Since Blur launched its NFT lending platform on May 1, Blend has caused an explosion in NFT lending. Users have already borrowed a staggering 51,656 ETH, equivalent to $95 million, against their assets.
Earlier this year, the new Blur marketplace made waves in the NFT sector. Recent figures suggest that its Blend lending platform could generate a similar buzz. However, there are real and serious risks in borrowing against an NFT.
Blur’s lending platform Blend has proliferated in popularity since its launch just ten days ago. According to Dune dashboard data, users have already borrowed a staggering 51,656 ETH, equivalent to $95 million, against their digital collectibles. Amazingly, more than 3,000 individual loans have been opened on the platform so far.
Blend Supports Four Collections
Blend currently supports loans backed by four collections of NFTs: Miladys, Azukis, DeGods, and wrapped versions of CryptoPunks.
Blur created a stir earlier in the year with its impact on the non-fungible token market. Shortly after launch, it overtook OpenSea, the king of NFT marketplaces, with a 53% market share. The Blur native token airdrop in Q1 2023 generated significant traction in the NFT aggregator and market, resulting in increased Ethereum NFT trading volumes.
Blend, aka Blur Lending, looks like it could do even better. Since its launch, Blur’s lending platform has quickly outpaced competitors like NFTfi, Arcade, and BendDAO, driving NFT lending volume to an impressive $67 million in just one week.
Blend loans alone represent a whopping 75% of total volume. Currently, the total number of loans accepted and refinanced is 3,045, with 922 unique lenders, according to Dune. Blend is the latest player to join the market.
However, the use of NFTs as collateral has been popular since 2021 thanks to the emergence of new platforms and the rising cost of digital assets. In more recent months, prices have been more moderate. In any case, the use of NFTs as collateral presents serious risks for lenders.
Liquidity Risk
Using an NFT as collateral is no different than using other assets to fund loans. Borrowers deposit their NFT as collateral, set the terms of the loan, and receive ETH from the lender, while the NFT remains as collateral. The borrower then repays the loan to recover the NFT. Non-payment results in liquidation and the lender claims ownership of the NFT.
However, NFT lending platforms like Blur pose a danger by allowing collectors to purchase tokens without having the necessary funds. This creates liquidity risks in the future when collection floors suddenly flatten out.
A liquidity risk arises when a borrower does not have enough cash to meet their financial obligations, in this case, the loan. Borrowing on NFTs may require a margin call to avoid liquidation. A margin call occurs when the lender asks for additional collateral to offset the asset’s value decline.
In 2022, traders were stunned after BAYC NFT prices plunged 80% in six weeks, many of them had become over-leveraged by using their apes as collateral, to borrow on BendDAO. Dozens of those who did face margin calls.
By Audy Castaneda
