In the ongoing speedrun to turn everything into a non-fungible token, savvy traders and entrepreneurs have recently taken a few steps to squeeze more investment opportunities out of their JPEGs.
Case in point: it’s now a thing to take out a loan and offer up an NFT as collateral. Take NFTFi, a peer-to-peer lending platform described by Coindesk as a "pawn shop for NFTs." The core premise is that you can mortgage your NFT in exchange for other crypto that can be sold for cash while keeping your NFT safe—if you can repay the loan.
NFTFi told Coindesk it had done over $12 million in volume since its launch in June 2020, with an average loan size of $26,000 and as high as $200,000. As you might expect, crypto-loans backed by JPEGs on the blockchain come with some risk for both parties. Default rates are just shy of 20 percent, the platform told Coindesk. Sometimes, that comes with some pain.
The Block recently reported on a trader who borrowed 3.5 ETH (around $12,000) on NFTFi, offering an NFT that had last sold for 3.25 ETH. Over the next three months, the value of NFTs from the same collection skyrocketed to around $300,000 on the low end. On October 10, the loan period ended, the borrower failed to repay the loan, and the NFT—now worth many times more than the original loan—was taken.
Know more about NFT loans? Have you put up any crypto-asset as collateral for a loan? We'd love to hear more from you. Using a non-work device, contact Edward Ongweso Jr on Signal at 202-642-8240 or via e-mail at firstname.lastname@example.org
That particular NFT had already been offered up once before as collateral for a loan that its previous owner defaulted on. That means that this JPEG has been part of a chain of loans and defaults, and now is in the hands of a third owner.
This is just the most recent entrant to a world of projects attempting to mix finance and non-fungible tokens, offering products and services that try to quickly generate liquidity, new tokens, allow the trading of tokens or other assets for one another, or tie NFTs into other tokens and assets.
There are fractionalized NFTs, which allow multiple people to each hold a fraction of an NFT and, in theory, ensure that even as prices skyrocket that no one will be kept out of the casino. There’s staking, such as on NFTx, which allows investors to lock their NFTs into vaults which are then tokenized and traded.
The financialization of NFTs has even taken on very literal dimensions. Visionaire, sought to gamify investing in startups in a way similar to a fantasy sports bracket using NFTs. Visionaire introduced an NFT marketplace that let users bid on fake NFT shares of real startups, building up portfolios that would then compete in a league.
“VisionShares are NFTs (non-fungible tokens) that live on the blockchain,” reads a section on the company’s FAQ page. “This way, players have real ownership over their fantasy equity, and there is a provable scarcity of the virtual equity of each company.”
As TechCrunch noted, Visionaire did not have permission from the companies to sell fake shares, but was offering a verification process that let those companies receive a "healthy percentage" of the NFT shares. The “experiment” lasted for just over 24 hours, with Visionaire saying it “underestimated the legal complexities.”
This is not the first time synthetic shares have emerged in DeFi spaces, either. Bloomberg reported this summer that various crypto projects had spent the last year sidestepping pesky regulations by creating fake Apple, Tesla, and Amazon shares. A similar effort by Binance, the world’s largest cryptocurrency exchange, drew scrutiny from Germany's financial regulators as it may have violated securities law by offering synthetic shares of popular U.S. shares in April before it was shut down in July.
NFTs have accelerated the monetization of, well, quite literally everything. And yet, in the race to financialize and profit from NFTs, there has been little time taken to ask if we actually want a digital world where everything lies in wait to be speculated on and turned for a handsome profit. Especially when such projects are not only likely to get attention from regulators, but only accessible to a select few rich or well-connected enough to take advantage of the temporary loophole before those regulators swoop in.