Elon Musk, Jack Dorsey, and Mark Cuban are among the billionaires and celebrities involved in the NFT trend. With such heavy hitters, you expect some NFT products to fetch prices around the 7-figure region or even higher. It, therefore, becomes logical to reason that, like traditional assets, the owners of NFTs may want to use them as collateral for loans.
We are Relite Finance, a cross-chain lending solution that simplifies borrowing and lending through interoperability, achieving lower collateral for lending products and fair fees for transactions. With the proper application, the NFT collateral can complement each other, producing a digital solution for the decentralized loan market.
NFT Collateralization
There’s no doubt that NFT collateralization will be massive. The signs are clear as day. It, therefore, becomes essential to understand how NFT collateralization works before the prediction becomes a reality. The following video by NFTX explains the step-by-step process of how individuals can use their NFT collectibles as collateral in an NFT index fund. Relite Finance can streamline and improve upon this process and make it more efficient for the consumer.
The Problem’s Right Now
Say, for example, you want a quick loan of about 2,000ETH, and you own an NFT that you purchased for 5,000ETH. It seems straightforward. Get a lending platform, offer the NFT as collateral, and get your funds approved. After all, the NFT costs way more than the loan you applied for, right
1. Getting the right lending institution
Because the loan requested requires a specific digital token, the borrower must find a platform that provides the exact cryptocurrency. The platform must also provide guarantees on the collateral’s safety if the borrower does not meet the terms of the contract.
Another critical factor to consider in the repayment terms is the interest charged on loan. This leads us to the second problem in our scenario.
2. Valuation
The value we hold or give to our possessions is never the same as what institutions provide. They have their valuation procedures that, in most cases, appear to undervalue our proposed collateral.
The two commonly used valuation systems are:
A) Price Value — This is where the value of a product is given based on the customer’s perception of the value of the product. Companies base the price of the product depending on how much the customer believes the product is worth.
B) Loan-to-Value — In this system, companies assess the lending risks associated with the product and overall contract before assigning value to the provided collateral. Depending on the outcome, it may lead to higher or lower interest rates on the loan provided.
In the case of NFTs, it becomes even more challenging to determine the value of a product given that the product is intangible, reasonably new, and in a very volatile market.
Lending institutions, therefore, require a sure way of determining NFT value. Luckily, there already exist different platforms that provide such a service, such as Rarible and OpenSea. Each has its strengths when it comes to helping in determining NFT value.
3. Cross-chain interoperability
Consider you bought your NFT using ETH, but you want a loan in DOT. Such cases will be numerous in this emerging industry; thus, users need to find platforms. Given the popularity of NFTs, there is also a possibility that the borrowing demands may be high.
A robust platform that provides these services under one banner is therefore necessary in the post-NFT world. As Relite is built on Polkadot, by having access to its parachains, Relite can efficiently allow interoperable solutions for users. This is where we can prove our value as the future of NFT collateralization.
So how does Relite Finance offer the Solutions?
With Relite Finance, you can quickly get your loan processed in whatever cryptocurrency you desire, as long as the platform supports it. This is because of its interoperable, cross-chain foundation.
Upon connecting their Metamask account, theoretically, individuals attempt to collateralize their NFT would take via the following process:
- Requesting for the loan.
We are still using our 2,000ETH hypothetical loan application with a 5,000ETH purchased NFT as collateral.
- Reviewing the application(s) of the NFT collateral is the primary concern.
At this point, platforms such as Rarible, OpenSea, and other NFT-centered platforms come into play. The platforms provide a foundation for determining the possible value of NFTs in the market by assessing historical price movements, the sale of NFTs on their platforms, and the perceived value of NFTs by buyers, among other parameters.
These platforms give a general price range that determines the value of the NFT collateral, making it easier for lending institutions to assess the loan’s viability. It must be noted, however, that the price “oracles” are not quite there yet, but the historical data is there. Through an API integration with Rarible and OpenSee, Relite can make a smart estimate.
- Approval/Rejection of the loan
Based on the assessments by the selected platform, the loan may be approved, rejected, or required to make changes to their existing collateral.
In this hypothetical case, owing to the improved value of the NFT over time, the market value of the collateral is between 7,500ETH and 9,000ETH, meaning that the loan can be approved. Suppose the value was lower than the ETH amount requested. In that case, the applicant can be advised to reconsider the loan, review their application, or get the approval of a lower rate than initially requested. It would also be smart to suggest a proper Loan-to-value based on their historical data.
If the applicant requests a different cryptocurrency for the application, Relite Finance makes it possible through their cross-chain solution. The platform provides lending options in a host of cryptocurrencies supported by its ecosystem.
Furthermore, because of its sustainable setup, applicants can avoid over-collateralization of their lending through Relite Finance. Applicants get contracts with reasonable interest rates that promote the repayment of the loan instead of the selling off of collateral.
Conclusion
Relite Finance finds itself in a unique position of providing more value by leading the market into a new lending era that involves collateralizing NFTs. As more people mint NFTs, it becomes increasingly clear that NFT collateralization is inevitable. Relite is ready for it.
The whitelisting process is still open for members who are keen to register their interest and be in with a chance to take part in our future IDO. The dates as such have not yet been finalized; however, community members can monitor Relite Finance and PAID Network’s social media and activity as the dates for the IDO and other details will be revealed when further information is known. For the lucky winners of Relite’s whitelist, additional information will be communicated by the Relite and PAID Network teams on how to access the IDO when it goes live.
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