DeFi Tokens Soared Amidst a Volatile Week: CoinDesk Market Index

Web3 Payments Company Transak Secures $20 Million in Funding

Nike Stumbles in .SWOOSH Launch as Bitcoin NFTs Reach New Heights

Blur, a non-fungible token (NFT) marketplace catering to professionals, is once again in the news for venturing into the NFT lending arena. This development has prompted discussions about its potential repercussions on the overall market.

Blur introduced Blend, a peer-to-peer NFT lending platform, on Monday. The platform enables traders to temporarily lease their NFTs to collectors who wish to purchase blue-chip NFTs with a lower initial payment. NFT holders interested in earning extra income can list their tokens on the platform, receive loan proposals, and then transfer their NFT to the borrower via an escrow smart contract for a set period, much like a digital pawn shop.

Blur has stated that Blend is designed to facilitate the integration of new buyers into its ecosystem by reducing financial hurdles to access popular NFT collections. Consequently, it contributes to enhancing liquidity across the wider NFT landscape by boosting the number of traders and transactions.

According to data from NFT marketplace OpenSea, Blend may have played a role in the short-term uptick of floor prices for select blue-chip NFT collections. Since the platform's launch on May 1, the floor price for the popular Bored Ape Yacht Club collection has risen from 47 ETH (roughly $93,500) to approximately 50 ETH ($99,400). Similarly, the floor price for its Mutant Ape Yacht Club has increased from roughly 10.5 ETH ($20,900) to 11 ETH ($21,900).

While Blend seems to be contributing to a possible upswing in NFT markets, it may not be a suitable option for every novice trader looking to join the fray. The concern is that NFT lending platforms, including Blur, may enable collectors to acquire tokens with borrowed funds, which can lead to liquidity risks in the future if collection floors or cryptocurrency prices experience a downturn.

 
 
Carl_m101, the founder of NFT collection Sky Scooters, took to Twitter to share a thread outlining some of the hazards associated with Blend. After a significant rise in the price floor, there is a possibility of a "margin call" occurrence, in which traders liquidate their NFTs, ultimately causing a market crash.
“While systems like these are of course basic knowledge to experienced traders, they are new to most NFT traders who can now all of a sudden afford to buy that shiny profile picture (PFP) they have been dreaming of,” said Carl. “We will have many unexperienced buyers fomo-ing into projects they couldn’t afford before or taking loans on their PFPs to buy more.”
 
While other platforms in the NFT industry provide lending services, the apprehension with Blend is that it is a product directly from Blur, one of the top NFT marketplaces in terms of trading volume, as per Dune Analytics data. Given its market dominance, its existing user base may be more inclined to lease NFTs rather than buying tokens at full price.
 
Blend's potential negative impact may extend beyond the NFT market, potentially affecting the native BLUR token as well. Bamboo, a pseudonymous Twitter user and strategic lead at NFT trader's club Invite Only Lounge, explained in a Twitter thread that as the NFT market is influenced by Blend's lenders, it could harm individuals' BLUR holdings and have an adverse effect on the broader cryptocurrency ecosystem.
 
 
 
“Blur is employing game theory with its tokenomics and unique airdrop distribution mechanics,” said Bamboo. “But as game theory experts, they must remember – increasing players' winnings at others' expense is not Pareto optimal.”
 
The NFT lender’s point of view
 
Although Blur is among the prominent NFT marketplaces to launch its proprietary NFT lending platform, it is not the first to introduce the concept of using NFTs as collateral.
 
According to PirateCode and Cryptobiosis, the anonymous co-founders of BendDAO, a peer-to-peer NFT lending platform, while NFT lending can generally benefit the market and enhance liquidity, Blend's financing methods raise concerns about the effectiveness of its "refinancing" process in ensuring the safety of lenders.
 
An area of concern that was highlighted pertained to the method that lenders could employ to divest their positions. Specifically, they proposed employing a Dutch auction to seek out a new lender and refinance.
 
“The viability of the refinancing process introduced by Blend remains uncertain,” said PirateCode and Cryptobiosos. “In practice, refinancing becomes relevant only when the number of lenders exceeds that of borrowers.”
 
A further issue of apprehension in relation to Blend is the procedure for obtaining loans for the purpose of buying NFTs through the platform.
 
Jonathan Gabler, who is a co-founder of the peer-to-peer NFT lending platform NFTFi, shared his perspective on Blend's strategy to introduce liquidity into the market. While he praised the initiative as innovative, he also expressed concern about the potential dangers of encouraging traders to take out loans at loan-to-value (LTV) ratios. Given the highly volatile nature of digital assets, this approach could prove problematic, as there is a risk that borrowers may default on their loans, leading to significant losses for lenders.
 
“Unchanged, the current incentive design will likely lead to bad outcomes for borrowers such as mass defaults or liquidations of high-risk loans, flush NFTs into the hands of point farmers, and in consequence, may lead to much higher market volatility,” said Gabler. “Existing peer-to-peer protocols tend to be more borrower-friendly and lead to healthier loan markets.”
 
Source Coindesk