There are many benefits to owning an NFT from a top collection; there are the bragging rights, the opportunity to use the image and likeness of your NFT (as some have done), and also the benefits of having them as an investment.
One way that NFT holders, especially those with very valuable ones, benefit from them is by leveraging them for loans. There are many sites these days that allow you to take a loan by putting up your digital assets like NFTs as collateral. But now, owners of some top NFTs like Bored Ape and Mutant Ape are on the verge of losing them because of these loans.
NFTs at Risk
This information about potential NFT liquidation comes from Dune Analytics, which published data on BendDAO, a decentralized lending platform. As per the data, 14 Mutant Ape NFTs have entered the 48-hour holding period. What this means is that their owner(s) took out loans with them as collateral and now have 48 hours to repay the loan or the NFTs will be seized.
This is also about to happen to 4 Bored Ape Yacht Club NFTs if the loans they were taken against are not repaid. Now, on the surface, this would seem simple enough; if the loan defaults, the collateral is seized, as is done with traditional loans.
But one thing that must be considered is that NFTs are not like a typical asset you would use as collateral for a loan. The digital assets market is notoriously volatile and as such, the floor price of each asset needs to be taken into account.
If, for example, the NFTs’ floor price falls below what the original owner borrowed against it, what happens? With some of the NFTs highlighted, there are no current bids and this brings into question what will be done.
But the platform has already given some information about how this will be handled on its FAQ page. First, it explains that temporary floor price dips are to be expected in the market and should not be a source of concern. It also explains that the site would have what is called a temporary floating loss and not an actual loss.
In that case, the borrower would be required to eventually repay the loan eventually or some time would be taken until the floor price recovers and then liquidators will come in to auction the asset.
As NFTs themselves become more popular, more people will look to take out loans by leveraging their assets. And as the market goes up and down, there will inevitably be situations like what is happening with BendDAO.
All that is left is for platforms to put measures in place that will protect both the lender and borrower in this instance. Like any other form of loan-taking, NFT loans carry some risk attached to them and over time, the nuances of them will likely be figured out and holders will be able to access loans through their assets.