Blur has announced BLEND a Buy Now Pay Later (BNPL) is revolutionizing the way we purchase products and services by allowing consumers to buy items using borrowed funds and repay over time. In the world of NFTs, BNPL is also making waves, enabling collectors and investors to buy digital art with borrowed funds. This blog post will discuss how BNPL works in the context of NFTs and provide examples of its potential benefits and pitfalls.
Blend is an innovative lending platform in the NFT space that combines the flexibility of peer-to-peer lending with the fluidity of peer-to-pool lending. This article will explore the benefits and potential risks of this new system, as well as how it compares to other NFT lending models.
Customizable Loan-to-Value in Peer-to-Peer Lending: The main advantage of peer-to-peer lending is the customizable terms and Loan-to-Value (LTV) ratios. Higher LTVs signify higher risk and yield, making it ideal for lenders who are comfortable with risk and have a good understanding of the liquid price of rare NFTs.
The Peer-to-Pool Model: Most people are familiar with the peer-to-pool model from liquidations that occur periodically in BendDAO. This model offers less flexible terms but provides more fluidity for both lenders and borrowers when exiting their positions.
For lenders, they deposit their ETH into a pool, which earns a variable APR, without worrying about offering specific terms. Borrowers can tap into the pool’s liquidity by depositing their NFT into the protocol and borrowing at approximately 50-60% LTV.
Blend’s Innovations: Blend introduces new features to the NFT lending landscape:
- Perpetual terms with no oracle-based liquidations, preventing forced liquidations due to market price fluctuations.
- Refinancing via auctions, combining the flexibility of peer-to-peer lending with the fluidity of peer-to-pool lending.
Now, lenders can provide peer-to-peer loans and exit their positions at any time by triggering a refinancing auction. A dutch auction begins at 0% interest and increases up to 1000% to entice other lenders to take over the loan.
If a new lender steps in, they pay off the initial lender and take over the loan at the auction’s final interest rate. If no new lender participates and the borrower fails to pay off the loan within the 30-hour auction, the original lender can claim the collateral.
Implications for Borrowers and Lenders: The new system, along with blur’s likely incentivization of loan offers, presents both benefits and risks for borrowers and lenders. Lenders may need to offer extremely favorable (and risky) terms to compete, while borrowers might capitalize on the best-ever rates, leading to a leverage-fueled NFT run.
However, potential cascading effects could be concerning as first-time lenders may offer dangerously high LTVs without realizing the risks until prices take a turn.
Blend’s innovative approach to NFT lending is both promising and potentially worrisome. While it may facilitate growth in the NFT market, it’s crucial for participants to fully understand the risks involved in borrowing and lending. Before diving into NFT lending to earn extra $BLUR, carefully read the whitepaper and make informed decisions to ensure responsible lending practices.
1/ Introducing Blend: the Peer-to-Peer Perpetual Lending Protocol for NFTs.
Built in collaboration with @danrobinson and @transmissions11 at @paradigm, Blend enables 10x higher yield opportunities than current DeFi protocols and unlocks greater liquidity for NFTs.
Here’s how 👇 pic.twitter.com/uOFC6i3LSq
— Blur (@blur_io) May 1, 2023
Buy Now Pay Later Overview
Understanding BNPL for NFTs: When you use BNPL to purchase an NFT, you borrow funds that will be repaid over time, either by using BNPL or by borrowing directly using an NFT you already own. Your borrowed balance accrues interest according to the terms of your loan.
For instance, suppose you borrow 10 ETH at a 0.05% daily interest rate. After a month, your borrow balance will have grown from 10 ETH to 10.15 ETH.
Repayment and Ownership of NFTs: Over time, you may choose to repay your borrow to gain full ownership of the NFT. Alternatively, you can sell the NFT and retain any remaining profit after the borrowed balance is repaid during the sale.
For example, if you sell your NFT for 12 ETH one month after borrowing 10 ETH at a 0.05% daily interest rate, you’ll retain 1.85 ETH, and 10.15 ETH will be used to repay your borrowed balance.
Loan Repayment and Refinancing: In some cases, your lender may require you to repay or refinance your loan. This typically occurs when the floor price of your NFT drops. If the floor price falls too close to the amount you borrowed, the lender may call on your loan.
When this occurs, an automated process initiates to find a new lender for your loan with similar terms as your existing loan. If a new lender isn’t found within 6 hours, you must repay or refinance your loan within 24 hours (ensure you have email notifications enabled to receive alerts).
Repaying from Your Portfolio: You can repay your loan directly from your Portfolio page. Currently, you must repay the full amount of your borrowed balance. However, partial repayments will soon be available, allowing you to extend your loan with new terms.
For example, if you borrowed 10 ETH and the floor price drops to 10.5 ETH, your lender may call your loan. In response, you can repay 1 ETH and extend your loan with a new, lower borrowed balance of 9 ETH.
Automatic Loan Refinancing: If you don’t want to repay your loan, you can refinance it with a new lender. This process occurs automatically based on available loan offers, visible on the Loans tab of the collection page. If loan offers are available, no action is required from you to refinance your loan.
For example, if you borrowed 10 ETH and the floor price drops to 10.5 ETH, your lender may call your loan. If another lender offers a 10 ETH loan at a 50% interest rate, your loan will automatically be refinanced with this new offer.
BNPL for NFTs is an innovative way to finance digital art purchases. However, it’s crucial to understand the potential risks and rewards associated with borrowing funds to buy NFTs. Be sure to thoroughly evaluate your financial situation and the loan terms before taking advantage of BNPL for NFTs.
Objective risks of BLEND and BNPL
- Financial instability: BNPL services can lead to users taking on more debt than they can handle. This could result in financial difficulties, defaults on loans, and a negative perception of the NFT market, discouraging new entrants.
- Increased market volatility: The use of borrowed funds to purchase NFTs could amplify price fluctuations, as buyers with leveraged positions may be forced to sell their NFTs when the floor price falls close to their borrowed amounts. This might lead to cascading effects in the market, potentially causing rapid price declines.
- Inherent risk in loan refinancing: Automatic refinancing of loans with new lenders can expose borrowers to unfavorable loan terms, such as significantly higher interest rates. This might lead to an increase in the number of loan defaults, creating negative sentiment towards NFTs and harming the market’s reputation.
- Overreliance on floor price: The text relies heavily on the concept of a floor price, which can be volatile and subject to manipulation. This can create additional uncertainty for borrowers and lenders alike, as the floor price might not accurately reflect the true value of the NFTs.
- Limited repayment options: Currently, borrowers must repay the full amount of their borrowed balance, which might lead to difficulties in managing their financial obligations. This inflexibility can deter potential users from adopting NFTs.
- Lack of transparency and regulation: The BNPL service described in the text seems to lack clear regulations and oversight, which can lead to predatory lending practices or market manipulation. This can hinder the trust of potential users and slow down NFT adoption.
- Potential illegality: The BNPL service may operate in a legal grey area or even be considered illegal in certain jurisdictions, depending on the specific lending practices and the regulatory environment. Operating an unregulated or illegal lending service can expose both borrowers and lenders to legal consequences, further damaging the reputation of the NFT market and discouraging new participants.
The BNPL service for NFTs presented multiple risks that could negatively impact NFT adoption and growth. It could contribute to financial instability, increase market volatility, expose borrowers to unfavorable loan terms, rely too heavily on floor prices, offer limited repayment options, lack transparency and regulation, and potentially even be illegal.