’s currently quite restricted and only makes sense for these higher value loans.” 

This might open a window to a new range of possibilities. For instance, lower value NFT collections are prone to wash trading, where owners are re-purchasing their NFTs at higher price tags to lure more bidders. This could also affect Arcade’s market, making it hard for the platform to determine a suitable lending price tag for an NFT.

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Do you think lending against an NFT is risky? Let us know in the comments below.