Let’s face it: NFT interest and trading volumes have declined significantly in 2023. However, lending against NFTs remains an important option for investors seeking liquidity.

To make the most out of the opportunities available to us in a bear market, it’s important to determine appropriate lending terms. This requires carefully calculating recovery rates–i.e., the percentage of collateral value recovered in default. This is essential for assessing your risks, even if fewer deals are being written.

In this blog post, we’ll dive into the calculation, usage, and adjustment of recovery rates for NFT lending.

Understanding this process provides key insights, regardless of market conditions.

## The Complex Calculations Behind NFT Recovery Rates

Determining appropriate NFT lending terms requires estimating recovery rates. But how exactly are these rates calculated for different NFT collections?

We use some robust calculations. To start:

![recovery rate formula](//images.ctfassets.net/lhkcghnr8ql4/6QgOJuwa1bveSxX05fbhhT/8a1981885ff88c14aa7b91f3da98a94e/recovery_rate_formula.png)

In this calculation, recovery rate R serves as a forecast of the change in an NFT's appraised value over a fixed time horizon. This rate is expressed as a relative change, where R < 1 signifies a decline in asset value, while R > 1 indicates an increase.

Recovery rates are inherently uncertain, and 
therefore, we treat R as a random variable following a skew-normal distribution.

To estimate the parameters of this distribution, we utilize the daily relative changes in floor prices based on Upshot appraisals, considering them as realizations of R.

It's important to note that when using floor prices, the resulting distribution applies to an entire collection, assuming that recovery rates remain consistent across assets within the same collection.

For point forecasting purposes, the mean of each skew-normal distribution serves as an estimate of the expected recovery rate for a given collection and time horizon.

Additionally, the default probability of a loan for a specific time horizon is determined by the probability that an asset's value depreciates below its appraised value at the loan's inception.

This probability can be derived from the cumulative distribution function (CDF) of R, specifically:

![recovery rate formula 2](//images.ctfassets.net/lhkcghnr8ql4/3I5eRhdRUz3u4W2q6sA6qD/fbe7a62a783cf32bed27601120346fda/recovery_rate_formula_2.png)

While these calculations provide valuable insights, it's crucial to acknowledge that they assume rational investor behavior.

It can be challenging to model and account for irrational behavioral patterns, which may impact the accuracy of these estimates.

To address this uncertainty, lenders must validate and adjust recovery rate forecasts to account for real-world irrationalities.

One approach is to compare projected returns to actual market performance over time. The gaps between projections and reality can then be used to refine your recovery rate estimates.

## Adjusting Recovery Rates for Forecasting Uncertainty

To assess forecast performance, we compare forward-looking returns based on floor prices with the forecast distribution means over rolling windows of 60 days. By calculating the mean absolute percentage error for each time horizon, we can adjust the recovery rate downward to account for forecasting uncertainty.

This adjustment, known as the "uncertainty margin," is calculated as the uncertainty-adjusted recovery rate equals the recovery rate multiplied by (1 - uncertainty margin) for each collection and time horizon.

With rigorously validated recovery rate estimates, lenders can incorporate these projections into competitive lending terms.

## Utilizing Recovery Rates in the Lending Process

The recovery rate model's output serves as a critical component in determining two key aspects of the lending terms: the loan amount and the interest rate.

### Loan Amount Determination

The uncertainty-adjusted recovery rate plays a pivotal role in determining the loan amount. For each collection, the loan amount is calculated as the maximum of the uncertainty-adjusted recovery rate multiplied by the appraised value of the asset.

The maximum uncertainty-adjusted recovery rate corresponds to the time horizon selected as the loan duration.

However, to prevent concentration risk and ensure a diversified lending strategy, the loan amount is capped at twice the collection-level loan median.

### Interest Rate Calculation

The interest rate for each asset is calculated at the collection level using the formula:

![Interest rate formula](//images.ctfassets.net/lhkcghnr8ql4/5txevxMsgxShLHHhNbNBUl/2963beaaf68539c981312403bb135ecc/Interest_rate_formula.png)

The risk-free rate is set at 4.3%, reflecting the long-term average of the 10-year US Government bond.

The premium, set at 0%, 2.5% and 5% depending on each NFT’s value bucket, is added to compensate for the additional risk associated with NFT lending.

The default probability utilized in this calculation corresponds to the default probability associated with the best recovery rate. The term (1 - default probability) increases the overall interest rate as the default probability rises, effectively compensating for default risk in the loan portfolio.

Our methodology offers various levers that can be adjusted to tailor the lending terms and enhance competitiveness.

### Interest Rates

The premium contributes to the interest rate formula and can be adjusted to make the rates offered more competitive.

### Loan Duration

Currently, loan durations range from 14 to 30 days. Depending on demand and risk considerations, this range can be extended to accommodate different lending preferences.

### Loan Amount

The loan amount is based on the adjusted recovery rate at a specific time horizon. The adjustment is determined using the mean absolute percentage error. The adjustment can be increased or decreased to align with market conditions, allowing for flexibility in loan amounts.

### Range of Collections

Currently, we generate lending terms for a range of liquid blue chip NFT collections. This selection of collections provides a competitive advantage as many other NFT lenders cover a smaller number of projects.

To further enhance our offerings, we have the option to selectively add more collections to the terms provided, catering to a wider range of investor preferences.

## Building Sustainable NFT Lending with Recovery Rates

Recovery rates are indispensable for structuring competitive, risk-aware NFT lending. Thoroughly understanding rate calculations lets lenders estimate collateral value retention across time horizons. Validating projections and adjusting for uncertainty creates actionable forecasts to inform loan terms.

Ultimately, recovery rates provide the foundation for sustainable NFT lending. Rather than reacting irrationally, lenders can rely on data-driven forecasts to confidently support investors long-term.

Careful rate analysis transforms lending from speculation to discipline. As NFT markets progress, recovery-focused strategies separate resilient programs from short-lived trends.


Learn how carefully calculating, validating, and incorporating NFT recovery rates into lending terms enables sustainable programs that withstand bear markets.

How to Calculate Recovery Rates for NFT Lending (Even in a Bear Market)

NFT lending is a type of financial loan that uses NFTs (non-fungible tokens) as collateral. It offers an opportunity for NFT owners, creators, and collectors to monetize their digital assets without having to sell them and lose the potential long-term value. 

Though NFT transaction volume has fallen in the past year, new products and platforms are being built in the NFT space that help owners extract value from their assets. NFT lending is a great example of this burgeoning infrastructure. 

NFT owners can put their collections or capital to work to generate higher returns, increase NFT liquidity, and enjoy new revenue streams.

![CBD Lending](//images.ctfassets.net/lhkcghnr8ql4/6LVCJCOpIvk1PvUkPZhPMG/46658185757ee963bb6104e968ebcdea/nft_lending.jpg)

## What Is NFT Lending?

NFT lending utilizes blockchain technology, smart contracts and NFTs as collateral to secure loans. Given the transparent and over-collateralized nature of the loans, users can access capital quickly and securely without having to sell their NFT. 

With NFT lending, borrowers can access larger loan amounts, while lenders benefit from higher returns than traditional investment options.  How? 

The flexibility of NFT lending protocols, and their peer-to-peer nature, enables borrowers and lenders to agree on mutually beneficial terms. 

The use of blockchain technology and smart contracts help ensure transparency and trust between parties throughout the entire lending process. 

Transactions that take place on the blockchain are fully traceable and cannot be altered, while smart contracts allow for trustless interactions and escrow services. 

### How Does An NFT Loan Work?

NFT loans provide a low-friction alternative to traditional lending institutions. Instead of going through credit and identity checks, NFT owners can use their NFT pieces as collateral to borrow cryptocurrencies, such as Ethereum or stable coins.

As a high-level overview, a borrower can secure a loan that’s a percentage of the appraised value of the NFT that is being used as collateral. The borrower must keep a minimum colalteral ratio, or face the risk of having their loan liquidatited. 

#### More on Minimum Collateral Ratio

The minimum collateral ratio (MCR) measures how much collateral a borrower needs to hold to keep their loan in good standing. NFT loans are over collateralized so that there is a buffer against potential price drops or declines in liquidity for the NFT. The ratio is monitored and used to prevent any financial losses on the lender's side, so that if the borrower defaults, the lender can repossess the NFT and sell it on the open market to be made whole. (Much of this liquidation happens via smart contracts automatically).

Since the NFT is the collateral, the MCR must be maintained throughout the duration of the loan, with the current collateral ratio determined by the current price of the underlying NFT.  

We'll get into the different types of NFT loans later. In general though, once both parties are happy with the terms around interest rates and NFT appraisal values, the NFT is transferred from the borrower’s wallet into a secure smart contract that facilitates the loan. 

NFT loans are powerful because they’re beneficial in a variety of financial markets: they can be used to leverage current NFT positions in good times, or could be used as a hedge against their downside during bad times. 

![NFT Lending Photo](//images.ctfassets.net/lhkcghnr8ql4/6zj1gxqlr8Po8FtZQPmTxI/4b0c7ee41422189ae5cc4af7305c5029/andrey-metelev-yscrM1AOEKI-unsplash.jpg)

## Types of NFT Lending

The different types of NFT lending models vary with lending platforms. 

### Peer-to-Peer NFT Lending

Peer-to-peer NFT lending is one of the more flexible NFT lending processes. It imitates an over the counter trade where the transaction occurs directly between the lender and the borrower.

The borrower (who, in this case, is the NFT owner) lists their asset as collateral. Interested lenders make loan offers with their desired terms, including interest and duration. The borrower can then accept the offer, allowing them to receive payment and close the deal automatically.

When a deal closes, the NFT is immediately moved to a digital vault where it’s retained until the expiration of the loan terms. When the borrower repays the loan, the NFT is returned to their wallet while the lender keeps the interest. However, if the borrower defaults on payment, the lender can renegotiate the terms with the borrower or receive the underlying NFT as payment.

### Peer-to-Pool NFT Lending

Peer-to-pool NFT lending is a more complex transaction that lacks some of the flexibility borrowers enjoy in peer-to-peer NFT lending. However, it offers increased liquidity and speed.

Peer-to-pool lending allows users to borrow directly from a liquidity pool, rather than wait to find a suitable lender.  The pool consists of liquidity providers that deposit directly into it for borrowers to automatically access funds after listing their assets as collateral.

NFT owners list an asset as collateral and deposit it in the system’s smart contract. In return, they’re awarded a loan that is usually a percentage of the NFTs value at an interest rate that varies with the utilization of the pool in the long run. 

In this lending protocol, borrowers deposit the collateralized NFT into the smart contract and borrow funds from the pool at an interest rate that is calculated by that smart contract. 

NFTs taken as collateral undergo liquidation when their value falls and the loan is now below the minimum collateral ratio, also known as the liquidation threshold. The higher the MCR value, the safer the state of your funds is against a liquidation scenario.

![Astaria 3 actor model](//images.ctfassets.net/lhkcghnr8ql4/3pyvHYLhyQiMykJDYDneFl/76211c6cddfe368faaee2daa68335928/Astaria_3_actor_model.jpeg)

Image from [astaria.xyz](https://www.astaria.xyz)

### Three-Actor Model 

Three-actor lending models, are a new concept being introduced by Astaria. Their aim is to offer a highly liquid NFT lending system that doesn’t require two-way approval to begin the process, but also has benefits over the peer-to-pool model. 

Three-actor models in NFT lending use a transactional process that includes the borrower, the lender, and a third party known as the strategist. The borrower or NFT holder uses their NFT as a collateral to secure a loan from the lender but doesn’t directly interact with the lender.

In this unique lending model, both the lender and borrower interact with a vault created by a data-driven strategist. The strategist’s role in this lending model is to create strategies that facilitate favorable terms for the lender and borrower, so that both can receive optimal terms.

Upshot functions as a strategist on Astaria, creating secure vaults to hold collateralized NFTs, and using an appraisal system to determine how much that NFT is worth, recovery rates to predict future movements, and much more. 

The main advantage of this 3 actor approach is that the borrower and lender can simply focus on providing collateral and capital and leave the terms to a 3rd party data-driven expert. 

### NFT Renting and Leasing

NFT renting and leasing is a permissionless lending option that operates based on a direct transaction. NFT owners use a peer-to-peer lending system that allows them to rent or lease out their digital assets in a secure system guarded by smart contracts.

NFT renting and leasing usually has no repayment terms or interest rates, but rather a single fee. The NFT owner agrees on a rent price and receives the agreed price while the NFT is held by a smart contract that acts as an escrow. 

During the duration of the lease, tenants enjoy full access to token-gated perks that come with owning the NFT, such as play-to-earn blockchain games and in-person events and conferences. After the predetermined period, the NFT is returned to the owner.

NFT renting and leasing allows NFT collectors and creators to earn yield on their assets without losing access to the underlying assets' appreciation. 

## How Do You Use NFTs for Lending?

To use NFTs for lending, you must list your non-fungible token on an NFT lending market on a decentralized platform. Depending on the lending protocol you use, this platform will connect you with lenders or ‘tenants’ interested in transacting with you, allowing you to set your terms and rates without a third party.

## Risks of NFT Lending

While automated smart contracts and transparent terms prevent risk, it is not entirely risk-free, as defaulting on terms can lead to losing your NFT.  On most NFT lending platforms, when a loan becomes delinquent or expires without being paid back, the NFT backing the loan is sold at auction. 

There is also concentration risk: many NFT lending platforms only allow a small (often similar) subset of collections to be used as collateral. When multiple loans are liquidated, elements of that subset will bear an outsized burden and fall in value. This could hurt other borrowers using htat NFT as collateral, and lenders who may have a problem recovering their full loan amount when trying to sell the now illiquid NFT. 

An improved NFT lending system could take advantage of Upshot’s appraisals, concentrations scores and gmi products. Upshot appraisals would be used to determine fair collateral terms for the loan, the concentration scores would take into account the risk of cascading liquidations, and the gmi index (a novel grading index for NFT wallets to determine the quality of a specific NFT trader) could be used or adapted to function similarly to a credit score to identify safe wallets and fair terms for a loan. 

There’s lots of exciting potential in the NFT lending space, and it’s just taking off.

## NFT Lending FAQs

### What is an NFT lending protocol? 

There are multiple NFT lending protocols realizing notable usage–and a new cohort of protocols on the horizon. These protocols are what enable NFT holders to borrow funds from lenders by using NFTs as collateral. They offer the financial flexibility many NFT holders crave while also providing a fair, open, secure, and transparent environment for these transactions.

### Can NFTs be used as collateral for a loan?

Yes, thanks to NFT lending practices, NFTs can be used as collateral to secure a loan.

### What is NFT financing? 

NFT financing is the process of lending out an NFT or buying an NFT on credit. Borrowers collateralize or lease their NFTs in exchange for cryptocurrency or fiat money.

Just like in DeFi platforms, NFT financing is processed on-chain using smart contracts. The smart contract contains the terms and conditions of the loan, the liquidity, and all relevant assets.

### What is the current NFT lending market? 

Although NFT lending is a relatively new concept in the NFT financial market, it is undoubtedly expanding and gaining traction. The current estimate of the NFT lending market is US$400 million. 

While this is only a fraction of the NFT market CAGR, the value is expected to multiply in the coming years as non-fungible tokens are increasingly being used as collateral against loans.

## Start Your NFT Lending Journey

NFT lending is a way to access liquidity from your NFTs without having to sell. However, given this space is so new, it is essential to only use trustworthy platforms for all NFT lending processes and be smart about the terms you receive. 

By merging DeFi and NFTs, Upshot makes NFT lending solutions accessible to NFT holders. The platform allows you to interact with and explore NFT markets in several ways including: 

- Deal finding: Upshot's appraisals are integrated into the core of our NFT aggregator to make it as easy as possible for collectors to find the best deals in the NFT market.
- Real-time portfolio tracking: Track the value of your NFT portfolio powered by near real-time appraisals.
- Build smarter trading strategies: Use Upshot's API to build smarter trading strategies informed by appraisals, liquidity analyses, and other advanced stats.
- Identify and track smart collectors: gmi is a novel grading index for NFT wallets that you can use to track the smartest collectors in the space to help inform your investing decisions.

Upshot is also launching: 

- Instant Sell: Access existing liquidity and open interest across the space to sell your NFTs instantly.
- NFT Lending: Use Upshot’s data-driven approach to gain exposure to NFT lending markets on lending platforms or through our upcoming managed lending products.
- OTC: Move in and out of large NFT positions through Upshot's NFT OTC desk.
- NFT Indices: Track the NFT markets through professionally crafted and managed NFT index products.

Ready to begin your NFT lending journey? 

[Join our NFT appraisal platform.](https://upshot.xyz) 


This guide provides an introduction to the world of non-fungible token (NFT) lending. Learn everything you need to know to get started in this exciting new asset class.

NFT Lending 101

As the [NFT market changes](https://upshot.xyz/post/nft-markets-are-maturing), so does the need to ensure fair and transparent decision-making. One way to do this is with governance tokens, a relatively new concept gaining traction in the NFT space.

Governance tokens are seen as a way to decentralize power and give control back to the community. They have become increasingly popular in the decentralized finance (DeFi) world as a way for users to have a say in how platforms operate.

This article explains everything you need to know about governance tokens, their use in [DeFi](https://www.techtarget.com/whatis/definition/decentralized-finance-DeFi) spaces, and their relationship with NFTs.

## What are Governance Tokens?

Governance tokens are a type of cryptocurrency that allows holders to participate in the decision-making process of a decentralized [autonomous organization (DAO)](https://cointelegraph.com/daos-for-beginners/what-is-a-dao). These tokens allow holders to vote on proposals, such as changes to a protocol or allocation of funds. 

In centralized organizations, the power of decision-making often centers around a hierarchy, with the most influential people at the top and the least influential members at the bottom. 

Governance tokens makes it easier to distribute power and influence among the organization's members rather than creating a top-down power distribution method commonly adopted in centralized organizations. 

### How do governance tokens work?

Governance tokens are usually tied to a particular blockchain project and act as a voting chip that governs that project. Like any other blockchain protocol, they operate using smart contracts to ensure voting processes are transparent, automated, tabulated, and recorded on a public ledger.

When a DAO proposal requires a vote, governance token holders have the right to use their token to influence the direction of that proposal.  These decisions range anywhere from user interface changes to how the underlying code of a project should be modified, how the budget for a proposal should be spent, or how much transaction fees should cost. 

Every DeFi project has its own governance rules. In many cases, governance token holders vote on limited governance issues. In others, members vote on every issue that concerns that blockchain project. 

In most cases, the voting power of a governance token holder is directly proportional to the sum of governance tokens they hold. A holder with 500 governance tokens holds more power than one with 200 tokens. However, this rule can also vary depending on the DAO.

### How NFTs Can Be Used as Governance Tokens 

Governance tokens usually refer to ERC20 tokens (fungible), but NFTs (ERC721, non-fungible) can also be used for governance. 

Non-fungible tokens (NFTs) are one-of-a-kind digital assets, meaning that no two NFTs are identical. This uniqueness allows for a great deal of flexibility in governance design. For instance, with NFT governance token, you could assign specific attributes or traits to each token, granting them different levels of governing power over the ecosystem.

In this way, a rare or unique NFT could have more influence over the protocol than a common or less rare one. Each non-fungible governance token would have varying levels of governance power, which could help level the playing field by preventing early adopters and value-add members from having an outsized influence on the protocol compared to investors with higher buy-ins.

### Governance tokens vs. utility tokens

Governance tokens are designed to give holders the right to vote on certain decisions in a DeFi system. While, [utility tokens](https://www.ledger.com/academy/glossary/utility-token) (also known as application/user tokens) are digital assets that have a specific use within a particular ecosystem or decentralized application (dApp) platform. Utility tokens provide access to certain features or services within a blockchain network.

The major differences between governance tokens and utility tokens include the following:

### Purpose

Governance tokens give holders the ability to participate in the governance of a blockchain project or protocol. This means they can vote on proposals for changes to the project, such as upgrades or new features. They can also be used for other processes such as staking and lockups, yield and farming, and creating loans. 

Utility tokens are designed to provide access to a product or service within a specific blockchain ecosystem. For example, a utility token may be used to pay transaction fees within a decentralized exchange (DEX) or to access certain features of a decentralized application (dApp). 

Utility tokens are mostly restricted to their native blockchain network or platform. An example of this is the BNB token native to Binance. [BNB](https://corporatefinanceinstitute.com/resources/cryptocurrency/binance-coin-bnb/) tokens can work for transaction fees and credit card payments, but they don’t provide voting power or governing capabilities on other networks. 

### Value

The value of governance tokens [depends on the value of the projects](https://guardarian.com/blog/governance-token-vs-utility-token/) they are tied to. The more successful and accepted a project is on a DeFi platform, the more valuable the project’s governance tokens are. 

Utility tokens are not tied to any project but instead have intrinsic value. The value of a utility token is directly proportional to its demand in the market. A popular example of utility tokens is BNB: BNB is a native utility token that is used within the Binance cryptocurrency exchange platform. It is used to pay for trading fees, withdrawal fees, and to participate in exclusive token sales on the platform. 

### Security

Governance tokens offer the guarantee of possessing exclusive ownership, with a high level of security against any compromise to the proof of ownership. In contrast, scammers may create fake ICOs and issue utility tokens to jeopardize users' assets. 

## DeFi, Governance, & NFTs: How They Intersect

Together, DeFi, governance, and NFTs are pushing the boundaries of what's possible with blockchain technology. 

### Governance-Token-Based NFT Communities

NFT governance tokens can used to create DOAs in the NFT space. They can strengthen the hold of NFT users by creating communities built on the foundation of decentralized decision-making processes. Since the NFT market is fully community-driven, every decision that is made within the platform can be approved using the vote of token holders within the community. 

By using non-fungible governance tokens in voting processes, communities will enjoy fair decision-making processes. With NFT governance tokens, members of the community can play a more active and crucial role in every decision-making process, thereby having the right to [accept or reject a proposal](https://www.blockchainappfactory.com/nft-marketplace-with-governance-token) concerning an NFT project. This allows members to have a larger impact in NFT communities than they already do.

### Appraisal-Weighted NFT Governance 

Governance tokens can be used to establish the value of NFTs. This is possible by using governance or voting power for consensus among expert appraisers. [Appraisal-weighted NFT governance](https://taetaehohoeth.substack.com/p/valuing-nfts-as-collateral-overview) is a perfect solution for NFT lending protocols where NFTs are used as collateral. 

In appraisal-weighted NFT governance, a DAO is created consisting of well-known and reputable individuals who are given governance tokens for the valuation process. The DAO then provides a valuation at which borrowers can get a loan. Afterward, the DAO underwrites the loan from its own capital, thereby assuming the risk of the loan.

Although appraisal-weighted NFT governance is yet to gain traction, Upshot offers an insight into the process by providing advanced NFT appraisal solutions. 

[Upshot](https://upshot.xyz/) uses sophisticated and trained machine learning models to make NFT financial markets more accessible. Upshot continuously analyzes and assesses NFT markets to collect, read, aggregate, prepare, and enhance data. This data is further extracted and analyzed to appraise NFTs. With these continuous and automated appraisals, Upshot makes it easier to price and value NFTs accurately. This helps investors find and close better deals in the NFT markets. 

## How to Obtain Governance Tokens
![astronaut token](//images.ctfassets.net/lhkcghnr8ql4/mLF3hTOTcfjG1Jl2EW3yB/404da78f864f146d09cf18aae70b0f19/astronaut_token.png)

### Buying governance tokens

Governance tokens can be bought directly on crypto exchanges. Buying a governance token immediately bestows voting rights to the token’s native project. When purchased, governance tokens can be traded like any fungible token.

### Earning governance tokens

Community members who have displayed significant loyalty to a community through constant contributions are usually awarded governance tokens as an incentive. 

To earn governance tokens, users need to be active community members. Some common ways of earning governance tokens are:

- Staking tokens into the platform’s liquidity pools
- Reward structures such as stock buyback where the user or token provider buys back some of their tokens)
- Participating in airdrops.

## Governance Token Pros and Cons
![virtual room](//images.ctfassets.net/lhkcghnr8ql4/5z7mPIHiBZE4fGXId9bvaA/a95ed22e6ed5e01f6f53991361a1fc84/virtual_room.png)

### Benefits

Governance tokens provide: 

#### Decentralized governance: 
Decentralized governance is a revolutionary concept that empowers users to take control of their own platforms and protocols. It eliminates the need for centralized authorities and allows for more transparency, accountability, and fairness. Decentralized governance also ensures that decisions are made based on consensus rather than the opinions of a few powerful individuals.

Governance tokens are an integral part of decentralized governance. They allow token holders to have a say in the decision-making process of a decentralized protocol or platform. Token holders who actively participate in voting and proposing changes can earn rewards or fees from the platform. This creates a self-sustaining ecosystem where users are motivated to work towards improving the platform.

#### Increased efficiency: 
With governance tokens, platform users can have a direct say in the decision-making process of the platform, without needing to go through intermediaries or rely on traditional voting systems.

This direct involvement can lead to faster decision-making and implementation, as users can quickly come to a consensus on important issues. Additionally, governance tokens can help reduce bureaucracy and streamline processes by allowing for more agile decision-making.

#### Collaboration:
Stakeholders are incentivized to work together towards common goals because they have a direct stake in the success of the community or organization. This can lead to more productive discussions and decisions that benefit everyone involved.

Additionally, governance tokens can help ensure that decision-making is transparent and fair. Since all token holders have a voice, there is less room for bias or favoritism in the decision-making process. This helps build trust within the community and encourages more people to get involved.

### Limitations

However, without the proper checks, governance tokens can lead to:

#### Malicious power: 
One of the main concerns with governance tokens is the potential for malicious actors or hackers to accumulate enough tokens to gain control over the network and make decisions that benefit themselves at the expense of others. 

This is known as a "51% attack" in which an individual or group acquires 51% or more of the governance tokens, giving them majority control over decision-making processes. With this much power, they could potentially manipulate voting outcomes or even make changes to the protocol that benefit their own interests. 

#### High voting power among whales: 
Whales are individuals or entities that hold large amounts of a particular cryptocurrency or tokens. In the context of governance tokens, whales can use their significant holdings to sway votes in their favor, potentially at the expense of smaller token holders. This concentration of voting power can lead to centralization and undermine the democratic principles that underpin many DeFi projects.

While they don’t have enough power to completely overwrite the decisions of others, like malicious actors might, whales can influence the governing of DAO projects. 

#### Lack of accountability: 
There is often no clear mechanism for holding those with voting power accountable for their decisions. Unlike traditional corporate governance structures where shareholders can vote board members out, there may be no such mechanism in place for decentralized projects with governance tokens.

## The Bottom Line on NFT Governance

NFTs possess value beyond their representation as artworks or collectibles. NFT governance exposes these potentials by showing how NFTs can significantly decentralize decision-making processes within the blockchain. 

Although NFT governance is still a new concept, it is quickly developing into what could possibly be the biggest innovative solution in the DeFi system. NFT governance will provide investors with opportunities to explore NFT markets in new ways.

When it comes to interacting with the NFT market’s new innovative solutions, Upshot offers NFT investors and creators cutting-edge solutions to explore the markets better. 

Upshot is a leading NFT appraisal platform that provides accurate and near-real-time appraisal using advanced machine learning models. With Upshot, investors can track the value of portfolios in real-time, find the best deals in the NFT market, and make better trading decisions.

Are you looking for a better way to appraise your NFTs? [Join Upshot](https://upshot.xyz/) for advanced NFT appraisal solutions.


Governance Tokens: What is Governance in the NFT Space?

[NFT markets are maturing](https://upshot.xyz/post/nft-markets-are-maturing), with some NFTs selling for millions of dollars. While NFTs have gained significant attention for their role in digital art and collectibles, their potential as investment vehicles has become an intriguing prospect for investors. 

This has led to a surge of interest in NFT funds: an asset class that enables individuals and institutions to gain exposure to the world of non-fungible tokens. NFT funds function similarly to [traditional investment funds](https://www.yourmoneyfurther.com/personal-money-solutions/investing/7-types-of-traditional-investments-to-consider) but are specifically tailored to focus on NFT assets. 

This article will explore the potential of NFT funds and discuss what investors need to know before investing in this asset class. We will also provide a list of some of the most popular NFT funds available.

## What is an NFT Fund?

NFT funds, much like traditional investment funds, pool together funds from investors and strategically allocate those resources across a range of assets, aiming to maximize returns while managing risk. However, NFT funds invest specifically in companies in or related to the NFT sector, allowing investors to access the benefits of NFTs without having to purchase an NFT directly. 

NFT funds can be managed by experienced investment professionals or operate as decentralized autonomous organizations (DAOs), with investment decisions made collectively by token holders.

### NFT Fund vs. NFT Index

NFT funds and NFT indexes are both NFT-focused investment vehicles. However, they differ in their mode of operation, how they are structured, and how they relate to NFTs.

[NFT indexes](https://upshot.xyz/post/introduction-to-nft-index-funds) are digital asset indexes created to track an NFT’s performance within the NFT industry. They’re designed to offer investors exposure and insight into an NFT’s overall value reflected by its performance in the market. Like regular stock indices, the index is weighted based on the value of each token’s circulating supply which means the importance or value of each token in the index is determined by how much of that token is in circulation.

So while an NFT fund actively invests in NFTs to generate returns, an NFT index tracks the performance of a specific group of NFTs without actively buying or selling them.

## How Do NFT Funds Work?

An NFT fund works by pooling money from multiple investors and using the capital generated to invest in NFTs to generate a return on investment. 

NFT funds can be tailored to different strategies depending on the aim and rules of the pool. Some of the NFT funds created may use an active investment strategy to buy and sell NFTs based on market trends and opportunities to profit. Others may use a passive investment strategy and hold on to a portfolio of NFTs for a longer period. 

Regardless of the strategy used, the pool is, in many cases, usually handled and managed by a [fund manager](https://www.forbes.com/sites/jacobwolinsky/2022/04/27/manager-of-worlds-first-nft-fund-talks-nft-evolution-and-the-future-of-crypto-assets/amp/). The fund manager is in charge of researching and identifying potential investment opportunities, making investment decisions for the fund, and managing the portfolio of NFTs held by the fund. Fund managers may be experienced investors, digital art collectors, or NFT enthusiasts with an in-depth understanding of the NFT market.

The returns generated by an NFT fund may come from various sources, including the appreciation in the value of the NFTs held by the fund, the sale of NFTs at a profit, or trading NFTs on digital marketplaces.

## NFT Funds to Know

NFT funds are a relatively new investment option, but there are a few important funds to know about on the market. 

### 1. 6529 NFT Fund
![6529 NFT fund](//images.ctfassets.net/lhkcghnr8ql4/68Fj62wZTeiIFlDfjHcMQN/765fea211c3fcb67348c77242ad6988a/6529_NFT_fund.png)

The [6529 NFT fund](https://6529.io/capital/fund/) is a collection of closed-end quarterly funds open to accredited investors and qualified purchasers. It was created by an [anonymous fund manager](https://blockworks.co/news/anon-cryptopunk-owner-launches-nft-fund-betting-on-ability-over-identity) known as “Punk 6529,” who was believed to own a slew of rare NFTs and was already involved in bids for high-profile projects such as Ross Ulbricht’s collection. The 6529 includes a pair of funds which are 6529 NFT Fund AI, LP, and 6529 NFT Fund QP, LP, also known as the “Master Partnerships.”

As part of the Delaware series limited partnerships, the 6539 NFT fund focused on investing in a relatively small number of “blue chip” or high-quality NFTs that should increase in value over time. It invests in NFTs which broadly fall into three main categories, which are PFPs, generative art, and 1/1s.

### 2. Curated
![Curated](//images.ctfassets.net/lhkcghnr8ql4/2Iw6Z7gVvqeWHKuuuqwUl3/13226ae3febb5ad917f36ef58ff5abc0/Curated_.png)

[Curated](https://www.curated.xyz) is an NFT fund dedicated to collecting exceptional crypto art and culture. It was founded by Todd Goldberg and Andrew Jiang as a crypto-native fund that draws on and is guided by cultural significance, aesthetic taste, and technical fluency. According to the [fund’s page](https://www.curated.xyz), it is “backed by many of the best NFT platform founders, crypto investors, and creators” and “focused on building a digitally native institution that stewards meaningful pieces and supports their creators.”

As of March 2022, the Curated NFT Fund was worth [over $30 million](https://decrypt.co/94892/andreessen-ohanian-30-million-fund-curated-nfts?amp=1) and planned to invest exclusively in blue chip or high value NFTs. This fund was said to have been raised mainly by builders, creators, and investors in the crypto community.

### 3. Meta4 NFT Fund
![Meta4 NFT Fund](//images.ctfassets.net/lhkcghnr8ql4/36Q247bxJicjh6uF0NP5aH/9f91fb1faaa672757af1c1975d4176b9/Meta4_NFT_Fund.png)

The [Meta4 NFT Fund](https://www.meta4.capital/) was launched in October 2021 by a Miami-based crypto-currency investment management firm. At the time it was launched, the fund aimed to raise $100 million with one of Silicon Valley's top venture capital firms Andreessen Horowitz as its lead investor.

### 4. Starry Night Capital 
![Starry Night Capital](//images.ctfassets.net/lhkcghnr8ql4/2Hm5q0feV4ZgaKunYIaayU/9d8b365a327cc56cb609cba51ffd0dc7/Starry_Night_Capital.png)

Starry Night Capital was Three Arrows’ CryptoPunks’ (3AC's) blue-chip NFT collection designed to expose investors to the NFT market. It was launched in August 2021 as a [$100 million partnership](Starry Night Capital was Three Arrows’ CryptoPunks’ (3AC's) blue-chip NFT collection designed to expose investors to the NFT market. It was launched in August 2021 as a $100 million partnership between 3AC and pseudonymous NFT collector Vincent Van Dough

However, what was once a high-profile hedge fund in the NFT space that had secured more than $35 million in funding became insolvent in May 2022. This resulted from the crash of Terra’s UST and Luna ecosystems, which 3AC firmly invested in. Following the market crash,  3AC suffered huge losses and had to resort to capitulation, bankruptcy, and surrendering its assets. This was brought on after the organization lost over $3 billion in 2021 and 2022.

Caught up in the crypto market crisis and 3AC bankruptcy, Starry Night Capital NFTs became collateral damage and were taken over by Teneo, a global CEO consulting and advisory firm. These assets are set to be liquidated to cover 3AC’s losses) between 3AC and pseudonymous NFT collector Vincent Van Dough

However, what was once a high-profile hedge fund in the NFT space that had secured more than $35 million in funding became insolvent in May 2022. This resulted from the crash of Terra’s UST and Luna ecosystems, which 3AC firmly invested in. Following the market crash,  3AC suffered huge losses and had to resort to capitulation, bankruptcy, and surrendering its assets. This was brought on after the organization lost over $3 billion in 2021 and 2022.

Caught up in the crypto market crisis and 3AC bankruptcy, Starry Night Capital NFTs became collateral damage and were taken over by [Teneo](https://www.teneo.com/), a global CEO consulting and advisory firm. These assets are set to be liquidated to cover 3AC’s losses

### 6. Sfermion 
![Sfermion](//images.ctfassets.net/lhkcghnr8ql4/4lmBfmVgwHJWH8cpNiBeHS/11a43d50a6da60a74a49060e2d9a20ea/Sfermion.png)

[Sfermion](https://www.sfermion.io) is an investment firm that was founded in 2019 and is dedicated to the NFT ecosystem. In November 2021, the firm announced the close of Fund II, a $100M venture fund with participation from strategic investors. 

Sfermion’s mission was to facilitate the creation and spur of an open, decentralized metaverse by investing in the infrastructure building blocks of our digital future. Fund II, the firm’s newest NFT fund, follows the success of Sfermion’s first NFT-focused fund, Fund I, an investment vehicle dedicated to direct NFT investments.

### 6. Spencer Ventures
![Spencer Ventures](//images.ctfassets.net/lhkcghnr8ql4/2F0XVlTEgQxHv53s07ZIAP/238abbc20a87c328901c1b9087dd9e9a/Spencer_Ventures.png)

[Spencer Ventures](https://www.spencer.vc) is an NFT token fund that supports and participates in communities rethinking how digital IP is grown. It was acquired in June 2019 by Spencer Gordon to capitalize on the bear market, providing investors with liquidity and profit.

In September 2022, 30 investors from Chicago and the Midwestern US contributed $4.5 million to the NFT fund.

### 7. Wave Financial 70/30 NFT Fund
![Wave Financial 7030 NFT Fund](//images.ctfassets.net/lhkcghnr8ql4/5KRarI9LdIwCjwnT2RZOdr/3832adc306059f2bcea393021de41992/Wave_Financial_7030_NFT_Fund.png)

[Wave Financial](https://wavegp.com/funds/nft-fund/) launched a new fund in August 2021, offering to bridge the gap between the NFT market and institutional investors. The company announced that the Wave NFT Fund would allocate its assets in a 70/30 split across collectibles and platforms/protocols.

The Wave fund was created to respond to the growing interest in the blossoming NFT market. After launching the fund, Wave Financial announced its decision to evaluate NFTs using a blend of financial analytics and the creators’ talent and market value. It also announced its decision to use machine learning to formulate pricing and valuation models for NFTs in its portfolio. Essentially, Wave Financial was created to introduce investors to NFT arts and collectibles in a way they have never seen before.

## Other Ways to Invest in NFTs

NFT funds are one of many ways to invest in NFTs and the NFT market. There are numerous NFT-related investment vehicles dedicated to helping investors make a profit from market changes. The risk and investment structures vary with the type of investment. 

As a result, it’s important to understand the various investment methods before exploring your options.

### NFT Stocks

[NFT stocks](https://www.cnbctv18.com/cryptocurrency/nft-stocks-and-how-they-work-explained-in-cryptocurrency-15087341.htm/amp) refer to equities or stocks in companies that engage in NFT-related businesses or actively pursue goals in the NFT industry. These businesses can be organizations that create their own NFT collections, NFT-enabled products, or NFT marketplaces. Some NFT stocks popular on the NFT market today include Meta, Nike, eBay, and Gretzky.

Investing in NFT stocks offers significant advantages, including:
- Benefiting from the rise of NFTs and the exponential growth of the digital asset market
-  Eliminating the need to invest in individual digital assets 
-  The simplicity and ease of buying a stock instead of an NFT. 

With an NFT stock, investors can diversify their portfolios by investing in various companies, thereby lowering the risks that will otherwise come from purchasing individual NFTs. 

### Direct Purchasing

You can also directly purchase an NFT from the creator or seller without the interference or involvement of an intermediary such as a marketplace. Unlike an NFT marketplace where all transactions take place on the blockchain, all exchanges and negotiations typically take place on messaging platforms (like Telegram) or emails. However, payment is usually made with cryptocurrencies such as Bitcoin or Ethereum.

Direct purchasing of digital assets potentially offers several advantages such as the ability to negotiate directly with the seller, potentially lower fees due to the absence of gas fees typical to marketplaces, and the opportunity to support independent creators and artists. However, it also comes with risks such as the possibility of fraud or scams, absence of transparency, and potential legal issues due to ownership disputes.

### Investment DAOs
An Investment DAO, or Decentralized Autonomous Organization, is a decentralized organization that invests funds collectively as a group of investors. In the NFT ecosystem, these DAOs act as virtual investment vehicles to raise investment capital and invest it in NFTs or NFT-related businesses based on the voting majority of the DAOs members.

Like traditional investment funds, investment DAOs collate and invest funds to make a profit. However, they do so in a decentralized and transparent manner on the blockchain, allowing them to enjoy the security that the blockchain offers while also allowing them to utilize a structured democratic, and open investment process.

Some investment DAOs may specialize in specific types of NFTs while others take a more diversified approach. Like NFT funds, investment DAOs use various investment strategies that range from active management to passive management or a hybrid combination of both.

Some advantages of investing in investment DAOs include lower costs, greater transparency, and the opportunity to participate in the NFT market and take risks as a group. However, it also comes with risks that include market volatility, risks of fraud and scams, and the potential for disagreements among members over investment decisions.

## The Future of NFT Funds

As the NFT market continues to grow and evolve, investors are looking for new ways to gain exposure to this exciting asset class. NFT funds are a promising option that offers several potential benefits, including access to a wider range of NFTs, professional management, and potentially lower investment minimums.

Investing in NFT funds could be an exciting opportunity for investors, but to make the right choices, you need to get the right tools. Upshot offers you all the tools necessary to make informed decisions when dealing with NFTs. The platform offers various industry-leading solutions–ranging from NFT appraisals to GMI scores–that make it easier to identify the smartest investment opportunities. 

Are you ready to make better investment decisions?

[Get started with Upshot.](https://upshot.xyz)


Discover the world of NFT Funds and their investment potential. Learn what NFT Funds are, how they work, and the benefits and risks involved.

Exploring the Potential of NFT Funds: What Investors Need to Know

__[Upshot](https://upshot.xyz/), a leading provider of NFT analytics, is becoming a data provider on the [Chainlink Network](https://chain.link/)—the industry-leading decentralized oracle solution. Through Chainlink, we’ll be able to provide our analytics data, which includes live appraisals of top NFTs, NFT market caps, price floors, holder information, and more, to smart contracts, unlocking a wave of new DeFi possibilities.__

dApp developers are now able to leverage Upshot’s NFT analytics to support them in building a wide range of smart contract use cases that rely on high-quality NFT data feeds, such as decentralized prediction markets, lending/borrowing platforms, options and futures contracts, yield farming products, and more. Our first user is [nftperp.xyz](https://nftperp.xyz/), a perpetual futures DEX that allows users to long or short the floor price of NFT projects such as Bored Ape Yacht Club (BAYC).

Upshot provides deep insight into NFT markets and unlocks a wave of innovation at the intersection of NFTs and DeFi. Our suite of tools, which includes [Upshot Analytics](https://upshot.xyz), the [gmi wallet grading index](https://upshot.xyz/gmi), and the [Upshot API](https://docs.upshot.xyz/docs), helps DeFixNFT builders and collectors explore the world of NFTs and the metaverse using powerful data. Leveraging novel machine learning models and crowdsourcing technology, Upshot provides close to real-time price feeds for NFTs regardless of how frequently they change hands. This creates a broad new frontier for NFT markets, enabling an entirely new class of financial primitives, from NFT indices to synthetics.

We chose to supply our NFT analytics through Chainlink because it provides a multitude of critical features that make integration simple and secure, such as:

- __Credential Management__ — Chainlink nodes can securely manage API keys and account logins, leading to a seamless integration in which Chainlink nodes can purchase Upshot API subscriptions in the same manner that traditional users do today.
- __Blockchain Agnostic__ — Chainlink is blockchain agnostic, meaning our data can be made available on any current or future blockchain environment.
- __Widely Adopted__ — Chainlink is the most widely used oracle network in the blockchain industry, offering us access to a vast addressable market of potential data consumers.
- __Provably Secure__ — Chainlink is thoroughly audited open-source software designed according to leading academic research, already proven to secure billions of dollars in value live in production.

“High-quality valuation data is powering new NFT use cases through the DeFi economy,” stated Nick Emmons, founder of Upshot. “By becoming a data provider on the largest decentralized oracle network in the smart contract industry, we’re able to help increase the adoption of NFTs as a new asset class and contribute to the growth of more sophisticated NFT-based financial products.”

### __View the [Upshot Node on Chainlink](https://market.link/nodes/Upshot/integrations)__

__About Chainlink__

Chainlink is the industry standard for building, accessing, and selling oracle services needed to power hybrid smart contracts on any blockchain. Chainlink oracle networks provide smart contracts with a way to reliably connect to any external API and leverage secure off-chain computations for enabling feature-rich applications. Chainlink currently secures tens of billions of dollars across DeFi, insurance, gaming, and other major industries, and offers global enterprises and leading data providers a universal gateway to all blockchains.

Learn more about Chainlink by visiting [chain.link](https://chain.link/) or read the documentation at [docs.chain.link](http://docs.chain.link/). To discuss an integration, [reach out to an expert](https://chainlinkcommunity.typeform.com/to/OYQO67EF?page=announcement).


Upshot Is Now a Data Provider on the Chainlink Network, Helping Bring Premium NFT Analytics to Smart Contracts

Upshot x Chainlink

There’s no doubt that non-fungible tokens (NFTs) have revolutionized how the world buys and sells virtual goods. 

Whether you're a digital creator looking to profit from your work or an investor capitalizing on the [explosive growth of NFTs](https://www.grandviewresearch.com/press-release/global-non-fungible-token-market), understanding the complexities of NFT pricing can help you get the best value from your transactions. 

This comprehensive guide provides detailed information on all aspects of [NFT pricing](https://upshot.xyz/post/explaining-nft-pricing-machine-learning) so you can confidently navigate the digital asset landscape.

## What Impacts NFT Pricing?
![nft pricing](//images.ctfassets.net/lhkcghnr8ql4/Lh2B7xbdl4QzVlJ6ZrNEI/a9be3061d1bf674b926db8ed8acb9541/nft_pricing.png)

### Rarity

As most collectors know, the more unusual or rare an item is, the more likely it is to trade for a higher price. Rarity usually refers to the rarity of an asset within a collection (as opposed to across collections).

When an NFT is newly minted, it is created with unique traits that cannot be changed. These traits are the unique identifiers or different parts that make up the entire character of an NFT. While this means your chances of finding identical NFTs is low, it does not translate to mean that every NFT within the [blockchain](https://www.researchgate.net/publication/366323642_The_Data-Driven_Blockchain_Ecosystem) is rare.

An NFT is considered rare when it possesses a more unique combination of traits than other NFTs in a collection. In the [NFT market](https://upshot.xyz/post/nft-markets-are-maturing), these types of NFTs hold more value than NFTs with more common traits and therefore sell at a higher price. For example, only [3% of Bored Apes](https://bitkan.com/learn/what-is-bored-ape-and-what-makes-bored-ape-expensive-8695) have a biker vest, making them more expensive than other Bored Apes within the collection.

### Utility & Functionality

The utility of an NFT refers to its ability to be used in real-world applications, whether in the digital space or the physical world. An NFT may be considered functional when it offers ownership bonuses like access to premium content, real-world events and conferences,  physical items, or special gaming access. 

NFTs with utility have a more tangible value than other NFT collections, often making them a more valuable investment and therefore more expensive to purchase. An example of an NFT with utility is the [Adidas “Into The Metaverse” NFT](https://www.dezeen.com/2021/12/19/adidas-enter-metaverse-first-nft-products-design/) that offered its holders access to exclusive physical products throughout 2022 at no extra cost.

### Reputation

NFTs can have a higher price tag simply because they have more “hype” in the NFT market. The popularity might result from the background of the NFT such as ownership history (especially for NFTs that were previously owned by celebrities). It can also come from how popular an artist or NFT collector is. 

### Floor Price & Last Sale Price

A floor price is the price of the lowest-listed NFT in a particular collection. To date, this has been the most-used metric for valuing NFTs and NFT collections.

The last sale price is, as it sounds, the last price an NFT was sold for.  By reviewing an NFT’s price history, a seller can determine how much a person was willing to (and did) pay for that NFT. This can help them determine the true (albeit past) value of an NFT and how to properly price that NFT for its next sale (taking other factors like hype and current demand into consideration).

Although using the floor price and  last sale price of an NFT to determine its value is a common practice, it is not often the most effective solution. Both pricing strategies have inherent flaws that we’ll cover later in this article. 

A better alternative to determining the price of an NFT is through an appraisal platform. [Upshot](https://upshot.xyz/) offers a smart appraisal pricing solution that uses market data to set the most accurate NFT pricing. We train our models on a wide array of blockchain data and metrics and use these trained models to refresh appraisals every hour. 

We then compare historical NFT sales to historical appraisal prices from our models to calculate the Median Absolute Percentage Error % for each collection (e.g. the appraisal is accurate within +/- MAPE%). Our performance is industry-leading, with Median Absolute Percentage Errors (MAPE) for the more popular and liquid collections, typically between 3 - 8% and ~11% on average for less-liquid collections.

Upshot appraisals provide accurate and updated NFT pricing information for 57m+ NFTs from over 32,000 collections.

### Royalties

Royalties are another element that can influence an NFT's pricing. When someone purchases an NFT, they often have to pay a percentage of their profits from it in the form of royalty fees to both the creator and/or platform it was purchased from. These royalties can range from 3% to 10%.

Lately, royalties have become a hot topic in the NFT space as many marketplaces are refusing to acknowledge them - however, that is info for another article. 

### Marketplace and Selling Fees

NFTs typically require a marketplace to host them, along with certain seller fees taken out when sold. These fees may vary from one platform to another.

Marketplaces such as OpenSea and Rarible often levy fees on sellers when their asset is purchased. On OpenSea, for example, sellers will pay a [fee of 2.5%](https://support.opensea.io/hc/en-us/articles/14068991090067-What-are-OpenSea-s-fees-), depending on the asset’s sale price. This fee can have a significant impact on how much money a seller can make from each sale and must be taken into account when setting prices for their NFTs.

## NFT Pricing Strategies

Whether you’re creating and selling your own NFT, or are looking to expand your NFT collection, understanding NFT pricing strategies–and how they’re changing–is critical.

### 1. Understand Floor Pricing

NFT floor price is the lowest price for an NFT within a particular collection. 

Essentially, if the lowest price of an NFT in a creator’s collection is $50, the default floor price is $50. If that NFT gets sold and the next NFT with the lowest price still within the same collection costs $70, the floor price increases to $70.

Although floor price is a useful metric for valuing an NFT, it has its limitations: 

- Using the least-valuable NFT in a collection to determine the value of that collection. Is a problem since most collections contain NFTs with different price values. Using the lowest price as a metric to measure the value of an NFT collection is inadequate because it ignores the higher (and more profitable) values of NFTs within that collection.
- Floor prices ignore demands by only offering information about the ask-side and not the bid-side of the order book. They only offer information on how much a seller is willing to sell the NFT and not how much the buyer is willing to pay.
- Sometimes, floor prices are non-existent for a collection, despite including assets with a rare combination of traits. 

NFT appraisals solve these problems by attaching a price or value to an NFT at NFT-level – not the collection-level. This ensures that individual NFTs get their unique values without depending on the value of the cheapest NFT within a collection.

### 2. Research NFT Price History For Similar Pieces

For sellers, comparing NFTs with similar NFTs within a marketplace is a great way to discover the best price range for those NFTs. Researching the price history of similar assets enables the seller to set an NFT price based on the previous spending habits of potential buyers. If an NFT is more expensive than similar NFTs that have the same value prop, the buyer might consider an NFT to be overpriced. 

### 3. Use an NFT Appraisal Platform

Although many of the pricing strategies mentioned can be effective if done correctly, they can be time consuming and can’t guarantee accuracy. 
NFT appraisal platforms are a more practical pricing solution.  An appraisal is an immediate estimation of sale price that would be yielded if the asset were to be sold at that moment. Appraisals are a powerful tool that offers: 
- __More granular pricing__: Instead of assigning a value at the collection-level or trait-level, every NFT gets its own price estimate and has its own unique value. 
- __Frequent updates__: Appraisals enable assets to be re-priced without them needing to change hands.
- __More accurate__: A larger set of inputs are considered when generating appraisals. Appraisals may take both floor and last sale price – among many other factors – into consideration, making them strictly more informative than either alone.

After exploring numerous strategies for appraising NFTs, we found machine learning to be the most effective in achieving high coverage, high accuracy, and frequent price updates. Upshot’s NFT appraisal platform uses several machine learning appraisal models to study the market, analyze market data, and continually refresh appraisals every hour. 
This ensures every NFT appraisal is updated and accurate, contributing to real-time portfolio value tracking. Creators and NFT owners can price their NFTs by leveraging insights into the NFT market that can lead to higher profits.  

### 4. Make Consistent Sales

Selling NFTs consistently helps creators to establish proof of concept. Proof of Concept (POC) demonstrates the feasibility and functionality of an NFT. It’s also a good way to boost your reputation as a creator and build hype around your creations. 

As a seller, seeing an NFT make consistent sales is an indication that it could be a worthy investment.

### 5. Sell on Multiple Platforms
Listing your NFTs on multiple platforms is a good way to explore different marketplaces and attract a wider audience. 

However, when selling NFTs on multiple platforms, it is essential to remain as transparent as possible, since discrepancies in pricing can impact a creator’s reputation. For example, a potential buyer might find that you listed an NFT for different prices on two different platforms and become skeptical of your integrity.

### 6. Offer a Distinct Value Prop
Other than the art itself (in this case, the NFT), what value is attached to the art?

An NFT’s unique value proposition refers to what it has to offer over other assets. It refers to the unique characteristics that make an NFT creator’s work more ‘beneficial’ than their competitors. By creating a distinct value proposition, creators can ensure their NFTs are unique from other creators’ assets and are worth a higher price. 

Whatever the value prop is, it is an easy way to increase an NFT price as buyers are getting more than just an artwork when they purchase that NFT.

### 7. Choose Fixed Price or Auction

NFTs can be sold using the fixed price strategy and the auction strategy. When a creator chooses to fix a price on their NFT, they choose the amount they would like buyers to pay. Conversely, when creators choose to hold an auction for an NFT, assets are offered on sale in an open market.

Fixed prices are usually set up during the minting process, while choosing to hold an auction leaves creators to receive payment from the asset’s highest bidder after a predetermined time. Depending on the trader’s needs, a fixed price or auction offers the pricing solution they need.

With fixed prices, sellers can choose the price that they are willing to sell their asset. This not only helps sellers estimate their profit but is also perfect for NFTs with defined value positions.

Conversely, a seller might choose to use an auction or bid to sell NFTs whose value they are unsure about. Auctions attract a large audience, thereby increasing the chances of revenue generation. However, unlike the seller-driven fixed NFT pricing method, NFT auctions are buyer-driven as the buyers determine what the NFT value is and how much they are willing to pay.

Distinct value props are appealing and are an easy way to attract high-paying buyers. An NFT’s distinct value prop might be as simple as offering buyers access to exclusive events, commissions, or discounts on the creator’s future art. It might also be something as simple as that NFT being readily available in higher quality formats or customized resolutions for the buyer.

## How Upshot Calculates NFT Pricing

Upshot solves the previous problems in NFT pricing by accurately appraising and assigning value to accurately and efficiently price NFTs for sellers on the platform.  Here’s a step-by-step breakdown of how Upshot calculates NFT Pricing:

### 1. Aggregation & Preparation of Data

Upshot records every activity on its platform using an aggregate method. This step involves indexing on-chain and off-chain data, including mints, sales, bids, price asks, and asset metadata. 

Upshot’s team of data engineers work to ensure this data is always the freshest, most complete view of the NFT universe possible. We also work closely with external data providers such as Reservoir, SimpleHash, and others to further ensure the coverage and quality of data we receive.

### 2. Feature Extraction 

Upshot processes this data to extract the bits of information most likely to influence NFT sale prices. We extract features that are predictive of future prices based on rarity, trait value, recent sale prices and combine into a single data frame, which we split into three temporally contiguous pieces: a test set, a validation set, and a training set.

### 3. Training & Prediction

Upshot trains advanced machine learning models with median-standard prices to refresh the appraisals every hour. This encourages an orderly input of appraisal history on the platform.

We currently use gradient-boosted tree ensembles, which are a family of particularly fast ML algorithms that handle numerical and categorical features with ease and are well suited to the type of data that describes NFT attributes. The algorithm is iterative and attempts to repair the biggest mistakes of the previous step until model accuracy is no longer improved.

After model training and lots of testing, the model is ready to be used. As new sales and events arrive, we refresh our features by repeating the first steps of the process. This returns fresh appraisals that are immediately posted to our API and front end.

[Read more about how Upshot’s machine learning models work.](https://upshot.xyz/post/how-upshots-ml-models-work)

## Determine NFT Pricing with Upshot

For many creators, determining accurate NFT pricing can be a challenging part of creating and selling an NFT. Without  a proper pricing strategy, creators risk setting the prices too low and running at a loss – or setting it too high and losing buyers. Collectors are at risk of spending more on a collection than it’s worth – or by missing out on a potentially great investment. 

Upshot solves these problems by offering a smart appraisal pricing solution that uses market data to set the best price for NFTs within its ecosystem. The appraisal platform automates the arduous and manual task of valuing NFTs and attaching a price by analyzing the: 

- Net present value of the utility and desirability of an NFT collection
- Asset’s desirability as a function of its rarity and desirable traits
- Recently-achieved sales of similar assets or ‘comps’ (comparables)

Upshot offers accurate and near-real-time NFT pricing, making the trading process easier to NFT creators, sellers, and investors.

Ready to experience the deepest insights into NFT pricing? 

[Join Upshot to enjoy an unmatched appraisal process.](https://upshot.xyz/)


This NFT Pricing Guide reviews what impacts NFT pricing, how to evaluate the value of a given NFT, and NFT pricing strategies. 


Ultimate Guide To NFT Pricing

It’s easy to get lost in the day-to-day fluctuations of a digital community’s:

- Social media engagement
- Website traffic
- And, in the case of NFT collections, floor prices

But as we always say: __floor price alone don’t tell the full story of a digital community’s value.__

Moreover, sometimes a dip in a key metric might look concerning on the surface, but may not actually signal impending doom like many assume.

To truly understand the health of a digital community, you must look beyond the standard metrics. In this post, we’ll break down how to do an in-depth community analysis—focusing on everything from network structure to engagement trends.

We’ll use a popular NFT collection ([Azuki](https://www.azuki.com/))  as a case study to showcase these techniques. But the insights apply to assessing any online community.

Analyzing how this community responded after the launch of a new collection uncovered some counterintuitive insights. Not least of which, their asset prices dropped but their community grew larger and stronger by many measures.

But we’re getting ahead of ourselves.

First, let's look at how to analyze a community's strength.

## Conducting Network Analysis
Most real world and digital communities can be thought of as networks: sets of people connected together.

Everything from social networks to metabolic networks fit this topology. Most networks have common properties. For example, they often follow a power law distribution, where a small number of nodes are highly connected hubs, but most nodes only have a few connections.

Analysis of network structure can reveal insights about the nature of the underlying community. For example, many networks follow a power law distribution, with a few highly connected hubs and most other nodes having just a few connections.

For NFT networks, this likely represents a few whale wallets transacting with many others, while most holders only interact with a small subgroup.

## Quantifying Subgroups Through Community Detection
One key technique used in network analysis is community detection. This involves identifying densely connected clusters of nodes, with sparser connections between clusters.

Intuitively, these clusters represent subgroups within the broader network - like friend groups within a social network. In an NFT collection, detected communities likely represent groups of closely linked collectors and holders.

The cohesion of communities can be quantified using modularity. Networks with high modularity have dense connections inside communities but sparse connections between them.

So when examining an NFT collection, detecting communities and calculating their modularity provides insights into the composition and connectivity of holder subgroups––going beyond just individual wallet links and floor price.

## Analyzing the Azuki NFT Network
To analyze the Azuki NFT community, and determine the strength of their network beyond the headlines and floor prices, we looked at transaction data over a 6 week period in mid-2023. The snapshots of the collection took place just before and after their Elementals mint on June 27th.

We extracted two key datasets:

1. __Ownership data__: how many Azuki NFTs each wallet held
2. __Transaction data__: a network showing Azuki sales and transfers between wallets

![azuki image](//images.ctfassets.net/lhkcghnr8ql4/HLjvxUMTU6zteB1M6qYtM/0b09f85247ce83e37eb1bf32dfebf536/azuki_image.jpeg)

# How Ownership Transformed
Now, many Azuki holders complained that they experienced technical issues with the mint. Some were unable to mint any NFTs from the new Elementals companion collection. Other holders complained that the art for the collection looked almost identical to the original collection. An egregious error for a hefty 2 ETH mint price.

These factors led to a massive drop in floor price, and many criticizing the project.
![azuki price chart](//images.ctfassets.net/lhkcghnr8ql4/1KyLtbeJJqACKyuQkFVysE/4d278678eb353d4d79e93640d3b9336c/azuki_price_chart.jpeg)
*Image courtesy of [@mrjasonchoi](https://twitter.com/mrjasonchoi) on X.com*

But network analysis shows us that floor price, headlines, and twitter sentiment don’t tell the whole story. 

The data we analyzed showed a steady increase in unique holders––i.e., more community members––from 3,381 in the weeks preceding the mint to 4,372 just a couple weeks after the mint.

We also saw the number of wallets making transactions surged after the Elementals release, from 1,006 to over 6,500 weekly.
![Azuki ownership analysis](//images.ctfassets.net/lhkcghnr8ql4/73qTy1J9g3dwaN8NDPcVU1/81cb712fd4160eda54e6ea5cfb99ffe0/Azuki_ownership_analysis.png)

Also, analyzing the top 100 Azuki holders showed around 60% remained consistent holders before and after the release. So, despite the headlines, the "whales" were mostly staying put.

![Azuki whale analysis](//images.ctfassets.net/lhkcghnr8ql4/3Cp1tNMdrqou4jVczVYuiY/d972fd46602fd63a96161317a084072e/Azuki_whale_analysis.png)

# Insights on Azuki’s Transaction Network
In addition to ownership data, we also looked at the network of Azuki transactions between wallets each week. Studying patterns in these transactions revealed insights about the community’s structure and engagement over time.

One metric we examined was __assortativity__: the extent to which similar wallets connect to each other. High assortativity indicates wallets tend to connect to other similar wallets.

For NFTs, this could mean whales transacting with other whales, or collectors within the same community subgroup trading with each other.

To calculate assortativity, we first used community detection algorithms to identify subgroups of closely connected Azuki holders. We saw the number of communities increase over time as more new holders joined.

This image is a visual representation of the Azuki community’s connections before the Elementals launch (between June 19th and June 26th):
![Azuki community pre launch](//images.ctfassets.net/lhkcghnr8ql4/7nrgWXj4oc0sIzIfZfPfuD/fee05411e5bda44b7596e3d9bafe0471/Azuki_community_pre_launch.png)

This image is a visual representation of the network after the launch, from June 27th to July 3rd:
![azuki community post launch](//images.ctfassets.net/lhkcghnr8ql4/6TioWd0t1nepvOFxJL57tM/2d03a0b615082ab75fcbd82f5731880b/azuki_community_post_launch.png)

As you can see, the community grew significantly, and became more interconnected. This suggests a stronger, more resilient network.

We also saw shifts in the key buyers and sellers week to week. No single whale dominated - different wallets emerged as hubs each period. This was another positive indicator, which shows a diverse network not dominated by single nodes (so to speak).

__Back to the assortativity calculations:__

The lower the assortivity, the less alike each wallet is. Implying a robust, diverse community that’s part of many communities.

The assortivity dipped when Azuki Elementals launched.

![assoritivity ratings](//images.ctfassets.net/lhkcghnr8ql4/4z7xk5mxaXExH23PM0H7Js/1ba2d2f2f74f91446ba3a96f216d7e45/assoritivity_ratings.png)

In short, these network insights suggest the introduction of Elementals brought in new holders from across groups. Azuki's community was diversifying and strengthening despite price drops.

## Key Takeaways
While we focused on one specific community, these network analytics can be used to understand any digital community. Some key lessons:

- Look beyond surface metrics. Network structure better reflects engagement.
- Monitor changes around major events. This reveals if new members join or existing ones leave.
- Identify core members and influencers within detected communities. Engage these VIPs.
- Watch for new hubs emerging over time. Distributed activity is healthy.
- Consider incentivizing key members during volatility to prevent mass exodus.
- Establish network baseline metrics early on. Track how they evolve across milestones.

Of course, every community is unique. But network analysis provides a data-driven toolkit to gain actionable intelligence on your digital community’s health.


Floor price doesn't reveal the full health of a digital community. We break down techniques like network analysis, engagement trends, and community detection to gain deeper insights.

How to Quantify a Digital Community’s Strength

Despite ever-changing market conditions, the NFT lending space represents immense potential for traders, lenders, and developers.

Indeed, its propensity for transformation is part of what makes NFT lending so fruitful.

But with potential comes risk. You must have a strategy to protect yourself, your profits, and your assets.

- Lending on risky platforms with low collateralization ratios could lead to unnecessary losses for you.
- Failure to diversify your portfolio across platforms, collections, and [asset buckets](https://upshot.xyz/post/asset-buckets) could leave you overexposed.
- You might miss out on opportunities for more attractive yields.

This article provides strategic insights on evaluating lending platforms, setting prudent loan terms, diversifying NFT assets, managing liquidation risks, and more.

With these practical tips and risk management strategies, you can confidently maximize returns in NFT lending while minimizing downside risks.

We’ll start by breaking down the two main types of lending models:

__Peer-to-peer and peer-to-pool.__

## What Are the Differences Between Peer-to-Peer and Peer-to-Pool Lending?

- __Peer-to-Peer Lending__: This model facilitates direct transactions between individuals. A typical scenario involves a borrower using a platform like NFTfi or Arcade, offering an NFT as collateral to secure a loan (often in WETH or DAI), then the NFT collateral is safely stored in a vault, governed by the agreed-to terms.

- __Peer-to-Pool Lending__: This model operates a bit differently. In peer-to-pool lending, liquidity providers stake tokens into pools. Borrowers can then tap into this liquidity by placing their NFTs in vaults. BendDAO is an example of a platform that champions this lending approach.

Now that we have a cursory understanding of the different NFT lending types, let’s break down a few of the most popular lending platforms, what makes them unique, and the most common ways people earn money on them.

# Peer-to-Pool Lending
Peer-to-pool NFT lending utilizes pooled funds contributed by multiple lenders. Borrowers can access these funds by staking their NFTs as collateral into smart contract vaults.

__This provides easy liquidity without needing to sell your NFTs.__

For lenders, peer-to-pool lending offers a hands-off way to earn attractive yields. By supplying capital to lending pools, they can passively earn interest and platform fees based on pool activity.

In general, this model provides higher liquidity than direct peer-to-peer lending.

### Lending for Enhanced Yield on BendDAO
BendDAO in particular offers a lucrative proposition for lenders:

By simply depositing ETH, you can watch your investments grow as the platform lends it out to eager borrowers. But the benefits don't stop there.

Those who stake the platform’s BEND token (and possess veBEND) are entitled to an administrative fee. This fee is calculated based on the holder's [veBEND](https://docs.benddao.xyz/portal/governance/vote-escrowed-bend-vebend) balance in relation to the overall veBEND supply.

Remarkably, this [administrative fee](https://docs.benddao.xyz/portal/governance/fee-collection-and-distribution) constitutes about 30% of the total interest revenue amassed from all NFT loans. And for the cherry on top? All these fees, paid exclusively in ETH, are disbursed to veBEND token holders on a weekly cadence.

# Peer-to-Peer Lending
Peer-to-peer lending facilitates direct loans between individuals using NFTs as collateral. On platforms like NFTfi, X2Y2, and Arcade, borrowers and lenders connect directly to agree on loan terms, and the NFT acts as security if the borrower defaults.

A key advantage of peer-to-peer lending is lower fees, as there are no intermediaries taking a cut. Lenders can also potentially earn higher interest rates than on pooled lending platforms. However, liquidity on peer-to-peer platforms can be lower as loans require manual matching. There’s also higher risk without centralized oversight.

For borrowers, peer-to-peer lending unlocks liquidity from NFTs without having to sell them. They can leverage NFTs to obtain loans tailored to their needs. Likewise, lenders can earn yields on a decentralized market outside the traditional financial system.

Overall, peer-to-peer NFT lending provides a direct and decentralized way for borrowers to monetize their NFTs and for lenders to earn yields. But it comes with the risks of a nascent market lacking intermediaries or oversight.

### How People Maximize Returns with NFTfi
NFTfi, one of the most reputable peer-to-peer NFT lending platforms, supports over 150 NFT collections. The platform employs a multifaceted approach to appraise NFT collateral value, considering factors like:

1. Current floor prices
2. Project averages
3. And valuations from [NFTBank](https://nftbank.ai/)

Borrowers benefit from the platform's robust, tamper-proof permissionless smart contract infrastructure, accessing liquidity through wETH, USDC, and DAI loans. Notably, while NFTfi waives borrowing fees, lenders incur a [5% fee](https://nftfi.com/how-it-works/) on the interest accrued from successful loans.

*__1. Lending for yield__*

This strategy can be an enticing alternative to traditional liquidity provision on platforms like [Uniswap](https://uniswap.org/).

For optimal returns, lenders might diversify by proposing multiple loan offers, each crafted with a focus on risk-minimization, such as spreading offers across different collections, and structuring conservative loan terms. Prioritizing loans on liquid assets and collections—those that can be swiftly sold if necessary—might also be beneficial.

*__2. Lending to acquire__*

Proactive lenders can leverage this strategy to make offers on desired NFTs, often securing them for a cheaper price than through an open market purchase. A boon for NFT aficionados and collectors, this strategy facilitates cost-effective NFT acquisition over time. The principles of diversified loan offers and asset liquidity still remain crucial with this strategy.

# Perpetual Peer-to-Peer Lending with Blend
Blend, [Blur](https://blur.io/)’s NFT lending platform, quickly emerged as a leader in the NFT lending space. What sets Blend apart is its deviation from the norm:

It operates independently of oracles and imposes no constraints on loan durations.

This flexibility allows borrowers to maintain their positions indefinitely, either until they repay or face liquidation. The interest rates, rather than being fixed, are shaped by market dynamics.

By channeling ETH into Blend, users not only reap yields but also accumulate Lending Points on the Blur platform. These points empower lenders to make loan offers from their Blur Pool funds. The "Max Borrow" value, chosen by the lender, dictates the maximum ETH amount that can be borrowed against a single NFT, and in turn, amplifies their point earnings.

When a borrower greenlights a loan offer, their NFT is secured, and the lender's interest earnings, denominated in ETH, commence. The loan remains flexible, allowing closure at any point to retrieve the principal and interest. However, borrowers are bound by a 30-hour window to either repay or refinance their loan with a fresh offer.

### Blur Season 2
This gamified take on lending has led to much of Blur’s early success.

The $BLUR [Season 2 Airdrop](https://blur.io/airdrop) is designed to incentivize specific user behaviors, such as bidding, listing, and lending. By partaking in these activities, Blur liquidity providers can earn rewards.

Bidding has emerged as the favorite among farmers, primarily because it demands exposure solely to ETH—a relatively low-risk asset compared to NFTs. This exposure can be further hedged using short futures, theoretically rendering farming almost risk-free.

### How Lenders Are Harvesting Blur Points
Blur Points serve as a testament to a user's engagement level, determined by the length and intensity of their participation in lending, bidding, and listing activities. In the case of lending, you earn Blur Points by loaning your NFTs to other users. Note that those points are on top of the yield you earn from the loan itself.

It’s a risky, high stakes yield strategy. Which is likely what has made it so popular. Which leads us to to the next section:

## NFT Lending Risks (and How to Manage Them)
In NFT lending, the key to maximizing your returns is effective risk management. There are several important aspects to creating a risk-resilient portfolio of NFT loans.

Let’s break some of them down here:

# 1. Setting Your Lending Parameters

Risk management in NFT lending relies heavily on the configuration of lending parameters. As a lender, you’re able to define the NFT collections you’re comfortable lending against, set the loan-to-value (LTV) ratio, determine the loan duration, and establish the interest rate. By carefully calibrating these parameters, you can ensure that your lending activities align with your risk tolerance.

For example, opting for a lower LTV ratio (e.g., 50% instead of 75%) provides a safety net in case the value of the collateral NFT experiences a sharp decline. Similarly, setting a higher interest rate can offset the risks associated with lending against NFTs.

You can also mitigate your risks by choosing shorter loan durations, such as 1-6 months, rather than longer 12-month loans. Diversifying your loans across multiple borrowers, collections, and even platforms can be prudent as well.

# 2. Navigating Loan Defaults

In the event of a default, the lender takes possession of the NFT the borrower used as collateral. At this point, as a lender you have the choice to keep the NFT, potentially benefiting from future value increase, or to liquidate it to recover their funds.

The decision of whether or not to take custody of an NFT can play a large role in your success as a lender. It may be tempting to hang onto the NFT, but if the price has dropped to the point that the borrower liquidated, you might be holding a depreciating asset.

When deciding, analyze the recovery potential of your new asset by looking at the collection's growth indicators:

- Check for positive community sentiment
- Upcoming catalysts like launches or events
- Recent sales trends

Also assess the liquidity of the collection to estimate how easily the NFT could be sold. More liquid collections generally have higher recovery rates if sold post-default.

If indicators point to potential near-term appreciation, holding the NFT may be worth your while. But if the value has dropped significantly, liquidating the asset quickly may maximize recovery.

# 3. Inadequate Appraisals
Loans are made based on a shared understanding of the appraised value of the collateralized asset. When the [valuation is inaccurate](https://upshot.xyz/post/asset-buckets), lenders risk financial loss, while borrowers risk receiving less than the actual value of their NFT asset.

It's important to benchmark your platform’s valuation models by backtesting accuracy across different market environments. Models relying solely on current floor prices aren’t enough. Sufficient out-of-sample data should be used to evaluate performance.

# 4. Concentration Risks
Diversification is an essential part of risk management for NFT lending. By lending across various NFT collections and platforms, lenders can spread their risk, thereby mitigating any negative impact if the value of a specific collection plummets significantly.

It’s also important to consider systemic risks such as cascading liquidations. If many loans from the same collection share the same liquidation price, drops in value can trigger sequential liquidations, amplifying price drops, liquidations, and more.

Furthermore, lenders can employ a risk overlay based on their current portfolio of active loans. This overlay can fine-tune the loan terms by considering various factors, such as:

- Collection-level concentration
- Ownership concentration
- The number of open NFT loans in the marketplace

Lenders can even employ more sophisticated techniques like quadratic programming to find the optimal asset weights that minimize portfolio volatility.

# 5. Market Volatility
NFT prices can fluctuate immensely in short periods of time. Regularly monitoring the market and adjusting your lending parameters accordingly can be an effective risk management strategy.

In the event of a specific collection’s value dropping, lenders might consider readjusting the LTV ratio or temporarily suspending lending against that collection until the market stabilizes.

# 6. Hedging Risks
NFT lending serves as a popular method for owners to hedge their long positions in NFTs. Essentially, taking out an NFT-collateralized loan functions similarly to purchasing a put option with an upfront payment.

If the market value of the NFT dips below the loan amount, the borrower might find it beneficial to default on the loan and surrender the NFT, thereby effectively utilizing it as a hedging tool.

However, NFT lending isn’t the sole strategy for risk mitigation. Financial instruments like perps and options offer alternative risk hedging avenues.

For example, borrowers concerned about a potential decline in [Bored Ape NFTs](https://app.upshot.xyz/indexes/yuga) could short $APE futures to counterbalance their long exposure. This provides downside protection if Ape prices decline, offsetting the impact of potential defaults on loans collateralized by the NFTs. Utilizing derivative instruments on correlated assets allows lenders to hedge risks beyond portfolio diversification.

## Future Prospects of NFT-Backed Lending
NFT-backed loans have emerged as a transformative tool, enabling asset owners to unlock liquidity in the NFT market and have been the go-to source for downside protection of NFTs. However, the journey isn’t without its challenges. Recent declines in NFT prices have cast shadows over the robustness of many NFT x DeFi protocols, as evidenced by dwindling user engagement.

There's a tendency among market participants to downplay the probability of adverse future events. Such an oversight can culminate in significant losses. It's imperative for investors to adopt a forward-thinking approach to risk management.

Despite the hurdles, the monetization and securitization of NFTs, a domain still in its nascent stages, brims with immense promise.

Learn strategies to maximize returns and minimize risks in NFT lending by understanding key differences between peer-to-peer and peer-to-pool models, setting prudent loan terms, diversifying, and more.