NFT Lending: How to Borrow and Earn Using Your NFTs

NFT Lending: How to Borrow and Earn Using Your NFTs

Non-Fungible Tokens (NFTs) have evolved from simple collectibles into powerful financial assets. Today, you can use your Bored Ape, CryptoPunk, or other blue-chip NFT as collateral to borrow stablecoins like USDC or ETH. This process, known as NFT lending or NFT collateral loans, unlocks liquidity without forcing you to sell your prized digital assets. Simultaneously, it allows lenders to earn passive yield by supplying capital. This tutorial covers how NFT lending works, the key platforms (BendDAO and NFTfi), loan terms, liquidation risks, and how to earn as a lender. We’ll also provide a platform comparison to help you choose.

Step 1: Understanding How NFT Lending Works

NFT lending operates on two primary models: peer-to-peer (P2P) and peer-to-pool (P2Pool).

• P2P Lending (e.g., NFTfi): You, as a borrower, list your NFT as collateral and specify the loan amount, interest rate, and duration. A lender reviews your offer and decides to fund it. If you repay the loan plus interest, you get your NFT back. If you default, the lender takes ownership of the NFT.
• P2Pool Lending (e.g., BendDAO): Lenders deposit assets (e.g., ETH) into a liquidity pool. Borrowers can instantly take loans against their NFTs by paying a variable interest rate. The pool’s smart contract handles the mechanics, and the floor price of the NFT collection determines the loan-to-value (LTV) ratio.

Both models rely on smart contracts to automate collateral custody, interest payments, and liquidations.

Step 2: Key Loan Terms You Must Understand

Before borrowing or lending, familiarize yourself with these critical terms:

• Loan-to-Value (LTV): The percentage of the NFT’s floor price you can borrow. For example, a 40% LTV on a 10 ETH NFT means you can borrow up to 4 ETH. Higher LTV means more liquidity but greater risk.
• Interest Rate: The cost of borrowing, usually expressed as an annual percentage rate (APR). On P2P platforms, this is negotiated. On P2Pool platforms, it’s algorithmically adjusted based on pool utilization.
• Loan Duration: The agreed-upon period for repayment. On P2P platforms, this can be 7, 14, 30, or 90 days. On P2Pool platforms, loans are often open-ended but subject to health factors.
• Health Factor: A metric used on P2Pool platforms (like BendDAO) that indicates how close your position is to liquidation. A health factor below 1 means your collateral is insufficient to cover the loan, triggering liquidation.
• Liquidation Threshold: The LTV level at which your NFT will be seized and auctioned. For example, if the threshold is 80% LTV and the NFT floor price drops, your position may be liquidated.

Step 3: How to Borrow Against Your NFT (BendDAO Tutorial)

BendDAO is a leading P2Pool NFT lending protocol. Here’s a step-by-step guide to borrowing against your NFT:

Prerequisites: An Ethereum wallet (e.g., MetaMask) with ETH for gas fees, and a blue-chip NFT (e.g., Bored Ape Yacht Club, Mutant Ape Yacht Club, CryptoPunks, or Azuki).

1. Visit BendDAO and Connect Wallet: Go to benddao.xyz and click “Connect Wallet.” Approve the connection in MetaMask.
2. Navigate to “Borrow”: Click the “Borrow” tab. You’ll see a list of supported NFT collections and their current LTV ratios (e.g., 40% for BAYC).
3. Select Your NFT: Choose the NFT you want to use as collateral. You’ll need to approve the contract to access your NFT (this requires a gas fee).
4. Set Loan Amount: Enter the amount of ETH or stablecoin you want to borrow. The maximum is determined by the LTV and the floor price. For example, if the floor is 50 ETH and LTV is 40%, you can borrow up to 20 ETH.
5. Confirm Borrowing: Review the interest rate (variable, based on pool liquidity) and the health factor. Click “Borrow” and confirm the transaction in your wallet.
6. Monitor Your Position: After borrowing, your NFT is locked in the BendDAO smart contract. You can repay the loan plus interest at any time to reclaim your NFT. Watch the health factor—if it drops below 1, you risk liquidation.

Note: You can also use the “Repay” tab to pay back your loan in part or full.

Step 4: How to Borrow Against Your NFT (NFTfi Guide)

NFTfi is a P2P marketplace. The process is different:

1. Go to NFTfi and Connect Wallet: Visit nftfi.com and connect your wallet.
2. Create a Loan Offer (Borrower): Click “Borrow” and then “Create Loan Offer.” Select your NFT from your wallet. Set the loan amount (e.g., 10 ETH), interest rate (e.g., 10% APR), and duration (e.g., 30 days).
3. List Your Offer: Submit the offer. Your NFT is now escrowed in the NFTfi contract, and your loan request is visible to lenders.
4. Wait for a Lender: A lender will review your terms and decide to fund the loan. Once funded, you receive the loan amount minus a small platform fee.
5. Repay or Default: Repay the loan plus interest before the deadline to get your NFT back. If you fail to repay, the lender can claim your NFT.

Tip: To attract lenders, set a competitive interest rate and a reasonable loan amount (e.g., 30-40% of the NFT’s estimated value).

Step 5: Understanding Liquidation Risks

Liquidation is the biggest risk for borrowers. Here’s how it works:

• On P2Pool (BendDAO): If the NFT’s floor price drops significantly, your health factor falls below 1. Liquidators can then purchase your NFT at a discount (e.g., 95% of the floor price) to repay your debt. You lose your NFT and any excess value.
• On P2P (NFTfi): If you fail to repay by the due date, the lender can claim your NFT. There’s no auction—the lender gets the NFT directly. This means if your NFT’s value has increased, you lose that upside.

How to avoid liquidation:
– Always borrow conservatively (e.g., 20-30% LTV instead of the maximum).
– Add extra collateral (if the platform allows) or repay part of the loan to improve your health factor.
– Monitor floor prices regularly using tools like Dune Analytics or Parsec.

Step 6: Earning as a Lender

Lending your crypto to NFT borrowers is a way to earn passive yield. Here’s how to do it on both platforms:

On BendDAO (Liquidity Provider):
1. Go to the “Earn” tab.
2. Deposit ETH or stablecoins into the lending pool.
3. You’ll receive bETH or other pool tokens representing your deposit.
4. You earn interest from borrowers. The APR fluctuates based on demand.

On NFTfi (Direct Lending):
1. Browse the “Loans” tab to see active borrow requests.
2. Choose a loan that meets your risk tolerance (consider the NFT collection, loan amount, and interest rate).
3. Fund the loan by sending the requested amount to the smart contract.
4. If the borrower repays, you get your principal plus interest. If they default, you receive the NFT.

Risk for lenders: On BendDAO, you face impermanent loss if ETH prices drop. On NFTfi, you risk holding an illiquid NFT if the borrower defaults.

Step 7: Platform Comparison: BendDAO vs. NFTfi

Which to choose?
– Use BendDAO if you need instant liquidity and own a blue-chip NFT.
– Use NFTfi if you have a rarer NFT, want to negotiate terms, or prefer a fixed-rate loan.

Final Thoughts

NFT lending is a powerful tool for both borrowers and lenders. As a borrower, you can access cash without selling your NFTs, but you must manage liquidation risks carefully. As a lender, you can earn attractive yields, but you take on the risk of holding NFTs in case of default. Always start with small amounts, understand the platform’s mechanics, and never borrow more than you can afford to lose. With platforms like BendDAO and NFTfi, the DeFi-NFT convergence is only beginning.

Frequently Asked Questions

Q: What is NFT lending and how does it work?

A: NFT lending allows you to use your NFT as collateral to borrow cryptocurrencies like ETH or USDC. You lock your NFT in a smart contract, receive a loan based on a percentage of its floor price (typically 30-50% LTV), and repay with interest to reclaim your NFT. If you default, the lender or protocol takes ownership of your NFT.

Q: Which NFTs can I use as collateral for loans?

A: Most platforms accept blue-chip NFTs such as Bored Ape Yacht Club, CryptoPunks, Mutant Ape Yacht Club, and Azuki. BendDAO focuses exclusively on these high-value collections, while NFTfi supports a broader range including rarer pieces. Always check the platform’s supported collections before attempting to borrow.

Q: What happens if I don’t repay my NFT loan?

A: If you fail to repay, your NFT is liquidated. On P2P platforms like NFTfi, the lender directly claims your NFT after the loan expires. On P2Pool platforms like BendDAO, liquidation occurs automatically when your health factor drops below 1, and your NFT is auctioned at a discount (e.g., 95% of floor price) to repay the debt.

Q: How can I earn passive income by lending NFTs?

A: You can earn yield by supplying ETH or stablecoins to liquidity pools on platforms like BendDAO (earning variable APR based on demand) or by directly funding loan requests on NFTfi (earning fixed interest). On BendDAO, you deposit into a pool and earn from borrower interest; on NFTfi, you choose specific loans and receive principal plus interest upon repayment.

Q: What is the difference between BendDAO and NFTfi?

A: BendDAO is a peer-to-pool platform offering instant loans with variable interest rates, automatic liquidations, and support only for blue-chip NFTs. NFTfi is a peer-to-peer marketplace where you negotiate fixed terms with lenders, wait for funding, and face manual liquidation after expiry. BendDAO is faster; NFTfi offers more control and broader NFT support.

Q: What is LTV in NFT lending and why does it matter?

A: Loan-to-Value (LTV) is the percentage of your NFT’s floor price you can borrow. For example, 40% LTV on a 10 ETH NFT lets you borrow 4 ETH. Higher LTV gives more liquidity but increases liquidation risk if the floor price drops. Borrowing conservatively (20-30% LTV) helps protect against market volatility.

Q: How do I avoid liquidation when borrowing against my NFT?

A: To avoid liquidation, borrow at a low LTV (e.g., 20-30% instead of the maximum), monitor your health factor regularly, and repay part of the loan or add extra collateral if the floor price declines. On P2Pool platforms, keep your health factor well above 1. On P2P platforms, ensure you can repay before the loan duration expires.

Q: Are NFT loans safe for lenders?

A: Lending carries risks. On BendDAO, you face impermanent loss if ETH prices drop, and your funds are pooled with other lenders. On NFTfi, you risk receiving an illiquid NFT if the borrower defaults, which may be hard to sell. Diversifying across loans and platforms can help mitigate these risks, but always assess the NFT collection’s liquidity and value.