Peer-to-Peer NFT Lending

Unlike pooled lending, P2P platforms function as a marketplace of individual offers. Lenders create public loan offers specifying terms like loan-to-value (LTV) ratio, duration, and interest rate for specific NFT collections. Borrowers browse and accept these offers directly, creating a binding smart contract. This model provides transparency and allows for customized, asset-specific terms.

Upon loan initiation, the borrower's NFT is transferred into a secure escrow smart contract. If the borrower repays the loan plus interest, the NFT is returned. If they default (fail to repay), the contract automatically enables a liquidation. The lender can claim the collateralized NFT, a process enforced trustlessly by the protocol's code, eliminating counterparty risk for the lender.

P2P lending enables highly tailored agreements not possible in pooled systems.

• Asset-Specific Terms: Offers can target specific NFTs (e.g., a Bored Ape #1234) or entire collections.
• Custom Durations: Loans can be structured for weeks, months, or until the NFT is sold.
• Variable Interest: Rates are set by lender appetite and negotiated by the market, not a protocol algorithm.

Risk evaluation is decentralized to the lender. They must perform their own due diligence on:

• The NFT's floor price and liquidity of its collection.
• The borrower's wallet history and reputation.
• The overall volatility of the NFT market. This contrasts with algorithmic underwriting in DeFi, placing the onus on individual participants to assess collateral quality.

Contrasting P2P with its alternative clarifies its use case.

• P2P (e.g., Blend, NFTfi): Borrower gets funds from a specific lender's offer. Lender bears illiquidity and specific NFT risk. Offers higher flexibility.
• Peer-to-Pool (e.g., BendDAO, Arcade): Borrower draws from a communal liquidity pool. Lender deposits into a pool for yield. Uses oracle-based, automated liquidations for entire collections. Offers passive yield for lenders.

A critical distinction in NFT lending architectures. Peer-to-Peer (P2P) models like NFTfi involve direct negotiation and escrow between two parties. Peer-to-Pool (P2Pool) models like Aave's NFT collateralization use aggregated liquidity pools where lenders deposit funds that are algorithmically allocated. Key differences:

• Counterparty Risk: P2P has specific counterparty risk; P2Pool has smart contract and pool insolvency risk.
• Liquidity: P2Pool offers instant loans; P2P requires finding a matching lender.
• Terms: P2P terms are customizable; P2Pool terms are standardized by the protocol.

Lenders assess risk based on several collateral-specific factors, which directly influence loan terms like the Loan-to-Value (LTV) ratio. Primary considerations include:

• Collection Floor Price: The baseline value of the least expensive NFT in a collection.
• NFT Rarity & Traits: Specific attributes can significantly increase an asset's value and borrowing power.
• Collection Liquidity: How easily the NFT can be sold, impacting liquidation risk.
• Oracle Reliability: Dependence on price feeds (like OpenSea's) to determine collateral value and trigger liquidations.

The core vulnerability in any P2P lending protocol is its smart contract code. Bugs or exploits can lead to the permanent loss of locked NFTs and funds. Key risks include:

• Reentrancy attacks where malicious contracts drain assets during a transaction.
• Logic errors in loan origination, liquidation, or repayment flows.
• Oracle manipulation if the protocol relies on external price feeds for NFT valuation. Users must audit the protocol's code, consider its audit history, and understand the immutability of deployed contracts.

NFT prices are highly volatile and often illiquid, creating significant risk for both borrowers and lenders.

• For Lenders: A sudden drop in the floor price of a collection can make the loan under-collateralized before a liquidation can be executed.
• For Borrowers: They risk a forced liquidation of their NFT if its value falls below the protocol's loan-to-value (LTV) ratio threshold. Slippage and low liquidity in NFT markets can mean the asset sells for far less than expected, potentially leaving the borrower with debt remaining (bad debt).

In a true peer-to-peer model, lenders are exposed to the credit risk of individual borrowers. Unlike pooled protocols, a lender's funds are tied to a specific counterparty.

• Borrower default occurs if the borrower refuses or is unable to repay, forcing the lender to claim and sell the collateral NFT.
• Liquidation inefficiency can exacerbate losses if the market for that specific NFT is thin, resulting in a fire-sale price. This contrasts with peer-to-pool models where risk is distributed across a liquidity pool.

Protocols rely on price oracles to determine the value of NFT collateral for loan health checks and liquidations. This introduces several attack vectors:

• Data manipulation: An attacker could artificially inflate or deflate the reported floor price of a collection to trigger unjust liquidations or create under-collateralized loans.
• Latency & staleness: NFT price feeds can be slow to update during high volatility, causing liquidations to occur at incorrect prices.
• Centralization risk: If the oracle is controlled by a single entity, it becomes a central point of failure.

The safety of a loan is governed by the protocol's configurable parameters, which can be changed via governance or are set by the founding team.

• Liquidation thresholds: An overly aggressive LTV ratio or short liquidation grace period can lead to premature liquidations.
• Fee structures: High liquidation penalties can disproportionately harm borrowers and increase bad debt.
• Governance attacks: A malicious actor gaining control of governance could change parameters to steal funds. Users must assess who controls these levers and the governance process's security.

The unique properties of NFTs introduce risks not found in fungible token lending.

• Collateral Locking: The NFT is transferred to the protocol's escrow contract, requiring trust in its ability to correctly release it upon repayment.
• Rarity & Trait Sniping: A lender may be able to liquidate and acquire a rare, undervalued NFT if the oracle only uses floor price.
• Wrapped & Fractionalized NFTs: Using wrapped NFTs (e.g., wNFTs) as collateral adds dependency on the wrapper contract's security.
• Provenance & Authenticity: Ensuring the collateralized NFT is not a counterfeit relies on the correctness of the underlying collection's smart contract.

The ratio of the loan value to the appraised value of the pledged NFT, expressed as a percentage. A key risk parameter set by the lender.

• Example: A 50% LTV on a 10 ETH NFT allows a maximum loan of 5 ETH.
• Purpose: Protects lenders from NFT price volatility and liquidation risk.
• Dynamic Adjustment: Can be automatically adjusted by the protocol based on floor price oracles.

The forced sale of a borrower's collateralized NFT when its value falls below a predefined liquidation threshold, triggered by an oracle price feed.

• Process: Liquidators can purchase the NFT at a discount to repay the loan and keep the difference.
• Risk for Borrower: Results in loss of the NFT.
• Incentive for Liquidators: Provides a profit opportunity, ensuring loan solvency.

The lowest listed price for an NFT within a specific collection, often used by lending protocols to value collateral.

• Oracle Reliance: Protocols like Chainlink or Pyth aggregate floor prices from major marketplaces.
• Valuation Basis: Determines the maximum loan amount (Loan-to-Value).
• Criticism: Can be manipulated via wash trading, leading to inaccurate collateral valuation.

A smart contract that holds a user's collateralized NFT and manages the associated debt. It is the fundamental accounting unit in P2P lending.

• Function: Tracks the loan amount, accrued interest, and collateral health.
• Owner Control: The borrower retains ownership rights (e.g., staking) but cannot transfer the NFT while the vault is active.
• Examples: NFTfi loans and BendDAO positions are structured as debt vaults.

The algorithmic rules governing how interest accrues on an NFT-backed loan, which can be fixed by the lender or determined by a variable supply-demand curve.

• Fixed Rate: Set at loan origination, common in peer-to-peer (P2P) models.
• Variable/Algorithmic Rate: Dynamically adjusts based on pool utilization, common in peer-to-pool (P2Pool) models.
• Components: Often includes a base rate and a utilization rate multiplier.