People take loans out all the time and they lay down personal assets as collateral, including cars, unique artwork, and other valuable possessions. However, we live in a world where NFTs sell for millions of dollars. Therefore, why shouldn’t they be accepted as collateral against a loan? There are many considerations to make when laying down NFTs as collateral including valuation, which constantly changes according to the crypto markets. Throughout this article, we’ll discuss the reasons for the appearance of NFT debt markets as well as how they’re evaluated.
Why the NFT Market Price is Rising
NFTs have made their way into the mainstream over the last couple of years, prompting many people to collect digital art and part ways with millions. According to Global News Wire, the NFT market will reach around $20 billion by 2028. This means that there’s plenty of cash moving around in the NFT system.
Alongside the sales of digital art, the metaverse is becoming a constant tech buzzword. These virtual worlds rely on NFTs, which allow players to own in-game assets that can be traded and sold through an NFT marketplace. Over the next decade, the metaverse will evolve and take shape into a new normal means of interacting online.
How Do NFT Collateral Loans Work?
Although in-game NFTs can be sold or traded, there’s no other use for them outside of their game. This is where NFT debt markets are coming in to fill the void. Instead of having an NFT sitting pointlessly in a digital wallet, people can lease them as collateral for loans. When they’re released, they enter into a smart contract containing the terms of the loan. Once a full repayment of the loan is made, the NFT is released.
How Are NFTs Valuated for Loans?
NFTs exist on blockchains, which means they’re crypto assets. As with all crypto, the value fluctuates constantly because different people would pay different amounts for the same NFT, which is why it becomes complicated. To guarantee the valuation is fair for all involved, the borrower and lender need to communicate. Finding the right lender may take some time, as your value for the NFT won’t always align.
What Happens When Collateral NFTs Increase in Value?
If you’ve found a lender and you’re happy to enter into the contract, you need to stop for a moment and ask yourself what happens if your NFT increases in value during the contract duration. There’s no set answer for this, and it will be down to the discretion of the lender. However, you will find some lenders that ask you to pay a higher value. Before entering into a lender agreement, ensure you understand all of the T&Cs.
We live in a digital age, so why shouldn’t valuable digital assets be considered viable loan collateral? Over the next few years, the NFT debt market will likely grow and enter the mainstream. After all, NFTs may as well have some further use than playing games and fleshing out a boastful library.
