NFTs, or non-fungible tokens, have grow to be a staple of the blockchain trade, and builders have sought methods to allow NFT house owners to borrow cash in opposition to the worth of their tokens, however doing so safely and reliably is simpler mentioned than executed. To perceive the challenges of lending/borrowing apps for NFTs, and the chance they pose to their lenders, it helps to know how cryptocurrency lending/borrowing apps work.

Decentralized Finance (DeFi) lending/borrowing apps like Aave, Compound, or Maker Protocol enable customers (the debtors) to deposit a number of cryptocurrencies and borrow a fraction of their worth in stablecoins (cryptocurrencies stable to the dollar) from a lending pool that’s equipped by different customers (the lenders). If a borrower’s collateral drops too far in worth, or if their excellent curiosity funds accrue too excessive, their deposit is liquidated to maintain the lending pool solvent, normally by promoting the cryptocurrency on a decentralized change like Uniswap. The liquidation course of is on the spot, dependable, and predictable, and may be executed routinely by using blockchain smart contracts. Lending/borrowing apps that observe this mannequin can preserve near-perfect solvency by means of even the deadliest market circumstances, making them pretty secure for lenders to earn curiosity on their stablecoin holdings.

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