Blur, a marketplace for NFTs, has made an unprecedented move to draw in customers. They've initiated the Blend, a perpetual lending protocol.
Blend is a fresh financing protocol that provides users the option to secure ETH loans against NFT collateral or acquire NFTs on the Blur trading platform via an ETH loan. The protocol leverages a peer-to-peer perpetual lending model, with price matching conducted off-chain and payments managed through the Ethereum network. Put simply, it's a system of "buy now, pay later."
Blend's standout feature is its auction mechanism, which permits lenders to trigger a Dutch auction to repay their loans whenever they choose.
The Dutch auction system works by initially setting the maximum sale price, which is then reduced if no potential buyers surface for the item.
Once the auction commences, the borrower has a 30-hour window to repay the loan, or the item is put back up for auction. The auction kicks off with an Annual Percentage Yield (APY) of 0%, meaning lenders don't earn interest on their funds, and the borrower isn't charged interest on the loan.
As the auction unfolds, lenders can propose higher APYs to attract the borrower's attention and outdo other lenders. The highest APY lenders can bid is 1000%. This implies that if a lender announces a 1000% annual yield, they're offering to earn tenfold the principal amount in interest over a year.
It might sound intricate. However, let's try to scrutinize this scenario from the lender's and borrower's perspectives.
What are the potential benefits and risks for the borrower?
- Loans automatically "roll over." In other words, there's no need to keep track of loan expiry dates to avert liquidation.
- The opportunity for speedy refinancing. Concurrently, one might find a lender offering more favorable interest rates. On the flip side, one might need to undertake refinancing at a steeper interest rate.
- If new lenders are reluctant to participate in refinancing, the borrower forfeits their NFT collateral. If the NFT is valued less than the unpaid loan balance (plus accrued interest), the borrower ends up in profit. If the NFT is more valuable, they sustain losses.
What makes such an auction appealing for lenders?
Offering loans via the Blend protocol opens up a myriad of possibilities for lenders. They have the option to initiate an auction on the pledged collateral to recoup their investment. Here, several outcomes are possible:
- The debtor might settle the principal and accrued interest to prevent losing collateral, especially if it's worth more than the loan.
- Another lender could refinance the loan, allowing the original lender to recuperate the entire principal amount and any owed interest.
- There's a chance that no other bidder might surface during the auction. In this scenario, the lender gains ownership of the collateral. Depending on the prevailing market price of the collateral, the lender could either make a profit or bear a loss.
Therefore, the Blend auction mechanism introduces both prospects and risks for borrowers and lenders. The protocol, which was inaugurated on May 1, 2023, currently supports loans in only four NFT collections: Azuki, Cryptopunks, Miladys, and DeGods. In just four days, the cumulative amount of unpaid loans on the Blur platform surged to $9.6 million. By May 10, the sum of distributed loans had escalated to $35 million. At the time of this article's publication, loans constitute between 30% and 40% of the marketplace's daily trading turnover.
Choosing to engage in such a venture is a subjective decision for each user. However, it's essential to comprehend that this type of auction is associated with a high degree of risk for lenders. Essentially, they're speculating on the future worth of the pledged NFT and the borrower's capability to repay the loan. Conversely, borrowers should tread cautiously when utilizing NFTs as collateral, given the volatile and unpredictable nature of these assets.
If you're a novice in NFT trading and find it challenging to gauge their potential value, it might be best to observe the workings of the Blend protocol from the periphery. Don't forget to follow the social media accounts of notable NFT collectors. They often provide insightful advice on preliminary token valuation and potential pricing.
