Originally published on 10/5/22 in DYOR with UNLOC by Maurice Chalfin
When we say NFTs are the future, we mean it. We believe in the doors they open and the possibilities they create. And much like art, collectibles, and property in the “real world”, NFTs require financial products and consumer services built up around them to service their owners optimally. Unfortunately, right now NFT holders are not empowered as owners; what holders can do with their NFTs is generally very limited. Illiquidity is just one of the primary issues an entire landscape of projects and protocols are working to resolve.
Right now the landscape for NFT-collateralized loans on Ethereum is getting quite robust, due to the longer history, higher ecosystem liquidity, and the higher demand for blue chip NFTs such as BAYC. And, the landscape of financial products and consumer services around NFT ownership on Solana is burgeoning quickly. Teams are working tirelessly to resolve issues around illiquidity first, each implementing a different system to govern loans, be it for borrowers or lenders.
One of Unloc’s goals is to provide NFT owners with better rights & more opportunities in Web3 which are afforded to owners of art, collectibles, & property in Web2 or “the real world”. We believe in the power of blockchain technologies to equalize the social and financial landscapes of the world and we want our platform to support this. Before we can make more robust financial products and consumer services, we must first address the illiquidity issue which haunts many NFT holders, DAOs, and project treasuries. Furthermore, we felt it would be disingenuous to push our agenda without understanding exactly what is currently on offer for the loan landscape on Solana.
We tested each platform touting NFT loans; we tested both borrower and lender experiences and tried to test any other functionalities as well. While this was first produced as an internal report, we thought we’d be doing a disservice by not sharing, as this could be beneficial to all our cohorts in the ecosystem. We’re sharing our findings as objective in the body of the article, abstaining from providing our opinions until The Conclusions section.
Order Book
Sharky
At present on Solana, there is only a single Order Book based NFT-loans platform on offer, from Sharky.fi. The goal of Sharky is to enable instant liquidity, aka instant loans. Their order book model stores all the loan offers for a specific collection and connects a borrower available in the book.
Lenders can make offers at any time, and with Sharky’s one-size-fits-all approach, all NFTs in a single collection are treated as the same; this means there is no way to value your NFT at your desired price level or its “true price”, only by their metrics and listed floor prices across the ecosystem.
While borrowing, each collection is labelled with “best offer” indicating what the Borrower will receive at that time for collateralization. Additionally, Borrowers cannot choose a specific offer from the order book, should they require a lower loan amount.
At this time they don’t take any fees, so Lenders accrue all the loan interest gained from engaging in a loan. Sharky’s platform is escrowless, with the Borrower’s NFT locked into their wallet for the duration of the loan.
All APY and Loan durations are set by the team themselves. Furthermore, they also participate in their markets as a lender. Lastly, they just launched their own NFT collection; “sharkx”. They outline the full dynamic of their NFTs here; in short they are gamifying their platform with their NFTs and their $FISHY token with dual revenue sharing.
Peer-to-Pool // Peer-to-Contract
Frakt
Frakt offers a few solutions to access liquidity using your NFTs, one of which is their pool based solutions. They offer two pool-based loan options, “Flip Loans” and “Perpetual Loans.” In both these options, the Borrower is returned the original NFT they put up as collateral.
Flip Loans or Aggregated Loans offer borrowers an opportunity to get instant liquidity through an instant loan on 20–50% of the floor price (FP) of their NFT for 7 to 14 days. Upon entering into the loan, every 24 hours a fee bump occurs, and there is also a 24 hour grace period to repay loans, with an additional 10% late fee.
This is the interest rate model for Flip Loans; the higher the pool utilization rate, the higher the base interest rate.
Perpetual Loans or Isolated Loans offer borrowers a dynamic rate for each collection based on the amount of liquidity available in the associated isolated lending pool. Collections are whitelisted for perpetual loans with:
High liquidity and low utilization rate = Low lending interest rate Low liquidity and high utilization rate = High lending interest rate
Each Perpetual Loan charges a 1% (of the loan value) upfront fee to the protocol, which is independent of interest rate.
As there is no time limit for Perpetual Loans, it is the borrower's responsibility to monitor their loan “health”, to make sure the amount of debt and the amount of collateral have a properly over-collateralized ratio. This may require occasional partial repayment.
A 24h Grace Period is granted for loans whose “health” reaches 0%, a last chance for the borrower to repay its debt. Frakt will liquidate the collateral and offer it up as a raffle to Frakts and Gnomies holders. The winner of this raffle (a Frakt or Gnomies holder) is offered the opportunity to purchase the liquidated NFT for the original loan value + interest rate price.
Frakt offers two other “liquidity solutions” for NFT holders via “FRAKT Pools” and “FRAKT Vaults” — both described below under Fractionalization.
Honey
Honey’s Peer-to-Contract (P2C) matches borrowers and lenders within a collection. Each listed collection has its own lending market (which needs to be approved via a vote from protocol participants holding veHONEY).
Lending markets require approval by DAO vote and then further require a “Market Admin” to create said market with the associated fees (also approved by the DAO vote). The Market Admin can be anyone who is approved by the DAO vote.
Lenders can only supply liquidity in the form of $USDC to an NFT collection’s associated lending market. Borrowers can borrow this supplied liquidity by depositing their NFTs as collateral, and all Borrowers over-collateralize their loans. Also, loans do not have fixed durations, therefore interest accrues over time.
Loans on Honey are not escrowless, however airdrops for NFTs held in escrow for a loan, will be held by the contract and withdrawn along with the collateral when the loan is repaid to whoever withdraws the NFT.
Each lending market on Honey also lives in isolation from the broader markets, risks are not carried over from one market to another, and each lending market will have its own interest rate, NFT collection (or collateral type), and essentially its own risk profile.
Each market also has a “liquidation threshold”, which determines if a position has become too risky and must be liquidated.
Fractionalization
Solvent
Using Solvent, users can fractionalize NFTs for listed collections to gain instant liquidity. Users deposit an NFT into a “Bucket”. Buckets are like vaults, and for each deposited NFT deposited into a vault, 100 x “droplets” are minted in that collections representation token, or “droplet”.
Droplets are fungible tokens that represent NFT projects — each project on Solvent gets its own unique token, which is treated like any other token on the Solana blockchain. Droplets can be thought of as a derivative product, and pricing will be discovered by an automated market maker (AMM) depending on the demand and supply in its liquidity pool.
Depositing into a bucket equates to losing ownership of your NFT — it is a system intended for floor-priced NFTs, not rare or sentimental ones. While anyone can technically create their own bucket, only buckets created/approved by the Solvent team will be available on the platform. Each NFT deposited into a bucket has a 2% fee subtracted as minting fees for the platform.
Droplets can be swapped for a variety of SPL tokens, deposited into a liquidity pool to earn yield, swapped for droplets for another project, and can also be used within different DeFi dApps and protocols which are integrating Solvent. To learn about liquidity pools and LP tokens, we’d recommend reviewing this.
Solent also has a native token $SVT; holders earn portions of the minting fees charged by the platform via staking. $SVT will also play a role in governance and will grant discounts on minting fees.
FRAKT
As outlined above in Peer-to-Pool and Peer-to-Contract loan solutions, Frakt offers two other “liquidity solutions” for NFT holders via “FRAKT Pools” and “FRAKT Vaults”.
FRAKT Pools allow projects and holders to add NFTs into collection-specific Pools to receive an associated fungible pool token, which can be used to trade for SPL-tokens or yield farmed. Initial liquidity providers for these pools are the teams or DAOs associated with the pool namesake.
Pool token holders can stake their pool tokens to generate yield off of pool fees. There are 2 types of stakers, Inventory stakers and Liquidity Stakers. The former stakes only NFTs while the latter stakes both NFTs and SOL.
FRAKT Vaults locks up an NFT in a digital vault and tokenizes it for distribution, with fractional shares representing pieces of the whole NFT, with according price fluctuations. In order to make the fraktions tradable, a Serum market must be spun up, which FRAKT offers as an option via their platform.
Bridgesplit
At present any collection which wishes to be listed needs to be whitelisted on Bridgesplit, but it is worth noting we are only providing a basic overview because they will be deprecating the platform on November 4th, 2022.
Fractionalization on Bridgesplit enables users to fractionalize an NFT to trade fractions on a market powered by Raydium and Serum.
When fractionalizing an NFT, users can choose the total number of fractions and the ticker symbol, i.e. $SOL for Solana.
Holders of fractions can vote on whether the fractionalized asset can be bought out and at what price. They can also create markets to trade on if they so choose; an AMM or Order Book model. These fraction holders can also provide liquidity or simply sell their shares.
Peer-to-Peer (P2P)
YAWWW
In addition to their “2nd best marketplace on Solana”, Yawww offers peer-to-peer NFT-collateralized loans. With Yawww, Borrowers set the loan parameters for loan duration (1 to 365 days) and the interest rate or APR% (1 to 1000%) with $SOL being the only currency enabled.
Once engaged in a loan the NFT is entered into an escrow account, held in a smart contract waiting for a lender to fund it. When a Lender chooses to fund a loan, the associated borrower receives those funds and the loan countdown begins.
The loan ends when either the borrower repays the loan amount with interest or defaults (doesn’t repay loan amount within the loan contract duration). If repaid, both parties can withdraw either their collateral or the lent amount with interest.
A 6-hour buffer window is granted to repay a loan upon expiration — a safety net provided in case to Solana experiences a network outage. If a borrower defaults, the lender gets the escrowed NFT.
Yawww collects a 10% lender fee from the total interest earned in a loan. When a loan is paid back early, the fee is prorated with any excess paid back to the lender. In the event of a loan default, fees are not returned. Lastly, there are no platform fees for listing or paying off a loan.
Yawww does also have 2 NFT collections which when staked offer $YAW token rewards and reduced platform fees, the SolSteins and Quantum Traders (QTs), which they self-label as the “backbones of the whole Yawww Ecosystem.” Neither are needed to engage in either side of a loan.
Honey
Honey P2P is built on top of Honey’s core lending product as a “Layer 2”. Any NFT can be collateralized on Honey P2P and have 2 fees associated; 10% of what lenders receive (lending fee) + 1.5% of the debt (borrower fee).
Borrowers set fixed-duration loans, and the lender is entitled to redeem the NFT if the borrower defaults; minimum loan durations stand at 1 day and there is no maximum loan duration. Unlike some other platforms, there is no grace period in the event of a default.
Honey also offers the ability to refinance a P2C loan (described in the labeled section above) by moving a P2C loan over to a P2P loan. A note on Capital Efficiency within the Honey platform as well as the why and how to manage this refinancing can be found here.
Conclusions
As a team, we engaged and tested each of the aforementioned platforms for manifold reasons; primarily motivated to learn how to improve the capabilities and experience on Unloc’s soon-to-be-released NFT loan platform.
Our secondary, but equally as important, driver to do this research was to support our cohorts in the ecosystem, for both users and platforms alike. Here are some of the key conclusions we’ve found while engaging in numerous loans along with countless hours of research:
- Well-organized and clearly defined gitbooks or documentation is imperative.
▹ Tutorials, screenshots, and videos are very useful for onboarding new users.
▹ Even as DeFi-natives, we still struggled to synthesize certain concepts. - Notification systems proved invaluable to staying on top of changes or updates to our loans — particularly if terms required monitoring.
▹ e.g. Notifi or Dialect - A lack of uniformity in loan terms and descriptors is very confusing.
▹ Platform-specific product names can further confuse the user, especially without the proper explanations or tool-tips. - Tool-tips aka informational pop ups are priceless, particularly for projects with more complicated liquidity solutions.
- UI/UX layout is integral for a smooth and enjoyable experience.
▹ We found that many of the dashboards and interfaces we interacted with took time to understand, elongating the onboarding process and surely turning off some users.
▹ Confusing UI/UX coupled with not-well-defined terms exacerbates the issue
▹ Multi-step processes can be automated to reduce the user’s experienced friction - Relaying real-time data for borrowers and lenders is imperative to make the most informed decisions;
▹ At present some loan platforms only pull data from a single source when there are in fact multiple.
▹ Inaccurate or delayed data relays can result in misinformed decision-making, resulting in issues like high slippage rates. - We found that most platforms were optimized for the lender, not the borrower ( NFT holder) — a counterintuitive conclusion. This, to us, was and remains a glaring issue as there are countless opportunities to earn yield on tokens or coins, while the same cannot be said for NFTs.
- Smart contract execution must be quick, slow code is just simply not acceptable, taking 20–30 seconds to execute a transaction makes for terrible UX. And no, the Solana network cannot be scapegoated. 🙂
The Unloc Approach
Our goal is to become the preeminent Financial Products and Consumer Services platform on Solana; to provide NFT holders with better rights & more opportunities in Web3 than are afforded to owners of art, collectibles, & property in Web2 or “the real world”. We are working to empower NFT ownership. Our first product, slated to release in the coming weeks, will be our fully customizable P2P NFT-collateralized loan platform:
Unloc lets the Borrower set their own terms; select SOL or USDC as the loan currency, set your own loan-to-value (LTV) ratios (i.e. allowing Borrowers to set interest rate, loan amount, currency, and duration), set multiple sub-offers allowing Lenders to find the perfect terms for their risk profiles, all while at the same time empowering Borrowers to unlock the full potential of their NFTs.
Both borrowers and lenders earn $UNLOC simply by engaging in a loan contract, “mining” tokens for the duration of the time the loan is active (not-repaid).
Staking Accounts on the Unloc platform have the ability to vote on specific collections’ $UNLOC token emission rates. This creates opportunities for NFT projects to add more utility to their NFT-holding communities.
We are also developing Unloc Score, based on locked staking amounts and total lock-up durations, which will determine voting power on the platform.
UNLOC LINKS 🔗
Website: https://www.unloc.xyz
Twitter: https://twitter.com/UnlocNFT
Discord: https://discord.gg/UnlocNFT
Instagram: https://instragram.com/UnlocNFT
TikTok: https://www.tiktok.com/@unlocnft
