NFT Lending Platform Blend Sparks Concerns Over Ecosystem Liquidity
Professional-focused non-fungible token (NFT) market Blur is making headlines once more, this time for getting into the NFT lending house. The transfer has raised questions on its broader market influence.
On Monday, Blur launched Blend, a peer-to-peer NFT lending platform that permits merchants to lease out their NFTs to collectors seeking to purchase blue-chip NFTs with a smaller upfront fee. Holders hoping to earn extra cash can put up their NFT, obtain mortgage provides after which switch their token by way of an escrow good contract to the renter for a specified time period – much like a digital pawn store.
In response to Blur, Blend goals to assist introduce new patrons to its ecosystem by reducing fiscal boundaries to entry for widespread NFT collections. Because of this, it helps drive liquidity into the larger NFT ecosystem by growing the quantity of merchants and transactions.
It’s potential that Blend has contributed to a short-term rise within the ground costs of some blue-chip NFT collections, based on knowledge from NFT market OpenSea. Since Could 1, when Blend launched, the floor price of the favored Bored Ape Yacht Membership assortment has elevated from 47 ETH (about $93,500) to about 50 ETH ($99,400). As for its Mutant Ape Yacht Membership, the floor price increased from about 10.5 ETH ($20,900) to 11 ETH ($21,900).
Though it seems that Blend could also be serving to nudge NFT markets upward, it is probably not a product that each novice dealer needs to be wanting to “ape” into. The hazard is that NFT lending platforms akin to Blur permit collectors to buy tokens with funds they don’t have, creating liquidity dangers down the road when assortment flooring or cryptocurrency costs crumble.
Twitter person Carl_m101, founding father of NFT assortment Sky Scooters, shared a thread explaining a few of the dangers of Blend, the place after a big worth ground leap, a “margin call” event might follow the place merchants unload their NFTs and, in consequence, find yourself tanking the market.
“While systems like these are of course basic knowledge to experienced traders, they are new to most NFT traders who can now all of a sudden afford to buy that shiny profile picture (PFP) they have been dreaming of,” mentioned Carl. “We will have many unexperienced buyers fomo-ing into projects they couldn’t afford before or taking loans on their PFPs to buy more.”
Whereas different platforms within the NFT house provide lending, the priority with Blend is that it’s a product instantly from Blur, one of many main NFT marketplaces by way of buying and selling quantity, according to data from Dune analytics. Contemplating its market share, its already-eager customers could also be extra prone to decide into leasing NFTs fairly than buying tokens at their full worth.
Not solely may it harm the market, but it surely additionally could harm the native BLUR token. Pseudonymous Twitter person Bamboo, strategic lead at NFT dealer’s membership Invite Solely Lounge, said in a Twitter thread that because the NFT market turns into impacted by lenders on Blend, it can harm folks’s BLUR holdings in addition to negatively influence the larger crypto ecosystem.
“Blur is employing game theory with its tokenomics and unique airdrop distribution mechanics,” mentioned Bamboo. “But as game theory experts, they must remember – increasing players’ winnings at others’ expense is not Pareto optimal.”
Whereas Blur is without doubt one of the first main NFT marketplaces to roll out its personal in-house lending platform, it definitely isn’t the primary to introduce the idea of pawning NFTs.
PirateCode and Cryptobiosis, the pseudonymous co-founders of peer-to-peer NFT lending platform BendDAO, instructed CoinDesk that whereas NFT lending is mostly useful for the market and may also help bolster liquidity, a few of Blend’s financing methods spark considerations over whether or not or not its “refinancing” course of will really preserve lenders protected.
One concern they referred to as out was the mechanism by which lenders can exit their positions. To take action, they’d set off a Dutch auction to discover a new lender and refinance.
“The viability of the refinancing process introduced by Blend remains uncertain,” mentioned PirateCode and Cryptobiosos. “In practice, refinancing becomes relevant only when the number of lenders exceeds that of borrowers.”
One other level of concern relating to Blend is the method of taking out loans to buy NFTs on the platform.
Jonathan Gabler, co-founder of peer-to-peer NFT lending platform NFTFi, instructed CoinDesk that whereas Blend’s initiative to assist introduce liquidity into the market is revolutionary, it’s additionally harmful to incentivize merchants to take out loans at loan-to-value (LTV) which is troublesome for extremely risky digital property.
“Unchanged, the current incentive design will likely lead to bad outcomes for borrowers such as mass defaults or liquidations of high-risk loans, flush NFTs into the hands of point farmers, and in consequence, may lead to much higher market volatility,” mentioned Gabler. “Existing peer-to-peer protocols tend to be more borrower-friendly and lead to healthier loan markets.”
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