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.

NFT Lending Strategies: How to Maximize Returns (and Minimize Risks)

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