Borrowers and lenders often have different objectives in mind while participating in an NFT credit market.
A borrower might be looking for liquidity, with several factors influencing their decision:
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How much capital do they require? Are they looking for maximum leverage? Or do they need liquidity just for cash flow purposes?
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Their outlook on the floor price of the NFT collection.
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How do they see ETH’s price in USD evolve over the duration of the loan?
Not all offers are the same. Choosing the right type of offer is crucial.
In this article, we will explore how users can leverage Gondi’s features — like the ability for lenders to make as many offers as they want on the same collection or listing — for the best possible outcome, tailored to the specific objectives.
We will look at:
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Understanding Loan-to-Value (LTV).
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Managing risks.
In a P2P market like Gondi, borrowers and lenders interact directly with each other. Borrowers can set their desired loan terms and choose the collateral they want to borrow against, while lenders make loan offers with different principals, APRs and durations depending on how they value the NFT — and their risk appetite.
There are four main parameters to every loan:
Principal — Generally in WETH or USDC.
Gross APR — Annual percentage rate of interest.
Due date — The deadline to repay the loan plus accrued interest to avoid default.
Collateral — Supported/whitelisted ERC-721 NFTs.
LTV and Risk Management
What is LTV?
LTV (loan-to-value) is the ratio of the loan principal to the value of the collateral. Higher the LTV, higher the risk for the lender. In a market, lenders typically set a maximum LTV ratio that they are willing to lend against.
For example:
If the collateral value is 10 WETH, and the loan principal is 5 WETH — the LTV is 50%.
Risk Management for Lenders
1/ LTV: The higher the LTV, the riskier the loan — a small drop in price can create a scenario where the borrower might choose not to repay the loan.
Let’s look at an example with a Chromie Squiggle:
If the current floor is 10 WETH, and a lender offers 80% LTV, the loan principal will be 8 WETH.
Similarly, if the LTV is 50%, the loan principal will be 5 WETH.
If the loan duration is 6 months, the 80% LTV loan has a much higher chance of being defaulted on — only a 2 WETH (20%) drop in floor price can cause this. The 50% LTV loan, meanwhile, will require prices to drop in half within those 6 months for the loan to be defaulted on.
2/ Duration of the loan: The longer the loan, the higher the risk for the lender. The further one goes into the future, the harder it is to predict what the price of the NFT will be (in other words, the variance goes up).
3/ APR: Lenders are compensated for these risks through tailored APRs. The riskier the loan, the higher the APR.
Risk Management for Borrowers
If you are a borrower, you will need to consider several factors.
Should you borrow in WETH or USDC?
The simple answer is that it depends on what you will use the loan for, and your perspective on the future value of your NFT as well as the ETH/USD rate by the end of the loan period.
For instance, if you think the price of ETH will go down in USD terms and you plan to use your loan for non-ETH expenses/investments, then borrowing in ETH might be a good idea as the repayment value in USD terms will be lower.
Let us explore this further with a case study.
You put your Squiggle up for loan on Gondi, and indicate that you want the principal in WETH. You accept an offer of 8 WETH, at 10% APR, over 1 year. This means you will owe 8.8 WETH at the end of the loan. At the time of borrowing, the price of WETH is $2,000.
Scenario 1: WETH price increases to $3,000
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Initial borrowed: 8 WETH at $2,000/WETH = $16,000
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Total repayment in Dollars: 8.8 WETH at $3,000/WETH = $26,400
If WETH’s price remained unchanged at $2,000, the borrower would only have to repay WETH amounting to $17,600.
Scenario 2: WETH price decreases to $1,500
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Initial borrowed: 8 WETH at $2,000/WETH = $16,000
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Total repayment in Dollars: 8.8 WETH at $1,500/WETH = $13,200.
If WETH’s price remained unchanged at $2,000, the borrower would have to repay a higher WETH amounting to $17,600.
As seen from the above scenarios, you need to take into account which currency you borrow in and what you plan to do with it. For eg. if you borrow ETH to increase exposure to NFTs purchased with WETH, then you don't need to care about ETH/USD.
Should a borrower choose a high LTV offer or a low LTV offer?
The main considerations for a borrower are:
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Are you taking the loan as a hedge against floor prices dropping? If that is the case, higher LTVs are probably preferable, assuming the cost is not too prohibitive.
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What is the capital being used for? Depending on the answer, your choice offer would be the one that maximizes your total profit. For instance, if the principal can get a 15% yield on investments up to 100 ETH, then borrowing 80 ETH at 10% is better than 100 ETH at 14.9%.
About Gondi
Gondi is a decentralized non-custodial NFT lending protocol engineered to create the most efficient NFT credit market.
READ MORE: All you need to know about Gondi
