How Does NFT Borrowing Work?
How do NFT Loans work?Each NFT-staked market will have a predetermined collateral factor (0-100%) which will be multiplied by the total value locked (TVL) of the reserve tokens in market. We can call this the loan limit which simply represents the on-demand credit available to the NFT staker. The interest rate payable by the NFT staker will be algorithmically calculated by the smart contract based on the relative supply and demand of loanable funds.When the NFT staker elects to borrow on-demand, the follow three outcomes are possible.
  1. 1.
    The NFT staker can use the borrowed funds indefinitely as long as the interest is paid according to the smart contract terms. In this case, LPs will continue to earn trading fees and interest in perpetuity.
  2. 2.
    The NFT staker can pay back the outstanding principal and interest at any time and the smart contract will automatically unlock the NFT asset and sent it to the NFT staker’s wallet address. All existing pool tokens will be burned and the appropriate value of reserve tokens will be sent back to the LPs' wallets. At this point, the liquidity pool will be successfully terminated and deleted from the platform.
  3. 3.
    The NFT price drops below the liquidation level triggering a liquidation event and temporarily places the market into an ‘unhealthy’ condition. At this point, the NFT staker can add a sufficient amount of reserve tokens to the market to restore it to a ‘healthy’ state and retain ownership of the staked NFT. However, if a liquidator pays off the loan in full before the NFT staker remits the required amount of reserve tokens, the NFT staker will lose the staked NFT to the liquidator. Therefore, the NFT staker must monitor the situation closely when the price is near the liquidation level.
Liquidators, who can be anyone including the existing LPs, stand ready to pay back the loan to restore the ‘health’ of the market when the staked NFT price has declined below the loan limit level and triggered a margin call. The liquidators will gain control of the staked NFT if they pay off the non-performing loan first. At this point, the NFT will be unlocked from the smart contract and sent to the liquidator's wallet and the market will terminate.
Last modified 5mo ago
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