Newsletter #105
The financialization of NFTs continues… but is it good for the community?
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The financialization of NFTs continues… but is it good for the community?
In an early January newsletter, we wrote about the increasing financialization of NFTs and the rise of “NFT Finance.” This week another step in that direction has been taken with the launch of Blend, a peer-to-peer lending platform developed by Blur and Paradigm. Although the technology behind the platform is undeniably interesting, not everyone is a fan. Let’s dig into the situation and learn more.
Blend is a newly launched lending platform that allows users to borrow money using their NFTs as collateral. The p2p system connects borrowers with lenders offering the most competitive interest rates. One of the main advantages of Blend is that loans don't have fixed end dates, providing more financial flexibility for users. It also doesn't rely on external data sources, known as oracles, to determine interest rates or collateral value, making it more decentralized and permissionless.
The mechanism behind Blend involves fixed-rate loans, refinancing auctions, and liquidation. Refinancing auctions allow lenders to exit. However, if no one is willing to take over the loan, the borrower's NFT is sold to cover the debt. Blend's system features continuous loans that automatically extend unless the lender wants to end the loan, allowing borrowers to repay their loans whenever they want. (For a full technical analysis of Blend, click here.)
Some might argue Blend is bad for NFTs because it could encourage speculation and over-leveraging, which might lead to an unstable market. By allowing people to borrow money using their NFTs as collateral, some users might take on excessive debt, hoping to profit from NFT price increases. If the value of the NFTs were to suddenly decline, it could lead to a wave of liquidations and further price drops, potentially destabilizing the market. Additionally, critics may argue that using NFTs as collateral for loans might detract from their original purpose as unique pieces of art or collectibles, and turn them into mere financial instruments.
On the other hand, others might argue Blend is good for NFTs as it can provide liquidity and broaden the use cases for NFT owners. By allowing NFT holders to access funds without selling their assets, Blend could encourage more people to invest in NFTs, knowing that they can unlock the value of their assets if needed. This can lead to increased demand and a more vibrant NFT market. Furthermore, the Blend platform can bring more attention to the NFT space and demonstrate the versatility of NFTs as not just collectibles, but also as a means of accessing financial services. This expanded utility could potentially drive innovation and increase the overall value of the NFT ecosystem.
As the NFT market continues to grow and evolve, Blend represents another provocative development in the merging of decentralized finance with NFTs. It's clear that opinions on its impact can vary, with some seeing it as a potential risk to the art market's stability, while others view it as a positive step towards broadening the utility and appeal of NFTs. We encourage you to join the conversation and share your thoughts on continuing financialization of NFTs.
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