How To Take Loans Against Your NFTs, Explains Arcade’s Gabe Frank

  • While cryptocurrencies are mired in bearish sentiment, NFTs are going against the trend amid widespread adoption.
  • NFT-backed loans, which allow holders to use their NFTs as collateral, have also become more popular.
  • Gabe Frank from Arcade shares the steps for borrowing against your NFTs and how traders are using the loans.

After a recent drop in performance, cryptocurrencies are surrounded by a haze of bearish sentiment and uncertainty. Some investors expect significant new drawdownswhile others are eyeing a $ 100,000 bitcoin price target again.

But non-fungible tokens, which were once called a digital fad, have continued to gain momentum thanks to increased sales volume and general adoption. In 2021, the size of the TVN market inflated to $ 41 billion in value, compared to around $ 50 billion in traditional art market sales in 2020.

The meteoric growth of NFTs has shown no signs of slowing down in 2022. OpenSea, the largest NFT market, this week raised $ 300 million in a Series C funding round that pushed its valuation 800% to $ 13.3 billion from $ 1.5 billion in July 2021. Electronics giant Samsung has said it integrate an NFT platform in its smart TVs later this year. More recently, the Wall Street Journal reported that GameStop is launch of an NFT unit and hired 20 people for it.

Meanwhile, prices for some of the so-called rare or prime NFTs continue to soar, with a recent Mega Mutant Serum NFT being sold for $ 5.8 million.

As the boom in digital collectibles continues, some investors and entrepreneurs have found a new way to extract the maximum value from their NFT holdings – using them as collateral for loans.

NFT-backed loans solve the problem that most digital collectibles are illiquid despite their rapid appreciation in value, according to Gabe Frank, co-founder of decentralized lending market NFT Arcade.

“We have always viewed NFTs as a new asset class,” he said in an interview. “And to be a new asset class, you have to have credit markets.”

How To Take Out Loans Against Your NFTs

Crypto users take out loans guaranteed by NFT for various reasons. Some use the money to recover more undervalued NFTs, others engage in a decentralized financing strategy called yield farming, which could generate potentially higher returns than interest on loans, according to Frank.

To get started on Arcade, users need a Web3 wallet where their NFT holdings are kept. After logging into the decentralized app through their wallet and giving the company their token credentials, Arcade’s institutional OTC office will assess assets based on metrics including recent sales and recent transaction activity. Then the lenders and borrowers will be presented with the appraisal report.

“It helps them accept the loan. And basically the blockchain is the loan terms sheet,” he explained. “Once those numbers are determined in terms of term, funding currency, and funding amount, then they can just log into the site. A few clicks and the loan is settled.”

Gabe Franck

Gabe Frank is the co-founder of the decentralized lending platform NFT Arcade.

These loans are mainly funded in the stablecoin american dollar coin (USDC) and ethereum (ETH). These are non-recourse term loans, which means that if the borrower defaults on the loan, the lender can claim the asset. For example, The block reported last year that an NFT owner used one of his NFTs as collateral to take out a 3.5 ETH loan but was unable to repay the loan at the end of the term. As a result, their NFT, which had jumped to $ 340,000 during the term of the loan, was taken by the lender.

During this time, if the NFT suddenly drops in value and the borrower cannot repay, the lender will be stuck with the asset as well.

Frank said the institutional lenders his company works with typically charge an annual percentage rate of between 15% and 20% on these NFT-backed loans. For example, a Golden Bored Ape asked a borrower for a three-month $ 850,000 term loan at around 15% APR on the platform, he added.

How to choose high quality projects

To be sure, Arcade is far from being the only player in the NFT-backed loan market.

In October, a loan of $ 1.42 million against the NFT Autoglyph # 488 was approved on the NFTfi loan protocol in what has so far been the largest NFT-backed loan ever, according to The defiant.

Likewise, the crypto lender Nexo has partnered with hedge fund Three Arrows Capital to allow clients to borrow stablecoins and other digital currencies using NFTs as collateral. Crypto exchange Kraken is also working on a marketplace where clients can take out loans backed by their NFTs.

Yet, as the financialization of the NFT continues, scams and frauds could also follow as bad actors enter the space. As a result, the ability to separate the wheat from the irritation could be more important than ever.

“Probably 95% to 98% of NFTs have no value,” Frank said. “So it’s hard to see it as a speculative investment because most of it will go to zero.”

Instead of getting sucked into choosing NFTs as investments, Frank follows a simple axiom that he also applies to purchasing physical art: “buy what you like”.

In addition, it tracks metrics such as following the artist on social media, the supply and demand dynamics of the collection, and whether the project is continually delivering value to its NFT holders. His favorite digital artists are Beeple, Pak and FEWOCiOUS.

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