Tokenized Debt as NFTs vs Tokenized Debt as Fungible Tokens (ERC-20)

Specific advantage: Each loan or debt position is a unique, non-fungible asset with its own metadata (collateral type, APR, maturity date). This matters for complex, bespoke financing like real estate loans on platforms like Centrifuge or individual invoice factoring.

Specific advantage: NFTs can be used as collateral in NFTfi, BendDAO, or JPEG'd without needing to be fractionalized. This matters for leveraging illiquid assets where the owner wants to retain the whole position while accessing liquidity.

Specific advantage: Fungible tokens enable automated market makers (AMMs) like Uniswap and Curve, crucial for protocols like Maple Finance (pool-based lending) and TrueFi (credit pools). This matters for institutional capital seeking efficient entry/exit and price discovery.

Specific advantage: ERC-20 is the universal standard, supported by every wallet, DEX, and lending protocol (e.g., Aave, Compound). This matters for creating aggregated debt indices or enabling users to manage positions alongside other portfolio assets without specialized NFT tooling.

Specific trade-off: Minting and transferring individual NFTs is more gas-intensive than batch transfers of ERC-20s. This matters for high-volume, small-ticket lending (e.g., micro-loans) where transaction fees can erode profitability.

Specific trade-off: Fungibility obscures the underlying risk profile of individual loans within a pool. This matters for risk-aware investors who need transparency into specific collateral, requiring off-chain attestations or oracle feeds to compensate.

Unique asset representation: Each loan is a distinct token with its own metadata (collateral type, LTV, borrower ID). This enables on-chain audit trails for compliance (e.g., Centrifuge) and customizable terms per position. Essential for real-world asset (RWA) platforms like Goldfinch managing discrete credit pools.

Direct integration with NFTFi ecosystems: Debt positions can be used as collateral in NFT lending markets (e.g., NFTfi, BendDAO) without fractionalization. Enables collateralized re-borrowing and unlocks liquidity for otherwise illiquid assets. Critical for leveraging high-value collateral like CryptoPunks or Bored Apes within DeFi.

Deep, unified liquidity pools: ERC-20 debt tokens (e.g., cDAV, aUSDC) aggregate into single AMM pools (Uniswap, Curve), enabling instant swaps and efficient price discovery. This reduces slippage for large positions, a key advantage for protocols like Aave and Compound where debt is a homogeneous claim on a pool.

Standardized ERC-20 tooling: Works natively with all wallets, DEX aggregators (1inch), and yield strategies (Yearn). Enables automated portfolio rebalancing and gas-efficient batch transfers. This operational simplicity is why MakerDAO's DAI debt is fungible, allowing seamless integration across thousands of DeFi applications.

Per-position minting/burning overhead: Managing thousands of unique NFTs (e.g., on Ethereum L1) incurs significant gas costs versus updating a single ERC-20 ledger. Complex indexing required for portfolio views. A limiting factor for high-volume, small-ticket lending platforms.

Aggregation obscures granular risk: Pooling debt into a single token erases on-chain visibility into specific collateral health or borrower default. Requires off-chain risk oracles and introduces opacity. A critical trade-off for investors needing asset-level transparency, as seen in traditional securitization.

Deep, native liquidity: ERC-20 tokens are the standard for DEXs like Uniswap and lending markets like Aave. This enables instant price discovery and secondary market trading. Matters for protocols like Maple Finance or TrueFi seeking high-volume, automated market making for their debt pools.

Inherently divisible: Allows for micro-positions (e.g., 0.001 tokens), lowering the capital barrier for investors. This facilitates pooling of capital from many lenders into a single loan, a core mechanic for platforms like Goldfinch. Matters for scaling retail participation in private credit.

Loss of granular detail: A fungible token representing a pool of loans obscures individual loan terms (interest rate, collateral, borrower). Metadata must be stored off-chain or in separate contracts. Matters for investors requiring full audit trails or protocols where loan terms are highly variable.

Bulk settlement only: Representing a pool of loans as a single fungible token makes it difficult to settle or transfer individual loan positions without redeeming the entire pool. Matters for secondary markets wanting to trade specific, non-performing loans or unique collateral packages.

Rich, on-chain metadata: Each loan (NFT) can encapsulate all its terms—principal, APR, maturity, collateral NFT ID—enabling verifiable provenance. Matters for platforms like Arcade.xyz or NFTfi, where each collateralized loan is intrinsically unique and must be tracked individually.

Individual loan trading: NFTs can be listed on marketplaces like Blur or OpenSea, allowing for the sale of specific loan positions. Enables novel strategies like buying distressed debt. Matters for creating a secondary market for non-standard or bespoke credit agreements.

No native AMM support: Each NFT is a unique item, preventing direct use in constant-function market makers. Requires fragmented OTC markets or specialized NFT AMMs like Sudoswap, which typically have lower liquidity. Matters for protocols prioritizing high-frequency trading or deep, continuous liquidity.

Barrier to fractional ownership: While ERC-1155 or fractionalization wrappers (like Fractional.art) can help, they add complexity. Native ERC-721s are not divisible, making it harder to pool capital from small lenders into a single large loan. Matters for syndicating large-scale institutional debt.