NFT Lending Volume Reaches All-Time High, But Not For Long
The NFT lending market has recently surged to record-breaking highs not seen since the apex of the 2022 bull market. In Q2 2023 alone, lending volumes for NFTs exceeded $197mn, driven almost entirely by Blend, the new lending platform launched by Blur in early May of this year. Blend is now the most widely used NFT lending platform with over 2.3k borrowers and 1.5k lenders. Since inception, Blend’s cumulative borrowing volume stands at ~$921mn across ~62k loans. Although a minority share of users represents the majority of Blend’s volume, the increases in active users are promising signs of adoption. This report provides a concise overview of the NFT lending ecosystem and highlights the profound impact of Blend's overnight success on the rest of the market.
Weekly NFT borrowing volume reached an all-time high of $197mn in Q2 2023
YTD, cumulative NFT lending volume increased 270%
Total users in the NFT lending markets are increasing
Top 10 lenders account of 48% of total lending volume on Blend
Top 10 borrowers account for 26% of total borrowing volume on Blend
68% of Blend’s lending volume is driven by airdrop farmers
Overview on NFT Lending Dynamics
Blend and other NFT lending protocols offer convenient solutions for NFT holders looking to leverage their assets to access immediate liquidity, while also providing opportunities for lenders to earn yield on their ETH. These protocols typically function as peer-to-peer lending marketplaces, where users can lock their NFTs as collateral within escrow smart contracts and request ETH loans secured by the underlying value of those locked NFTs for a specified duration. Borrowers receive bids from potential lenders with specified collateral and interest rate parameters, enabling lenders to select the most appealing lending terms. Among the various collateral and interest rate parameters, there is a liquidation level that sets a loan-to-value (LTV) threshold relative to the value of the underlying NFT collateral. In the event of liquidation, the escrow smart contract transfers the NFT used as collateral to the lender to settle the outstanding loan amount. Once the loan is activated, the borrowed ETH may be utilized to acquire additional NFTs, effectively establishing a leveraged NFT position.
In our NFT DeFi report, we highlighted that NFT holders often use peer-to-peer lending markets to hedge their long positions in popular NFTs. “Effectively, an NFT-collateralized loan is a put option with the money up front: if the NFT’s true value falls below the loan amount during the loan duration, it is in the interest of the debtor to not repay the loan, forfeiting their NFT for the borrowed amount. By holding the NFT (locking it in the contract), the borrower creates a put + long payoff profile, which is similar to that of a call option.” (Sal Qadir, Kirill Naumov)
NFT Lending Landscape
Following the NFT market peak in April 2022, NFT lending activity experienced a remarkable surge in volume. Initially, the market was largely controlled by Bend and NFTfi, representing 63% and 23% of market share, respectively. However, the NFT lending landscape shifted in December 2022, with new competitors like X2Y2, Arcade, and Paraspace entering the space, leading to a more competitive market for NFT lending. As a result, Bend and NFTfi's market share dwindled to 12% and 19% respectively, while Paraspace, X2Y2, and Arcade gained traction with market shares of 35%, 25%, and 6% respectively. While significant at the time, this disruption was nothing compared to what we’ve seen since the arrival of Blend. Since launching in May of this year, Blend has captured roughly 95% of the NFT lending volume.
Prior to Blend’s emergence, NFT lending volumes were slowly recovering from all-time lows seen in November 2022. YTD, cumulative NFT lending volumes increased 270%. Blend’s overnight success pushed lending activity to new highs in a matter of weeks. Notably, Blend achieved more volume in the past six weeks ($921mn) than most of its competitors have done in a year.
Similar to other NFT lending platforms, Blend took a conservative approach by limiting support to a few select major NFT collections, which carry lower risk due to increased liquidity. At launch, Blend only allowed its users to borrow ETH against Miladys, Azukis and Wrapped Punks. Blend eventually diversified the loan collateral options to other major blue chip NFTs, however, Azuki’s remain the dominant collection used as collateral (706 active loans).
Blend Lenders and Borrowers
In our NFT Marketplace Update, we previously noted that the user base of Blur heavily consists of ETH whales. Like Blur, Blend’s lending base also consists heavily of ETH whales. Blend’s top 10 lenders, for example, contribute to 48% of the total lending volume on the platform. Among these lenders, wallet 0x8BC stands out as a major player, being responsible for approximately 7% of the ETH issued to borrowers on Blur. With a wallet that holds roughly $19.7 million, this user holds a substantial token allocation, primarily consisting of ETH. Notably, wallet 0x8BC received the third largest airdrop of Blur tokens, totaling 2.97 million tokens (~$1mn at today’s prices). Many of these top lenders received sizable BLUR season 1 airdrops, which suggests the largest beneficiaries from the initial airdrop round are still the most active users on the platform, presumably incentivized by the upcoming season 2 airdrop.
Analyzing the wallets of the top Blend lenders suggest that these users also have sizeable NFT collections ranging from 5 to 7 figures. It should be noted that sophisticated NFT collectors diversify their respective collections across multiple wallets; therefore, the aggregate NFT holdings for each user recorded below could be much larger.
In contrast to Blend’s lenders, Blend’s borrowing demographic is less concentrated and more diverse, with the largest borrower accounting for no more than 4.5% of total borrowing volume. For reference, Blend’s top lender accounts for 13% of total lending volume. Evidently, there are more borrowers on Blend than lenders.
Although Blend’s borrowing volume is more distributed among its users compared to its lending volume, the types of users borrowing are still wealthy NFT collectors and ETH whales. This finding reinforces our view that NFT lending and borrowing is a tool dominated thus far by sophisticated wealthy NFT collectors.
Blends effect on Blur
Although NFT lending activity is increasing on Blend, Blur’s overall transaction volume, which excludes NFT purchases with loans, is decreasing. Since May 1, 2023, Blend’s cumulative weekly lending volume is 43% more than Blur’s weekly transaction volume.
NFT Lending’s Longevity in a Bear Market
One key trend suggests the current lending volume is inorganic and potentially not sustainable. For Blend, over 68% of approved loans have a 0% APY, indicating that users are more focused on airdrop farming by earning points from accepted bids. At the other end, 20% of loans carry an APY between 10% to 20%, signifying borrowers' are desperate to accumulate points for the imminent airdrop. This surge in activity will benefit Blur in the short-term, but there may be a drop in user engagement and trade volume when these lending/borrowing incentives stop. Hence, Blend will face similar user retention challenges as other NFT lending platforms that operate without token incentives. Blend’s borrowing and lending volumes will significantly decrease after the season 2 airdrop from unattractive loan terms due to lenders having no incentive to take on 0% APY terms. The decline in lenders will inevitably contract borrowers on Blend, leading to a drop-off in lending activity.
Blend’s immediate impact on the NFT ecosystem will have a positive effect on NFT collectors through educating new users on airdrop dynamics. Additionally, exposing sophisticated NFT collectors with competitive lending products fosters new trading strategies around liquid NFT collections. The financialization of NFTs will be one of many developments that propel the industry to new levels by attracting new types of profit-driven collectors, which will increase overall liquidity in the NFT market. However, NFT lending will struggle to find sustainable product market fit in a bear market as key metrics such as cumulative volume and number of traders are at all-time lows. Although Blend’s case analysis highlights only one demographic of NFT collectors, lending is generally a leverage tool used by sophisticated traders. From this, NFT lending products will not cater to retail collectors in the short-term.