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Using NFTs As Collateral: A Crash Course With Franklinisbored

How to get cash fast without selling your NFT

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Hannah Scherwatzky / FranklinisBored

If you’ve ever been in a situation where you’ve had to sell your beloved NFT for cash, you’re not alone. While browsing Twitter, I’ve seen a number of people mention they had to sell their NFT, despite not wanting to. But, what if instead you used your NFT as collateral to get the cash you need, and you still keep your NFT?

After chatting with Franklinisbored (he often collateralizes some of his 60+ Bored Ape NFTs), I learned a lot about collateralizing your NFT. Below I walk you through how NFTs are collateralized, the risks involved, and the most preferred platforms for safely collateralizing your digital asset. Franklin is currently the 6th largest Bored Ape Yacht Club holder in history.

Update: Franklin now has 60 but made this graphic when he had 61 apes

Can NFTs Be Used As Collateral?

NFTs can be used as collateral to secure a loan. First, the lender and borrower must agree on the asset's value, the length of the term, and the amount of interest to be repaid on top of the original loan amount.

Once agreed upon, the NFT is locked into a smart contract for a set amount of time or until the borrowed amount (plus interest) is repaid. While the NFT is in this contract, the technical owner of the asset is the smart contract.

That said, neither the lender, borrower nor smart contract escrow have access to the NFT. The escrow remains the sole owner of the asset until the set terms have been satisfied or ended.

If the borrower can’t repay the loan in time, the NFT is sent to the lender’s wallet as collateral for the unpaid amount, hence the lender becomes the new owner of the asset.

How Does NFT Valuation for Loans Work?

In general, an NFT’s valuation for a loan is based on the floor price of the project. However, some platforms allow lenders to do their own valuation and propose their own prices. Then, the borrower can choose to either accept or decline the terms proposed by the lender.

Additionally, some platforms enable the borrower to state their desired terms for the asset in question. From there, it’s up to the lender to decide if the borrower's valuation is fair or not. If the lender does not agree with the desired terms, they can make an offer in hopes that the borrower will agree to it.

Is Lending Your NFT Safe?

Lending your NFT is safe as long as you use a lending platform with a heavily-audited smart contract. If a smart contract has not been audited, you risk placing your NFT in a contract that could potentially be hacked, resulting in your assets being stolen.

Although there are millions of dollars worth of NFTs locked into loans at this very moment, there are still risks you might want to consider before deciding to lend your NFT or borrow money.

  • Market Conditions: Considering the NFT market is extremely volatile, the value of NFTs fluctuates by the second. With that, lenders risk being stuck with an overvalued NFT if the project plummets in value.
  • Risk of Default: If you can’t pay back the loan, you could lose your NFT. Considering many lenders lend less money than a particular NFT might be worth, you could end up losing money in the long run.
  • Improper Valuation: An improper proper valuation of an asset means that you run the risk of losing money as a lender. Also, borrowers risk losing the ability to borrow more money if their valuation is undervalued.

Above is a perfect example of how risky collateralizing your NFT can be. You can agree on any terms you want, but ultimately, the smart contract maintains control of the loan and only executes based on the agreed terms.

What Are the Best NFT Collateral Platforms?

There are several NFT collateral platforms that are trusted by many including:

BenDAO is preferred by many big-time collectors, including Franklin. This platform is the first NFT liquidity protocol to support instant NFT-backed loans, Collateral Listings, and even NFT Down Payments.

Also, BenDAO remains transparent with proof of its smart contract audit on-site, as well as a maximum Bug Bounty of up to $1,000,000, if you find a bug in their smart contract.

The main difference between BenDAO and other collateral platforms is that you are lending from a DAO, whereas other platforms are peer-to-peer.

Backed by investors like Coinfund and Flamingo DAO and having partnered with Flow blockchain and Animoca Brands, NFTfi is one of the most trusted peer-to-peer NFT lending platforms.

NFTfi enables borrowers to set their own desired terms and allows lenders to submit counteroffers. Furthermore, the platform does a great job of providing a detailed analysis of the NFTs that are listed as collateral.

By providing the current floor price of projects, a valuation from NFTBank, project averages, and other information about the borrower, NFTfi supplies a transparent platform that can help lenders and borrowers make the best possible decisions.

Arcade is one of the leading platforms for NFT-backed loans. The platform has been featured in some of the leading media outlets including Fortune, Bloomberg, and TechCrunch to name a few, and has the support of investors like GMoney and Pantera.

As a borrower, you can list NFTs with or without terms, and lenders can accept or make offers for loans. In addition, Arcade is the only protocol that allows lenders to make collection-wide loan offers. This means lenders can reach a broader range of borrowers. 

X2y2 might be best known as an NFT marketplace. But, you can also use the platform to lend ETH and use your NFT as collateral. Notably, x2y2 does not allow many NFT collections to be used as collateral yet.

Currently, the only whitelisted collections (allowed collections) are:

  • Otherdeed for Otherside
  • Doodles
  • Azuki

So, if you don’t own an NFT from these collections, you aren’t able to use your NFT as collateral to borrow ETH. That said, x2y2 is a trusted platform that has the potential to be a good place to collateralize your digital assets. You can view their audit on-site

What Are the Pros and Cons of Using NFTs as Collateral?

Using your NFT as collateral has its fair share of pros and cons. Let's take a look at them both.

Pros

You can collateralize your NFT for liquidity without having to sell it for good. Understandably, you might need cash immediately, but you don’t want to sell your NFT. Putting your NFT up as collateral to borrow the money you need is a good option.

Furthermore, you can collateralize your NFT to take advantage of price fluctuations in crypto. For example, you could borrow ETH when it pumps and cash it out for fiat or exchange it for USDC, then wait for ETH to drop in value so that you can re-buy it at a lower price, and keep the extra ETH as profit. However, this is extremely risky.

Something that Franklin often does is use his Apes as collateral to borrow ETH so that he can flip NFTs for a profit. This allows him to keep his NFT and make a profit at the same time.

Cons

There’s also an array of cons that come with using your NFT as collateral. For one, when your asset is locked in an escrow smart contract, you lose the benefits of being a holder of that specific token. 

Say you need to interact with your NFT to claim an airdrop. If it’s locked in escrow, there’s no way that you can access it. With that, your ability to participate in token-gated events is extinguished since your token is locked in a contract, meaning it’s no longer controlled by you or held in your wallet.

Conclusion

Using your NFT as collateral is a realistic way to get cash fast without having to sell your NFT. However, there are many risks involved for both borrowers and lenders alike. If you are considering collateralizing your NFT or lending someone crypto, be sure you are aware of these risks and use a platform you can trust.

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