The protocol will increase liquidity and help smaller investors invest in blue-chip collections. But how does it work?
Blur, a top Ethereum NFT marketplace, has unveiled a new perpetual lending protocol which enables NFT collateral. The protocol was created in collaboration with Paradigm, and it operates without oracle dependencies. It also has no expiries, allowing borrowing positions to remain open indefinitely until liquidated.
Blur likens the protocol to home ownership via mortgaging.
The platform tweeted: “Every trillion dollar market relies on financialization to scale. NFTs are no different. Instead of paying $1m for a house, buyers put $100k down and pay the rest through their mortgage. Without this mechanism, almost no one would be able to afford homes.”
The protocol, called Blend (blur + lending), is now live for three collections: Punks, Azukis and Miladys. An Azuki purchase has already been made via the protocol, according to Blur.
Blur tweeted: “If you have a Punk, you can now borrow up to 42 ETH within seconds. If you want an Azuki, you can now buy one with just 2 ETH up front”.
So how does it work?
The protocol matches users looking to borrow against their NFTs with lenders offering the most competitive rates.
A white paper published by Paradigm outlines that Blend loans have fixed rates by default and never expire. Borrowers can repay at any time, and lenders can exit their positions through a Dutch auction to find new lenders at new rates. (In a Dutch auction, the price of an item or asset starts high and gradually decreases over time until a buyer is found or a predetermined price is reached.)
If the auction fails, the borrower is liquidated and the lender takes possession of the collateral.
What the protocol means for lenders:
- Competitive rates.
The protocol allows lenders to offer their funds at competitive rates by participating in off-chain offer protocols.
- Continuous loan opportunities.
Through Blend, lenders have the flexibility to provide perpetual loans, meaning there are no fixed expiration dates. This allows lenders to maintain their lending positions indefinitely, generating ongoing interest income as long as borrowers continue to repay their loans.
- Liquidation possibilities.
In cases where borrowers fail to repay their loans or collateral values drop significantly, lenders have the opportunity to trigger refinancing auctions to find new lenders willing to take over the loan. This provides an avenue for lenders to exit their positions or recover their funds through collateral liquidation.
- Diverse collateral options.
The Blend protocol supports arbitrary collateral, including NFTs. This expands the range of assets that lenders can accept as collateral, potentially increasing their lending opportunities and diversification.
What the protocol means for borrowers:
- Access to liquidity.
Blend Protocol lets borrowers access liquidity by utilizing their NFT assets as collateral for borrowing, rather than selling their assets. This allows individuals or entities to unlock the value of their illiquid assets without the need for selling them outright.
- No expiration pressure.
The perpetual nature of the protocol means that borrowers benefit from the absence of fixed loan expiration dates. Borrowers can hold their borrowing positions open indefinitely until they choose to repay their loans or until liquidation occurs.
- Potential lower rates.
With a peer-to-peer lending model, borrowers have the opportunity to find lenders willing to offer competitive interest rates. The off-chain offer protocol matches borrowers with lenders offering the most attractive terms, potentially leading to lower borrowing costs.
- Potential for loan modification.
Borrowers can modify their borrowing arrangements by atomically taking out new loans against their collateral. This allows them to adjust the loan amount or seek better interest rates without fully repaying the existing loan.
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