Now you can borrow money by using NFTs as collateral

Chris Ciobanica wanted a loan to invest in cryptocurrency projects. But instead of using a bank that would require him to put up his home or car as collateral, he tried an upstart website called Arcade that specializes in connecting owners of digital art and collectibles, called non-fungible tokens, with lenders.

Ciobanica, a digital art collector who goes by Silver Surfer, submitted a collection of 10 so-called NFTs by well-known artists Pak and Fewocious to the service that he says is worth about $5 million. Not long after, Genesis, a firm which lends cryptocurrencies to borrowers, offered him a six-month $1.25 million loan with a 7.5% interest rate over that period, the equivalent of a 15% annual rate.

Independent lenders are increasingly using services like Arcade to connect with NFT owners who want to borrow money by using their NFTs as collateral. The idea is to give people who sink large amounts of money into NFTs, an increasingly popular investment, a way to get some cash without having to sell their digital assets.

In 2021, people spent $44 billion buying and selling NFTs, according to blockchain data platform Chainanalysis. A number of NFTs from popular collections, like CryptoPunks and Bored Ape Yacht Club, have sold for millions of dollars, including to celebrities such as tennias star Serena Williams and late-night talk show host Jimmy Fallon.

Lenders are attracted to using services like Arcade by the potential of charging interest rates that far exceed traditional loans. In theory, they could also take ownership of an NFT used as collateral if a borrower defaults.

The interest rates for loans on Arcade can vary depending on the type of NFT, the duration of the loan, and the loan to value ratio—calculated by looking at the difference in the loan amount and the appraised value of the NFTs. Arcade CEO Gabe Frank said the average annual interest rate for loans transacted on the website, which varies based on the duration of the loan, is about 20%.

Borrowers, on the other hand, can get large sums of cryptocurrency and keep their NFT, as long as they repay it. This beats them having to sell the NFT, which is difficult because there are fewer buyers in the market for such expensive assets, said Frank.

In addition to Arcade, borrowers can post their loan requests on websites such as NFTfi, PawnFi, and TrustNFT. All of the services were introduced in the last two years.