There's a new player shaking up the NFT lending market - ParaSpace. This lending protocol, which has only been launched for just over two months, has been stably holding the second highest Total Value Locked (TVL) in the NFT lending sector from mid-January to the end of February, only dropping to fourth place in the past week.
For NFTs, the biggest challenge as a financial product is the lack of liquidity. The main reasons for the current lack of liquidity are: the web3 environment is still in a bear market, most NFTs lack use cases, and blue-chip projects have high floor prices and high participation thresholds.
In the process of adding financial attributes to NFTs, we roughly divide these tools into several categories: trading, liquidity pools and LP, lending and borrowing, perpetual contracts and options, fractionalization and valuation, infrastructure and analytical tools.
NFT lending is a financial product that occurs during the holding stage of an NFT. In financial markets, how to generate passive income from idle assets has always been a goal for various financial tools. The core mechanism of NFT lending is to use NFTs as collateral to obtain loans and generate income from idle NFTs.
In the NFT lending field, ParaSpace is undoubtedly a shining new star in recent days. How did it surpass veteran NFT lending projects such as NFTfi, JPEG'd, Pine Protocol, and Arcade xyz in just over two months?
ParaSpace leverages Ape Staking to break through.
This new NFT lending protocol has caught the attention of industry insiders since its launch. Not only because it is invested by star institutions such as Sequoia, Coinbase Ventures, and Polychain, but also because it coincided with Yuga Labs' launch of Ape Staking.
On December 6th, 2022, ApeCoin staking system ApeStake.io was officially launched and began APE deposits. At that time, ParaSpace had not yet launched its mainnet, but it opened a pre-staking event for an ApeCoin liquidity pool and launched an additional 30% APY mining reward for APE token during the pre-staking phase to encourage early user participation.
On December 11th, 2022, ParaSpace announced the official launch of its mainnet, and also launched a spot pool staking and mining mode for Ape Coin.
ParaSpace's announcement of the launch of the auto-compounding feature on December 28 was a significant move that allowed them to significantly increase ApeCoin staking rewards through the power of auto-compounding. While the Ape Staking official contract does not support auto-compounding, ParaSpace's introduction of the feature has resulted in higher APY for both APE token and NFT holders on the platform, attracting more users to stake and improving pairing efficiency. In January of this year, they also offered gas reduction incentives for all Ape Staking users who reinvest their rewards. ParaSpace's support for auto-compounding has resulted in much higher yields than the official channel.
The Ape Staking pairing mining mechanism in the form of NFT lending and borrowing carries the risk of Ape NFT liquidation. However, ParaSpace has ingeniously addressed this issue. The price of the APE token is closely related to the floor price of Ape NFT, so the liquidation risk is lower than that of the ETH collateralized NFT lending model. In extreme cases where liquidation is required, ParaSpace will automatically redeem the staked Ape NFT but will deduct the necessary amount from the staking rewards to ensure the solvency of the APE token loan while keeping the Ape NFT from being auctioned off.
ParaSpace has developed a front-end interface that interacts directly with the official Staking contract for users who are geographically restricted from participating in Ape Staking through ApeStake.io.
Compared to ApeStake.io's official staking, ParaSpace has done better in terms of paired staking, APE pre-staking rewards, support for staking Ape NFT lending, no restrictions on user IP, and protection of APE tokens during NFT sales.
ApeStake.io, as a staking platform launched by Yuga Labs, the largest NFT brand, is bound to attract a lot of traffic and be a carnival in the NFT community. ParaSpace, as a new lending protocol, started its pre-deposit campaign for Ape staking even before it was officially launched, demonstrating its team's high responsiveness to industry hotspots. By seizing this opportunity, ParaSpace has attracted a group of high-quality users in the NFT finance market through significant discounts and better user experience.
Keeping users engaged with innovative collateral methods
We can classify NFT lending products on the market into two types: peer-to-peer and pool-based (centralized lending models are not discussed in this article, as some centralized institutions and exchanges offer such services).
Peer-to-peer refers to borrowers displaying their demand on the platform, and lenders browsing all the borrowing demands and choosing the orders they are interested in to negotiate interest rates and terms with the borrowers and complete the lending. When the loan is repaid on schedule, the NFT goes back to the original owner; if it cannot be repaid, the NFT belongs to the other party. Currently, NFTfi and Arcade xyz use the peer-to-peer mechanism.
Pool-based refers to NFT holders collateralizing their NFTs to obtain loans, similar to the logic of Aave and Compound in DeFi. Funds are lent out by over-collateralizing, while interest must be paid. Borrowers inject money to earn interest. Currently, ParaSpace, BendDAO, JPEGd, and Pine Protocol use the pool-based mechanism.
The pool-based model uniformly prices NFTs of the same series at a floor price. Compared with peer-to-peer, the advantage of the pool-based model is that borrowers can instantly borrow from the lending pool after pledging their NFTs, without waiting for a match, and the lending efficiency is high. The disadvantage is that rare NFTs with valuations higher than the floor price cannot borrow at a fair market value, leading to low capital efficiency. Also, when the market is bad and lenders panic collectively, liquidity dries up, and it is easy to form a death spiral.
As a pool-based NFT lending protocol, ParaSpace allows users to package assets of ERC-721 tokens or ERC-20 tokens, pledge and borrow them to improve the low capital efficiency of users' on-chain assets.
Compared to BendDAO's pool-based model, we find that ParaSpace actually does not have many advantages, except for the lending method of the pool-based model. BendDAO can also achieve peer-to-peer matching, and the effects of ParaSpace and BendDAO are similar in the pool-based lending method.
But ParaSpace has its own innovation. ParaSpace's collateralized lending function has two innovative collateralization methods: full-position leverage and bundled collateralization. Under these two innovative collateralization methods, ParaSpace allows users to provide loans with a credit limit for all collateral, which means that by using ParaSpace to collateralize your NFT assets, you will generate a credit limit for you, and a health score for your entire collateralized asset portfolio. As long as the health score of your entire collateralized asset portfolio remains above 1, none of your NFTs will ever trigger a liquidation auction.
For users, whether the collateral is an NFT or an ERC-20 token, users can borrow based on their total value. Currently, the ParaSpace platform supports a total of 12 blue-chip NFT assets, including BAYC, MAYC, BAKC, Swer Pass, CryptoPunks, Otherdeed, Azuki, Moonbirds, CloneX, Doodles, Meebits, and Pudgy Penguins. It also supports a total of 8 ERC-20 assets, including APE, cAPE, ETH, DAI, WETH, stETH, USDC, and USDT, and innovatively supports 12 groups of UNISWAP V3 LP (specified fee rate) composed of the above ERC-20 as collateral.
Peeking into the future of NFT lending
Currently, the entire NFT lending market is relatively small. This is because it is a highly specialized field that requires users to understand both NFTs and DeFi. There are about 2,000 active users, with the top 50 borrowers accounting for 80% of the transaction volume and the top 50 borrowers by loan amount providing about 35% of the loans. However, 2022 laid the foundation for NFTfi to take off. From the beginning of the year to the end of the year, the cumulative lending volume using NFTs as collateral increased by 10 times, reaching over $500 million.
The DeFi market is already a highly competitive arena, and NFT lending, as an extension of DeFi, is poised to become another important on-chain financial system and experience explosive growth as the NFT market gradually expands.
Because of the low liquidity of NFTs, which is similar to real estate in the real world, we liken NFT lending to real estate mortgage lending and draw parallels with the development path of Defi to perhaps glimpse at some possible future directions for NFT lending.
Firstly, NFT lending will inevitably move towards greater efficiency and more accurate asset valuation. As the value of core NFT assets continues to increase, demand for trading among holders will decrease. For blue-chip holders, they may choose to mortgage their assets for lending purposes in order to maximize their utility when they are unwilling to sell their high-quality assets. As for the tail-end NFTs, which have long been in an "unwanted" state, they also need refined lending development to enable them to be more liquid. This requires not only accurate asset pricing but also efficient transaction efficiency.
To meet this demand, a combination of pool-based and peer-to-peer models will certainly be adopted by various lending protocols. As for accurate asset pricing, perhaps AI and machine learning-based off-chain computing will gradually become an emerging NFT oracle pricing method. This is because it can analyze value information such as NFT attribute classification, rare features, and historical sales data to provide a relatively reliable and accurate pricing or pricing range.
Furthermore, as the NFT lending market expands, more non-fungible tokens such as virtual real estate and NFT music will become collateral for lending. Under this trend, we may see the gap between traditional finance and decentralized finance continue to narrow. After all, when NFTs are recognized as a universal collateral, they will be seen as assets rather than just bubble art.
Miyuki
JinseFinance
Edmund
decrypt
Coindesk
Bitcoinist
Cointelegraph
Ftftx