Non-fungible tokens (NFTs) have become the latest hot trend in cryptocurrency and for good reason – NFTs will revolutionize the way we interact with assets. It’s a new technology and most people have no idea what NFTs and the implications they bring to assets.
This article will explain everything you need to know about NFTs. And we will also cover how using NFTs as collateral can open up, or more specifically – engulf, the trillion dollar lending market.
What Are NFTs?
NFT is an acronym for non-fungible token. As the name implies, a non-fungible token is, well, not fungible.
This is in stark contrast to a fungible token like bitcoin or Ether. Those tokens are essentially the same as each other. One bitcoin is the same as the other, so the value of each individual token is the same.
Non-fungible tokens are obviously different – each token is unique, which opens up the possibility to tie an NFT to a unique real world asset. And this is exactly what has happened with NFTs being tokens that represent real world assets.
A traditional finance comparison would be that bitcoin and other fungible tokens are a standard $20 bill. Each bill is essentially replaceable with the next $20 bill and no particular bill is worth more than the other.
NFTs would be real estate. Each piece of real estate is unique and no two real estate assets are the same, hence the non-fungibility. Of course, NFTs take this to the next level by tokenizing and digitizing the non-fungible nature (and ownership) of the asset, which makes the asset much easier to trade.
That last point brings us to how NFTs as collateral can open up a trillion dollar market.
How NFTs Will Open Up a Trillion Dollar Market
NFTs can, and likely will at some point, open up a trillion dollar market.
How is this possible?
We’ll use another example to make it simple to understand. Say you own a mint condition Honus Wagner baseball card worth millions of dollars. You don’t want to sell the card as it will likely appreciate in the future.
However, you need access to capital to start a business, so you take the Honus Wagner card to a bank to use it as collateral for a loan.
The banker you are asking for a loan would likely stare at you with a confused look on his face.
First of all, the banker does not know the value of that Honus Wagner card or the legitimacy of it. It could be a fake for all the banker knows, which means he has to bring out an appraiser to value the card.
The other, more pressing problem, is that the bank has no interest in being a custodian for the card nor do they have an interest in constantly reappraising the card to ensure it’s still worth enough as collateral for the loan.
In short, the bank would deny you the loan despite you having an asset worth millions of dollars – it’s simply too much headache for a bank to deal with for a loan. Now, a pawn shop would likely offer you a loan, but the rate would be terrible to account for the custodial risk, valuation risk, and that’s how the pawnshop makes their money.
This is where an NFT as collateral enters the picture.
Imagine that you could simply use an NFT that represents ownership of the card as collateral. The bank would not have to undergo a complicated and convoluted appraisal process as they could simply examine the value of the card on an NFT marketplace like 0x.
To further this point, any NFT that has value can be used as collateral for a loan – it does not have to be a meatspace asset that has value like a Honus Wagner card. In fact, an NFT that represents something 100% in the digital space makes more sense for an NFT collateralized loan as the custodial risk is minimal.
Do you have a CryptoKitty worth $50,000?
You could use that as collateral on a loan. The CryptoKitty NFT would be placed in a smart contract and would be released when the loan is paid back or the value of the CryptoKitty falls below the capitalization requirements of the loan.
This is a huge market just based on digital asset NFTs alone. Remember, an NFT by digital artist Beeple recently sold for $69 million at the auction house Christie’s.
The next section will cover a potential timeline for the NFT collateralized market becoming a trillion dollar industry – it’s much faster than you probably think, too.
The Timeline for The Trillion Dollar NFT Collateral Market
As mentioned previously, the timeline for the trillion dollar NFT collateral market is much quicker than most think possible.
First, there is already an NFT collateralized loan platform called NFTfi. It has a total of 1150 wETH (Wrapped Ether) loaned out with NFTs as collateral. The dollar amount of that is nearly $3 million USD at the time of writing.
We know, 3 million is not anywhere to close to $1 trillion.
However, NFTs are an extremely new technology and the concept of a loan collateralized by an NFT is an even newer concept.
This market is bound to explode in popularity as the popularity of NFTs grows.
Remember, that $69 million Beeple artwork can now be used as collateral for a massive loan.
The other point worth mentioning is that most of the collateral used for loans on NFTfi is CryptoKitties kitties.
This is fine, but it does not factor in the massive lending industry that will open up when real estate NFTs become popular.
That’s right – it will one day be possible to place your real estate into an NFT, which means the normal lending process will use the real estate NFT (that represents ownership of the real estate) as collateral on a real estate loan rather than the real estate itself.
Once that occurs, NFTs as collateral will become a trillion dollar market. Easily.
As for the timeline on this, it will likely follow the same pattern as the Dot Com bubble with a huge bubble and most companies (NFTs in this case) failing. But just like the Dot Com bubble, the underlying technology will evolve into something usable and part of our daily life.
The bubble aspect is simply investor excitement leading to money getting thrown at otherwise worthless or pie in the sky projects.
That covers it for the trillion dollar industry that NFTs as collateral will open up.
This technology is the technology of the future. Platforms already exist to use NFTs as collateral, but they are not super popular at the moment mostly because NFTs are not super popular.
When the NFT market explodes in popularity, then the NFTs as collateral market will also explode in popularity.