Introduced on Monday, Blur’s fast-developing foray into the business of NFT lending has already been met with a number of open questions.
Blur, the upstart NFT exchange that has grown to dominate trading volumes, rolled out its NFT credit ambitions via the launch of its new protocol, Blend, designed for that purpose.
Chief among those questions, according to a number of industry participants: Can Blur’s Blend gain enough market share to make the ambitious venture worthwhile?
Though it’s too early to make that call, industry participants, including institutional NFT traders, say they’re starting to get a feel for Blend’s potential.
And they’re looking closely to see how Blur’s lending product differentiates itself — from both a marketing and a technical perspective. Blur’s NFT exchange runs in its own native token, BLUR.
Blend is up against abundant competition.
The token’s white paper positions itself as a viable, and winning, alternative to existing DeFi products and protocols designed to make markets on loans collateralized by digital collectibles. And to originate loans for digital collectible purchases.
Blend relies on a peer-to-peer lending model, with Blur playing up its Dutch auction structure that enables a bidding process around blockchain-based lines of credit.
Read more: How Does NFT Lending Really Work? A Beginner’s Guide
“Blend is a flexible and permissionless floating-rate lending protocol that can support arbitrary collateral with no oracle dependencies, and allows whatever interest rates and loan-to-value ratios the market will bear,” its white paper said.
Endless NFT loan rollovers?
Dutch auction structures aren’t new in NFT markets. But, according to a number of Web3 specialists, Blur’s usage of rollover mechanisms for loans using those same Dutch auctions is something new.
Matthew Liu, the co-founder of Origin Protocol (OGN), told Blockworks that “Blur’s largest purported innovation is the continuous, rolling lending mechanism that allows for rollovers of loans.”
In other words, according to Liu, “the same lender and borrower don’t need to be in contract,” which introduces additional lending liquidity.
Blur’s core NFT trading volumes have tapered off in recents weeks on the heels of its repeat airdrops — with some costly delays that hit participants with up to $200 in gas fees.
But its marketplace has still been holding down the top spot in terms of volumes. Investor eyes are now turning to Blur’s latest gambit to maintain its NFT standing.
“When a lender wants to exit at any time, they can initiate a Dutch auction to pass the loan over to another lender at an interest rate determined by the auction,” Liu said. “This is indeed a mechanism that has not been used by existing competitors. However, this model is not without its own risks.”
Blur representatives were not available for an interview and did not return a request for additional comment on Tuesday.
The case for NFT collateral
Retail and institutional interest in buying, holding and trading NFTs has waned since floor prices and volumes plunged in the fourth quarter of 2022 — with sales dropping by about 20% in the month of November alone,
More recently, floor prices of blue chip collections and their associated volumes that feed into overall NFT market capitalizations have stabilized, traders say. And the outlook on the sector has been shifting.
Read more: How to Sell an NFT — The Investor’s Guide
Protocol participants can use NFTs they own as collateral to secure crypto loans. And NFT buyers using the Blend platform can obtain a loan to purchase fresh Web3 collectables. Loan terms, including duration and interest rates, are set by lenders via the Dutch auction setup.
Dutch auctions set a high water mark price for a given asset — in Blend’s case, generally a line of credit tied to crypto assets — and stay open for a predefined period wherein issuers can lower their asking price until a buyer or counterparty is found. It’s essentially the eBay model for digital assets.
Gabriella Kusz, the chief executive officer of Global DCA, told Blockworks in a statement that she is “not surprised at the innovation we are seeing with Blur,” adding that “for a long time people made fun of or underrated the power and utility of NFTs.”
“What we are seeing now is on trend with the overall maturation and evolution of the digital asset space – a heavy focus on utility and value,” Kusz said. “The use of Blur for NFT lending is just one possibility.
But what’s an NFT worth, anyway?
The auction system appears designed to tackle one big standing problem among NFT traders and market makers: how to accurately value inherently illiquid non-fungible assets.
Aaron Rafferty, the co-founder of StandardDao, told Blockworks that Blur’s auction system is a “great solution to previous NFT lending protocols and should attract more lenders to a traditionally risky space” considering that “NFT valuations are extremely subjective.”
But there are risks. Including the risk of an NFT losing all of its value.
Or going to zero.
That “edge case,” according to Rafferty, was “previously unlikely,” has lately been “on the back of the minds of many with the recent events in crypto.”
Blur is widely expected to subsidize Blend users via incentives — perhaps extending to the airdrops that have been a recurring feature for the exchange to win market share.
“Blur will be highly aggressive in subsidizing usage with the BLUR token,” Liu said. This is what they have done to enable order matching on their core marketplace, and I expect that they will spend heavily on this new initiative.”
It’s possible that Blur doubling down on its growth-oriented spend, spend, spend strategy could create an arms race of shelling out crypto assets among NFT marketplace competitors.
Competitors should be prepared to subsidize usage with their own tokens,” Liu said. “Blur is notorious for spending money to generate volume and does not seem to care about generating protocol revenues at this time. They are going for growth and market share even as the overall NFT market contracts.
Coupled with the heavy usage of Blur airdrops: the possibility of market manipulation. A number of research reports have found uneven airdrop effects and related purported wash trading.
Loan originators on Blur can, in turn, employ another Dutch auction to establish a secondary market for lenders — who can demand higher interest rates as a result of taking on risk from a distressed loan.
But if a given NFT loses all of its value, “not even 1,000% APR would bring in a new lender,” Rafferty said.
Upside for tokenized assets?
Still, according to Rafferty, “Blur is a value add to the market” because the protocol is “extremely light weight to run and maintain,” especially considering it does not employ oracles or expiries.
On the whole, there have been mixed results for peer to peer crypto lending efforts — especially when it comes to the liquidity they provide to illiquid assets. Some of Blurs’ key competitors are expected to be “NFTfi, PWNDAO, BendDAO, and ParaSpace,” The Defiant reported Monday.
The outcome of those efforts heavily hinge on NFT buyer, seller and lender interest in markets that are still stagnant, according to Liu of Origin protocol.
“In the current NFT market [downturn], my main worry is whether there will be sufficient liquidity on the lender side,” Liu said. “Many NFT holders are looking for liquidity as their assets have declined in value, so the demand side for these loans should be reasonable. I’m more skeptical of lenders wanting to step up to the plate at reasonable interest rates.”
In one possible upside, Rafferty said that Blur’s lending platform “sets a base for collateral provision for the growing tokenized asset market and should attract some previously illiquid assets.”
If all goes well.
“NFT lending is not for the faint of heart,” he said. “Even though Blur mitigates many of the risks of losing one’s NFT, repayments and loan amounts could skyrocket for borrowers if they are not tracking the status of their loan.”
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Source: https://blockworks.co/news/nft-loans-on-blur